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High Court of New Zealand Decisions |
Last Updated: 7 June 2018
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
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CIV-2017-404-2725
[2018] NZHC 1289 |
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BETWEEN
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CROWN FINANCE LIMITED
Plaintiff
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AND
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TIMOTHY MORGAN FITZGERALD CRONIN
Defendant
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Hearing:
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22 May 2018
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Appearances:
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K J Webster and C Boswell for the Plaintiff M J Fisher and K J Ng for the
Defendant
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Judgment:
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1 June 2018
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JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 1 June 2018 at 3:30pm
pursuant to Rule 11.5 of the High Court Rules.
.......................................
Deputy Registrar
Solicitors:
Wilson Harle (K J Webster), Auckland, for the Plaintiff Claymore Partners Ltd, Auckland, for the Defendant
Copy for:
Michael Fisher, Auckland, for the Defendant
CROWN FINANCE LIMITED v CRONIN [2018] NZHC 1289 [1 June 2018]
[1] Malone No.5 Ltd was a single venture property developer. It carried out a development at 3 Taylors Ave, Bryndwr, Christchurch, by subdividing the property into two sections and building a townhouse on each section. Under a loan agreement of 10 September 2015 Crown Finance Ltd advanced funds to Malone No.5 Ltd to finance the development. The loan was repayable on 15 June 2016 but was extended to 18 November 2016. Malone No.5 Ltd did not repay. Crown Finance Ltd made demand and appointed a receiver under a general security agreement. The receiver completed the development and sold the townhouses. The purchaser, Dacia Properties Ltd, a company related to Crown Finance Ltd, paid $882,00 for each property. Crown Finance Ltd says that the short-fall after receiving the proceeds of sale from the receiver is $762,278.81 as at 1 November 2017. It sues Mr Cronin, the director of Malone No.5 Ltd, under a guarantee dated 10 September 2015. Crown Finance Ltd applies for summary judgment. It says that the amount owing under the loan as at the date of hearing is $835,087.33 after taking into account further payments from the receiver and updating interest.
[2] Mr Cronin opposes, saying that the receiver breached his duties under ss 18 and 19 of the Receiverships Act 1993 to obtain the best price reasonably obtainable at the time of sale, and that Crown Finance Ltd was involved in those breaches, as it obtained the properties for the benefit of a related company at below the best price reasonably obtainable – $1,160,000 each.
[3] Crown Finance Ltd, in response, denies any breach of duty by the receiver and that it can be liable for any sale at an undervalue by the receiver. It also says that even if the properties had sold at the prices for which Mr Cronin contends, he would still face a shortfall.
[4] There is no dispute as to the principles on a plaintiff’s application for summary judgment.1 To give a plaintiff summary judgment the court must be satisfied that judgment can be entered now, without the need for further interlocutory steps such as discovery and interrogatories or for a full hearing with witnesses giving evidence in person and being cross-examined.
1 See Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26].
[5] The issues are:
[a] Did the receiver comply with his duty under s 19 of the Receiverships Act 1993?
[b] Can any breach of duty by the receiver be held against Crown Finance Ltd?
[c] Is there any minimum amount for which Mr Cronin is liable, even if he has an arguable defence as to the sales by the receiver?
[6] The lending arrangements are set out in three documents signed on 10 September 2015:
[a] a term loan agreement between Crown Finance Ltd as lender, Malone No.5 as borrower, Mr Cronin as guarantor;
[b] a deed of guarantee and indemnity between Crown Finance Ltd as lender and Mr Cronin as guarantor; and
[c] a general security agreement between Crown Finance Ltd as security- holder and Malone No.5 Ltd as debtor.
[7] The purpose of the loan was to re-finance an existing mortgage over the Taylors Avenue property and to meet the costs of the development. The loan amount stated in the loan agreement was $1,421,036, but Malone No.5 Ltd did not draw down all that amount immediately. The interest rate was 10 per cent per annum. The interest rate on default was 20 per cent per annum. Unpaid interest was capitalised. The loan was repayable on the expiry date, which was defined as nine months from the first draw-down date. The first draw-down was on 14 September 2015.
