Bank of New Zealand v O'Connor [2014] NZHC 3004 (28 November 2014)

Last Updated: 3 February 2015

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2014-404-000083 [2014] NZHC 3004

BETWEEN	BANK OF NEW ZEALAND Judgment Creditor
AND	JACQUELINE ANNE O'CONNOR Judgment Debtor

Hearing:	28 November 2014
Appearances:	B J Upton/B K Johnston for the Judgment Creditor J A O'Connor in person the Judgment Debtor
Judgment:	28 November 2014

_{ORAL JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN}

BANK OF NEW ZEALAND v J A O'CONNOR [2014] NZHC 3004 [28 November 2014]

[1] When the matter was called this morning I advised counsel and Ms O’Connor that I had read all submissions. I then invited Mr Upton to quickly address those matters raised on behalf of Ms O’Connor to persuade the Court to exercise its discretion against a grant of adjudication.

[2] When Mr Upton concluded this, I addressed Ms O’Connor regarding those matters I felt she should deal with. She did so by reconfirming she had a friend available who might be prepared to fund an offer but that those funds would not be available for some time.

[3] I then explained to Ms O’Connor that I would issue my fuller reasons later today but that meanwhile it was the Court’s firm opinion that bankruptcy ought to be ordered and an order for adjudication was at that time made at 10:10am.

[4] My judgment reasons follows.

Background

[5] The Bank of New Zealand (the Bank) applies for an order adjudicating the judgment debtor (Ms O’Connor) bankrupt. The Bank obtained judgment against Mr O’Connor on 29 October 2013 in the sum of $257,662.81.

[6] Ms O’Connor did not defend the bank’s summary judgment application. She

failed to satisfy the bankruptcy notice served on her.

[7] Ms O’Connor has filed two affidavits in opposition. Her grounds for

opposition include:

(a) That the Bank played a significant role in her current financial predicament because it should not have lent to her as much as it did, and it did not obtain the best price reasonably obtainable in selling her property at 6 Fow Street, Hamilton (the property) which secured her borrowings. Also she says she might lose her employment if she was adjudicated bankrupt.

(b) Ms O’Connor says the Bank is her only creditor and she would like an opportunity to settle the debt.

[8] In her first affidavit in opposition she deposes, inter alia:

(a) She placed too much faith in the Bank’s officers in helping and

advising her to make good business decisions.

(b) She purchased the property for $225,000 of which $185,000 was borrowed from the Westpac Bank.

(c) She refinanced Westpac’s mortgage with a loan of $300,000 secured

against her property. That loan was later transferred to the Bank.

(d) Later she purchased a restaurant business in Takanini. The Bank assisted her. The business failed when the vendor landlord retook possession.

(e) Ms O’Connor works on a commission basis for a residential property management company. She believes her employment would be at risk if she was bankrupted.

(f) Ms O’Connor did raise a complaint with the Banking Ombudsman about the behaviour of the Bank of New Zealand in Whangarei in relation to or in connection with the business of her brother.

(g) She said that in 2011 the Bank sold her property for approximately

$180,000 when she believed its value was in the vicinity of $380,000

- $400,000.

(h) Her offer of payment of $20,000 in settlement has been rejected by the Bank. She says she could increase that amount to $40,000 but would require up to 12 months to pay it all off.

(i) She said the core debt to the Bank is $44,000 being the shortfall in the sale of the house and approximately $100,000 on the business loan for the Takanini restaurant. She believes these debts would have been avoided if the property had been sold for a fair market figure.

[9] In a second affidavit Ms O’Connor deposes:

(a) She earns about $500 per week as a commission agent.

(b) She lives with a family friend and pays rental of $250 per week. (c) She is uncertain if she would retain her job if she was bankrupted. (d) Her assets comprise furniture and effects worth $2,000 – 3,000.

(e) Her only creditor is the Bank of New Zealand.

[10] Ms O’Connor wants the opportunity to explore a settlement with the Bank.

Overview of Ms O’Connor’s complaints against the Bank

[11] Ms O’Connor’s essential complaint is that her property was sold for less than she believed it should have been – “for about half its realistic value at a mortgagee sale”. She believes it was sold to a speculator type of friend of the real estate agent involved. She believes it had a market value of between $340,000 – 380,000. It had a rating value of $330,000. The property was sold at auction for $182,000 of which

$166,020.49 was realised as net proceeds.