[8] From the initial advance, Crown Finance Ltd received $5,000 in payment of an acceptance fee. It received no other payments from Malone No.5 Ltd. The parties agreed to extensions of the expiry date to 18 August 2016 and later to 18 November
2016. A letter of 26 August 2016 recorded the loan amount (including loan extension fee) as $1,506,326.
[9] The deed of guarantee and indemnity is wide and extensive. It is an “all obligations” guarantee. All common law defences normally available to a surety are negated. Crown Finance Ltd can look to Mr Cronin whether or not it takes any steps under the term loan or its security.
[10] Under the general security agreement, Malone No.5 Ltd gave Crown Finance Ltd security over all its property. In the case of land, it agreed to mortgage all its present and future interests and rights in any land to Crown Finance Ltd. The remedies on default (including non-payment) allow for appointment of a receiver:
11.1 At any time after the occurrence of an Event of Default the Securityholder may, (whether or not it has exercised the power) appoint in writing any person or persons (whether an officer or officers of the Security-holder or the Debtor or not) to be Receiver of the whole or any part of the Collateral. A receiver shall be the agent of the Debtor, and the Debtor alone shall be responsible for the acts and defaults of the Receiver.
The general security agreement gives a receiver wide powers, including to take possession of collateral, carry on the business of the debtor, borrow funds, appoint managers and agents, and sell the collateral.
[11] Malone No.5 Ltd did not repay the loan when it fell due on 18 November 2018. Crown Finance Ltd made written demand on Mr Cronin for the amount then outstanding under the loan, $1,369,847.71. Crown Finance Ltd pleads that demand was made on Malone No.5 Ltd, but a copy of the demand has not been put in evidence. That is not fatal to Crown’s summary judgment application: the loan had fallen due and Crown was entitled to appoint a receiver even if it had not made formal demand on Malone No 5 Ltd. On 21 November 2016, Crown Finance Ltd appointed as receiver of Malone No.5 Ltd Mr Stephen Tietjens, an experienced Auckland insolvency practitioner with all the powers given a receiver under general security agreement. The appointment makes it clear that he was an agent of the company and of no other parties. That is consistent with s 6(3) of the Receiverships Act 1993:
A receiver appointed by, or under a power conferred by, a deed or agreement is the agent of the grantor unless it is expressly provided otherwise in the deed or agreement or the instrument by or under which the receiver was appointed.
[12] Mr Tietjens says that when he was appointed receiver the development at Taylors Avenue was not complete. He found that there had been cost over-runs and time delays. He decided that the best course was to complete the development and sell the houses to maximise repayment of the money owing to Crown Finance Ltd. Malone No.5 Ltd had no access to funding other than any that might come from Crown Finance Ltd. Crown Finance Ltd agreed to fund the cost of completing and selling the development. All up, Crown Finance Ltd advanced over $550,000.2 Neither Mr Arbuckle, director of Crown Finance Ltd, nor Mr Tietjens say whether the advance was to the company or to Mr Tietjens personally. Under s 32(1)(a) of the Receiverships Act 1993, Mr Tietjens would be personally liable for any contract entered into by him as receiver, unless the contract limited or excluded his liability.3 As Mr Tietjens is based in Auckland, he appointed a Christchurch project manager. He arranged for the construction contractor to complete the building work.
[13] In early 2017 he began planning how to sell the development. He obtained marketing proposals from local real estate companies – Harcourts and Ray White – and engaged Harcourts to market the development. They recommended selling by tender. Mr Tietjens accepted the advice and considered it an acceptable method of sale for a property in receivership as it gives the sale process tension and an end point but keeps the amounts of all offers confidential. In May 2017, he obtained a valuation from Christchurch registered valuers. One report by the valuers has been put in evidence – for Dwelling Two. The evidence does not say that there was a report for the other townhouse. The valuers assessed the current market value of the property as at 10 May 2017 as $1,160,00 inclusive of GST and inclusive of chattels. The report was subject to an assumption that a separate certificate of title would be issued for the property. The registered valuers also gave estimates for a sale on a receivership basis ($980,000), and a mortgagee sale basis ($930,000). I am left to infer that any valuation of the other townhouse would show the same values.
[14] Harcourts began marketing the development in June 2017, offering both properties for sale by tender over three weeks. Mr Tietjens says that both properties were almost complete, with only a few minor things outstanding. He was keen to get the properties sold as soon as possible, to stop ongoing costs and accruing interest associated with the development. The titles showed a caveat lodged by a creditor. The Christchurch City Council had not yet issued a code compliance certificate under the Building Act 2004. The real estate agent used the ADLS Particulars and Conditions of Sale of Real Estate by Tender but added special conditions and deleted most of the vendor’s warranties – all directed at minimising any potential liability of the vendor. Mr Tietjens has put in evidence reports he received from Harcourts as to marketing, including reports on open homes.
[15] There were two offers, one for each property: a conditional offer of $700,000 for 1/3 Taylors Avenue, and a conditional offer of $940,000 for 2/3 Taylors Avenue. He considered that the offer of $700,000 was too low. He invited Crown Finance Ltd to consider the offer of $940,000. Its consent was required for release of its security. The offers would not clear the debts to it. Crown did not consent to sell at that price.
[16] In July, Harcourts sent a post-tender market report which indicated the possibility of other buyers, but no further offers were received.
[17] Mr Tietjens received an offer from Dacia Properties Ltd, a related company of Crown, of $882,000 for each property net of any real estate commission (which would have been in the order of $50,000). Mr Tietjens says that he made a counter offer but Dacia Properties Ltd would not move. In the end, he sold the properties to Dacia Properties Ltd for $1,764,000 under an agreement of 3 August 2017. The sales settled on 26 September 2017, when Mr Tietjens paid Crown Finance Ltd $1,500,000 from the proceeds. Since then, Crown Finance Ltd has received two further payments from him –$1,000 on 7 December 2017 and $13,765.00 on 12 February 2018.
The attack on the receiver’s sale to Dacia Properties Ltd
[18] Mr Cronin attacks the receiver’s sale to Dacia Properties Ltd as being at an
under-value. He contends that in selling the Taylors Avenue properties Mr Tietjens
breached his duty to obtain the best price reasonably obtainable as at the time of the sale, as required by s 19 of the Receivership Act 1993:
A receiver who exercises a power of sale of property in receivership owes a duty to—
(a) the grantor; and
(b) persons claiming, through the grantor, interests in the property in receivership; and
(c) unsecured creditors of the grantor; and
(d) sureties who may be called upon to fulfil obligations of the grantor— to obtain the best price reasonably obtainable as at the time of sale.
Before considering his criticism and Crown’s responses, it is helpful to see the legal
setting.
[19] A significant feature of this case is that the receiver sold the properties to Dacia Properties Ltd, a related company of Crown Finance Ltd. Both are apparently members of the Crown group of companies. As best I am aware, this aspect is relatively unexplored in New Zealand law. A convenient way of approaching the matter is to consider the law as to mortgagees exercising powers of sale. The duties of mortgagees under s 176 of the Property Law Act 2007 exercising powers of sale under mortgages, and of receivers selling properties in receivership are the same: they are required to obtain the best price reasonably obtainable as at the time of sale. Section 176 of the Property Law Act 2007 has generated considerable litigation, usually in cases where mortgagees have sued mortgagors for a short-fall following a sale. Asher J summarised the main principles in Public Trust v Ottow:4
It can be noted that:
(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.