[12] Ms O’Connor complains that the Bank gave her no opportunity to refinance or to sell the property herself. She believes that if given that opportunity she would have had some prospect of repaying the Bank in a much greater sum than was provided by the auction sale.

[13] Ms O’Connor in effect says the Bank should not have lent to her at all.

The Bank’s evidence

[14] Evidence on behalf of the Bank has been provided by Ms L Eagar, Hamilton real estate agent, and Mr S L Bittle a senior manager with the Bank.

[15] Ms Eagar has been involved in the real estate industry for more than 33 years. She managed the sale of the property on behalf of the Bank. She has read Ms O’Connor’s affidavits.

[16] When her employer Ray White Real Estate was approached by the Bank’s solicitors in January 2012 to market and sell the property she prepared a marketing appraisal for the Bank. It noted that due to lack of a code of compliance for re- cladding work it was Ms Eagar’s opinion the property had a current market value of between $280,000 and $300,000. In her opinion the property could sell for as little as $230,000 in a forced sale situation.

[17] By letter dated 28 February2012 Ms Eagar reported to the Bank with advice she had commenced the pre-auction marketing of the property; that despite advertising no enquiries about the property had been made in the previous week.

[18] She reported signage was placed on display on the property and colour brochures had been produced for promotion purposes.

[19] The report noted also that the unit needed complete redecoration inside. The property was a potential “leaky home” property.

[20] When the property did not sell at auction on 23 March 2012 Ray White’s

were instructed to commence a post auction marketing campaign.

[21] By her post-auction report dated 5 April 2012 Ms Eagar reported there had been six enquiries for the property post auction. Further reports followed weekly until a sale was settled on 13 June 2012. Ms Eagar says it is incorrect that the property was sold to a “speculator type friend” of hers. Ms Eagar is aware that the purchaser of the property had bought several properties at mortgagee sales as investment properties, but that he was not a friend of hers nor has ever been.

[22] In his affidavit Mr Bittle observed that much of what Ms O’Connor has to say

concerned issues with her business debt which the Bank has not pursued her for.

[23] Mr Bittle says written demand was made on Ms O’Connor for payment of

arrears but no payment was made.

[24] A Section 119 Property Law Act (PLA) 2007 mortgage notice was served on

5 December 2011. Following expiry of that notice the Bank exercised its mortgagee power and settled a mortgagee sale on 13 June 2012. The net proceeds of sale of

$166,020.49 was credited to Ms O’Connor’s account.

[25] On August 2013 summary judgment proceedings were issued against Ms O’Connor for the shortfall. It appears through this time Ms O’Connor had received advice from Mr Meyrick a solicitor, and Mr Templeton a barrister. It seems neither was formally instructed by Ms O’Connor. Mr Templeton acknowledged he had provided some legal advice to Ms O’Connor.

[26] Regarding Ms O’Connor’s claims that the property was sold at undervalue

Mr Bittle notes these were not raised as a defence to the High Court proceeding.

[27] Ms Eagar had estimated a forced sale value of about $230,000. An estimated value was also obtained from Fergusson Lockwood & Associates real estate agents which indicated a forced sale value of between $180,000 and $220,000.

[28] The Bank decided to adopt Ray White’s suggestion of sale by public auction. The property was marketed for four weeks during which there was advertising in the Waikato Times on four occasions and advertising on a number of real estate websites.

[29] Weekly reports noted concerns regarding the lack of a code compliance certificate and the type of cladding on the property.

[30] An agreement for sale and purchase in the sum of $226,000 was entered into

on 26 March 2012. That was subject to a builder’s report being obtained. The

builder’s report uncovered various issues particularly around the weather tightness of

the property. The purchaser cancelled the agreement.

[31] Another sale and purchase agreement for a price of $225,000 was also cancelled when the purchaser’s finance was not approved. Eventually the property sold for $182,000.

[32] Regarding Ms O’Connor’s complaints of a lack of sufficient response from the Bank to requests to access her file with the Bank, Mr Bittle’s response is that the Bank confirmed it would provide the information but that this would take three weeks as it would need to be retrieved from the Bank’s storage facility. Mr Bittle said the Bank requested Ms O’Connor to provide a physical address to which the documents could be couriered. She never responded to that request.