4 Public Trustee v Ottow [2009] NZHC 2904; (2009) 10 NZCPR 879 (HC) at [17].
(b) The mortgagee’s duty of care is to take reasonable care to obtain the best
price reasonably obtainable at the time of sale.
(c) It does not matter that the time may be unpropitious and that by waiting a higher price could be obtained.
(d) A mortgagee is under no obligation to improve the property or increase its value.
(e) A mortgagee 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.
(f) A mortgagee does not have any general duty to maintain properties prior to sale.
(g) Following the service of a Property Law Act notice there is no duty on a mortgagee to keep a guarantor informed of the sales activities.
(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.
(i) Proper care must be taken to expose the property to the market and to obtain the best price reasonable obtainable.
(Citations omitted).
[20] He also said:5
The following steps indicate that a mortgagee has made reasonable efforts to obtain the best reasonably obtainable price:
(a) With the appointment of a reputable real estate agent to market the property;
(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;
5 At [31].
(f) A sale price that, in all the circumstances, can be reconciled with expert opinion as to value.
And:6
A failure to achieve an assessed valuation price at a mortgagee sale is not in itself any indication of a breach of the mortgagee’s duty of care to obtain the best price reasonably obtainable. A failure to achieve a price that a mortgagor believes the property should achieve, does not give rise to an inference that a mortgagee has breached its duty to take reasonable care. ... Of course, a sale at a price which is much less than the assessed value, when there is no explanation for the discrepancy, can indicate a failure to take reasonable care.
[21] Those requirements can be applied to a receiver selling real estate which is the sole asset of a debtor company in receivership. Indeed, if the law were to apply different standards to mortgagee’s sales and to receivers’ sales, secured creditors may be tempted to realise their securities by whichever method was more favourable to them.7 There is no principled reason for setting different standards.
[22] While those are the main requirements, there is the added feature of the sale to a related company. The law as to sales by mortgagees gives a lead-in. While a mortgagee exercising a power of sale under a mortgage cannot sell a property to itself, except at a public auction under the conduct of the Registrar of the Court under s 187 of the Property Law Act 2007,8 a mortgagee may sell the property to a company in which the mortgagee has an interest. But in that case the mortgagee has the legal burden of proving the validity of the purchase by showing that it acted bona fide and took reasonable precautions to obtain a proper price.9 Greater scrutiny is required, because of the risk of the mortgagee disposing of the property at an under-value but to the advantage of the related company. Whereas most mortgagees would normally wish to maximise the sale price if there is a risk of a shortfall, that assumption may not apply in the case of a sale to a related party. Covenantors are entitled to increased protection against being required to subsidise an advantageous purchase for the related entity.
6 At [33].
8 Property Law Act 2007, s 196.
[23] A sale by a receiver to a related party of the secured creditor is not on all fours. There appear to be no New Zealand cases on point. The learned authors of Private Receivers of Companies in New Zealand offer this:10
There appears to be no reported decision on the question of whether a receiver who is the agent of the company can validly sell assets to the appointing secured creditor. It is not to be supposed that such a transaction is necessarily void for it is theoretically the same as a sale by a mortgagor to a mortgagee, not a sale by the mortgagee (through an agent) to itself. However, it is conducted for the debtor company by an agent whose primary duty is to the purchasing secured creditor. This conflict of duty will, at the very least, lead to the sale being most carefully scrutinised by the Court if the sale is challenged, especially if the liability of the company is not entirely satisfied by offsetting the price against the indebtedness to the security holder. The Court will be likely to set the transaction aside if it is not demonstrated by the receiver and the security holder that there has been due regard shown for the interests of the company and other persons with interests in its property, so that there is no unfairness in the transaction.
They refer to Australian authorities as giving guidance along these lines.11 This suggested approach aligns with that taken in cases of mortgagees selling to related companies. Just as a sale by the receiver to the secured creditor should be subject to thorough scrutiny, so also should a sale by the receiver to a related company of the secured creditor. The same concerns as to potential conflict of interest and risk of sale at an undervalue apply. Again those seeking to uphold the sale have the burden of justifying it.
[24] These considerations bear on whether summary judgment should be granted. Because of the requirement for increased scrutiny it may be safer to require a case to go to an ordinary hearing so that defendants in proceedings such as this have full opportunity to find out about communications between the receiver and the secured creditor and the purchaser. An ordinary hearing following discovery and other interlocutory steps offers greater prospects of transparency.
[25] Many of the steps Mr Tietjens took are consistent with complying with his duty under s 19 of the Receiverships Act. Although not required to, he completed
10 Peter Blanchard and Michael Gedye Private Receivers of Companies in New Zealand (3rd ed, LexisNexis, Wellington, 2008) at 10.12.
11 Re One Tel Networks Holdings Pty Ltd [2001] NSWSC 1065, (2001) 40 ACSR 83; Re Actwane Pty Ltd [2002] NSWSC 572, (2002) 42 ACSR 307; and White v Huxtable [2006] FCA 559, (2006) 57 ACSR 435.
construction of the town houses because that stood to offer a better return for Crown Finance Ltd. Before putting the properties on the market, he obtained a valuation from a registered valuer as to current market value and on a forced sale basis. He appointed a recognised real estate agent to market the properties. The marketing reports by the agent show conventional steps to market the property to the public: ‘For Sale’ signs on the property, running open homes, advertising, and listing the property for sale on appropriate websites. The receiver has given reasons for selling by tender rather than by auction – the caveat and the lack of code of compliance certificates made a sale by auction undesirable.
[26] Now for Mr Cronin’s criticism of the sales process. His case is that the properties could have sold for $1,160,000 each. There was a failure to obtain the best price reasonably obtainable because:
[a] The market was buoyant and there was a strong demand for marketable properties in 2017. There should have been little difference whether the properties were sold by an owner, mortgagee or receiver.
[b] If a tender process does not produce acceptable offers, the vendor should negotiate with the highest bidder for a higher price while continuing marketing with a view to selling to other potential buyers at a better price. That was not done here. The real estate salesman told Mr Cronin that he could not get instructions from the receiver to negotiate with the highest bidders.
[c] The offer of $940,000 for one property could have been accepted, to set a benchmark for selling the other.
[d] The price of $882,000 for each property was less than that offered for the second unit.
[e] The properties should have been sold by auction.
[f] The listing agreement with the real estate agent provided that commission would not be payable on any sales to Crown or a related company. Such a sale was anticipated from the start. That suggested that questions as to the propriety of the sale to Dacia.
[27] For some of these matters, but not all, Mr Cronin is supported by Mr McGoldrick, a Christchurch real estate agent with extensive experience selling real estate by auction.
[28] In the hearing I raised the relatively short marketing period, three weeks. That did not seem to fit Asher J’s suggestion of “Marketing over a reasonably long period of time” in Public Trust v Ottow. In proceedings by mortgagees suing to recover a shortfall after a sale, I have not seen such a short period. Four weeks tends to be the minimum with longer periods for properties that are harder to sell. Ms Webster properly objected that the defendant has not taken that point.
[29] Crown had answers to some of the objections. A tender was preferable to an auction because of the difficulties of the caveat against the title, the absence of code compliance certificates and the limited warranties. Only Mr Cronin suggested an auction and he is not an expert in these matters. Mr McGoldrick’s evidence did not say that there should have been an auction. The real estate salesman rejected Mr Cronin’s version of the conversation. He had tried to negotiate with the highest bidders. He continued to hold open homes. The sale to Dacia was acceptable because there was no commission payable. And although Crown did not say this expressly, the sale to Dacia went ahead only after the market had been tested.