[33] Mr Templeton had been in discussions with the Bank’s solicitors but these

involved without prejudice offers.

[34] The Bank’s position is that the amount offered by Ms Connor is unsatisfactory. Mr Bittle reports that in the outcome of the failure of the Takanini restaurant Ms O’Connor’s company was struck off.

[35] Regarding Ms O’Connor’s claims of having received bad advice from the Bank Mr Bittle responds that it was not for the Bank to provide financial advice rather for the Bank to lend prudently, which in his view it did.

[36] Mr Bittle confirms that the summary judgment proceedings make clear that the Bank sought judgment against Ms O’Connor for her personal indebtedness only and not for her indebtedness under her guarantee to the Bank. Ms O’Connor is incorrect he says when she asserts that the core debt to the Bank represents a

$44,000 shortfall on the house sale and approximately $100,000 on the business loan. In fact he says it is a total of $241,000.

[37] Regarding Ms O’Connor’s claims to have behaved properly and responsibly in regard to claims by the Bank Mr Bittle advises the Bank was unable to locate and

serve Ms O’Connor with a PLA notice. It is his belief she was deliberately avoiding service. Orders of substituted service were required in respect of the delivery of the notice, and also in relation to the bankruptcy application.

Evidence overview

[38] At no time prior to the mortgagee sale did Ms O’Connor or anyone on her

behalf question the process then being undertaken.

[39] The Bank’s judgment in respect of the debt shortfall was obtained at an

undefended summary judgment hearing.

[40] Although there were discussions between the Bank and a barrister Mr

Templeton no agreement could be reached for payment of a debt.

[41] The debt has been long outstanding. No payment at all has been made.

[42] There can be no doubt that Ms O’Connor is insolvent. Her assets comprise furniture and effects of very modest value. She is 45 years of age, single and has no dependents.

[43] Ms O’Connor is concerned she will lose her job if bankrupted. But, and as counsel for the Bank comments, no evidence has been provided to corroborate her income details or possible consequences for her if she is bankrupted.

[44] Ms O’Connor claims the Bank is her only creditor. However there is evidence that she owes $16,404 to Equivalent Finance Limited following a judgment being obtained against her in that amount.

Legal principles

[45] Ms O’Connor’s debt is for an amount for which she can be adjudicated. The Court’s discretion is unfettered. It is for Ms O’Connor to show why an order for adjudication should not be made.

[46] Section 37 of the Insolvency Act 2006 (the Act) provides the Court may refuse to adjudicate if:

(a) The applicant creditor has not established the requirements set out in s

13 of the Act.

(b) The debtor is able to pay his or her debts.

(c) It is just and equitable that the Court does not make an order for adjudication.

(d) For any reason an order for adjudication should not be made.

[47] The Court needs to consider the interests of creditors when exercising its discretion under s 37. Also, there may be good reason to exercise control over the affairs of an insolvent person.

[48] Case authority indicates the exercise of discretion under s 37 is to be used sparingly.

[49] An absence of assets of the insolvent does not prevent an adjudication order. Public interest considerations may prevail to ensure some element of control is imposed.

[50] Loss of employment is, as Associate Judge Gendall noted “often an incident of any adjudication order made in the wider public interest”.¹

[51] Of significance are claims by Ms O’Connor calling into question whether the Bank complied with its duty under s 176 of the Property Law Act by the actions the Bank took in this regard. The submissions of counsel for the Bank provide a useful summary of issues dealt with by this Court in that regard.

[52] In Ottow², Asher J summarised the applicable principles as follows at paragraph [17]:

¹ CIR v T M Sala High Court Masterton, CIV 2012-435-21.

(a) A mortgagee has no duty at any time to exercise the powers of sale or possession. In default of any provision to the contrary in the mortgage, the power of sale is for the benefit of the mortgagee, who can sell at any time in accordance with the mortgagee’s convenience: Raja (Administratrix of the Estate of Raja (Dcd) v Austin Gray (A Firm) [2002] EWCA CIV 1965 at [55], per Peter Gibson LJ; Silven Properties v Royal Bank of Scotland [2004] 1 WLR 997 at [14].

(b) The mortgagee’s duty of care is to take reasonable care to obtain the best price reasonably obtainable at the time of sale: Agio Trustees Co. Ltd v Harts Contributory Mortgages Nominee Co. Ltd (2001) 4

NZ ConvC 193,480 (HC).

(c) It does not matter that the time may be unpropitious and that by waiting a higher price could be obtained: Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 at 1355B; Silven Properties v Royal Bank of Scotland at [14].

(d) A mortgagee is under no obligation to improve the property or increase its value: Silven Properties v Royal Bank of Scotland at [16].

(e) A mortgagee sale for a price less than the current market value assessed by valuers does not, of itself, establish a breach of duty, although a large discrepancy may indicate a failure to take reasonable care: Moritzson Properties Ltd v McLachlan (2001) 9

NZCLC 262, 448 at [61].

(f) A mortgagee does not have any general duty to maintain properties prior to sale: Silven Properties v Royal Bank of Scotland at [16].

(g) Following the service of a Property Law Act Notice there is no duty on a mortgagee to keep a guarantor informed of sales activities: G Merel & Co. Ltd v Barclays Bank (1963) 1 SJ 542.

(h) The mortgagee is not entitled to sell in a hasty way at a knock-down price sufficient to pay the debt, which because of the speed of sale leads to a lower price than could otherwise be obtained: see Palk v Mortgage Services Funding Plc [1993] 1 Ch 330 at 338-8.

(i) Proper care must be taken to expose the property to the market and to obtain the best price reasonably obtainable: Harts Contributory Mortgages Nominee Co Ltd v Bryers HC Auckland CP403-1M00, 19

December 2001 at [43](d) and (f).

[53] Asher J at paragraph [31] provided the following useful guidance in respect of factors indicating that a mortgagee has made reasonable efforts to obtain the best reasonably obtainable price:

(a) The appointment of a reputable real estate agent to market the property.

² Public Trust v Ottow (2010) NZCPR 879 (HC).

(b) Obtaining a valuation report from an experienced valuer as a guide to what could reasonably be expected for the property.

(c) Marketing over a reasonably long period of time.

(d) An extensive advertising and promotional campaign. (e) A properly conducted auction.

(f) A sale price that, given all the circumstances, can be reconciled with expert opinion as to value.

[54] The Court accepts counsel’s analysis of case authority which confirms:

(a) Valuations lose most of their significance once there has been a properly advertised auction.

(b) In the normal course, the proposed sale will need to be advertised with an adequate description of the property’s attributes and, within reason, widely enough to attract all possible purchasers.

(c) Whilst under a duty to take reasonable care it does not follow that the best price reasonably obtained will in fact be achieved.

(d) The Court should not be asked to second guess the actions of a mortgagee acting on sound professional advice.

(e) When a mortgagee has more to gain if a higher price is achieved then it cannot be assumed likely that the mortgagee has acted contrary to his own interests.

Conclusions

[55] The requirements of Section 13 have been met, Ms O’Connor has not satisfied the bankruptcy notice served on her and therefore the Bank is prima facie entitled to an order of adjudication. Regarding whether or not the Court should be persuaded otherwise by the matters raised by Ms O’Connor the Court says:

(a) Ms O’Connor is insolvent.

(b) She owes at least $273,000 to the Bank. (c) The Bank is not her only creditor.

(d) Her assets are minimal and her income modest and these factors are insufficient to persuade the Court not to adjudicate.

[56] The Bank had no duty to give her financial advice but only to ensure for itself its actions were prudent. The Court is of the view that Ms O’Connor’s claims about the Bank’s behaviour are without foundation. Likewise in regard to the process by which the Bank chose to realise the security provided for its loans, the Court is satisfied the Bank met its obligations as mortgagee.

[57] No sufficient evidence has been provided that Ms O’Connor’s employment is at risk. Rather her claims appear speculative. Regardless, her employment situation is of insignificance in the overall view of matters.

[58] Ms O’Connor has made earlier suggestions of a proposal for settlement but those are well short of commercial or personal reality. Her belated suggestions of an increased offer, have been rejected by the Bank.

Summary

[59] In the Court’s view an order adjudicating Ms O’Connor bankrupt would serve the wider public interest of removing her from the commercial community for three years. In the Court’s view the public interest is served in exposing and controlling Ms O’Connor given that she is an insolvent debtor.

Result

[60] There is an order for adjudication of Ms O’Connor as a bankrupt. Costs are awarded on a 2B basis together with disbursements approved by the Registrar.

_{[61] The time of the order is 10:10am.}

Associate Judge Christiansen