[30] Arm’s length sales on the open market to third parties at $882,000 each after reasonable marketing are likely to withstand scrutiny.12 But what makes me cautious of upholding these sales in a summary judgment application is that the purchaser was a related company of Crown. Matters that would otherwise pass muster become points for inquiry: the sale at a value below that fixed by the registered valuer, the sales of each lot at a price lower than the highest bid for lot 2, Crown’s ability to influence the
12 For a comparable example, see Southland Building Society v Austin [2012] NZHC 497; and
Austin v Southland Building Society [2012] NZCA 337.
sale decision by withholding a release of its security and the absence of full disclosure of communications between Crown Finance Ltd, Dacia Properties Ltd and the receiver. A deeper examination of the sales is required. That is not to say that they may not be upheld at a later hearing, but at this stage I cannot be sure that they will be.
Can any breach of s 19 be held against Crown?
[31] Crown Finance Ltd says that any failure by the receiver to comply with his duty under s 19 is no defence to its claim under the guarantee against Mr Cronin because the receiver is not its agent. It did not sell the properties and was not under any duty to obtain the best price reasonably obtainable at the time of sale.
[32] The matter is not so straightforward. It is recognised that security-holders may become liable for acts of receivers if they become involved in the conduct of the receivership. In Medforth v Blake Sir Richard Scott V-C said:13
A mortgagee who has appointed a receiver has no general right to instruct the receiver as to how or when to exercise the powers that have been conferred on the receiver. The mortgagee retains his own powers as mortgagee. He does not, for example, lose his power to sell by appointing a receiver with a power of sale. The receiver, on appointment, exercises his powers as agent for the mortgagor. ... If a mortgagee establishes a relationship with the receiver he has appointed under which the receiver exercises his powers in accordance with instructions given by the mortgagee, I can see the force of an argument that if the receiver is liable to the mortgagor then so will the mortgagee be liable. ... If the mortgagee chooses to instruct the receivers to carry on the business in a manner that is a breach of the receiver’s duty to the mortgagor, it seems to me quite right that the mortgagee, as well as the receivers, should incur liability. This conclusion does not in the least undermine the receivership system. What it might do is to promote caution on the part of mortgagees in seeking to direct receivers as to the manner in which they (the receivers) should exercise their powers. I would regard that as salutary.
[33] The circumstances of the sales suggest that Crown Finance Ltd was in a position to influence the receiver in his decision to sell the Taylors Avenue properties. Mr Arbuckle, Crown’s director, says that the receiver discussed the offers he had
13 Medforth v Blake [2000] Ch 86 (CA) at 95. See also State Bank of New South Wales v Chia [2000] NSWSC 552, (2000) 50 NSWLR 587 at [886]; Peter Blanchard and Michael Gedye Private Receivers of Companies in New Zealand (3rd ed, LexisNexis, Wellington, 2008) at 2.06; and McCollum v Thompson [2017] NZCA 269, [2017] NZAR 1106 at [45].
received at the end of the tender process. Mr Arbuckle considered the offer on unit 1 was too low and while the offer for unit 2 was higher it was conditional on a number of matters, including the purchaser obtaining finance. Crown Finance Ltd wanted both properties to be sold. It agreed to the sale to Dacia Properties Ltd.
[34] Crown Finance Ltd’s consent was required for the sale, so that securities could be lifted when the sale proceeds would not cover the entire debt. Admittedly, a receiver can apply to the court under s 17 of the Receiverships Act 1993 to authorise the sale of a property when a mortgagee has not consented. But that would require time and expense. That is a fetter on the receiver’s ability to operate independently of Crown Finance Ltd. Both Mr Arbuckle and the receiver say that they conferred with each other as to the sale of the property, but their evidence is sparse as to the content of those discussions. The receiver does say that he tried to negotiate higher price with Dacia but without success.
[35] This is not the usual case of a receiver selling an asset under an arm’s length transaction where the purchaser has no connection with the receiver or the security- holder. In those cases, consultations between a receiver and a security-holder may not expose the security-holder to being implicated in any breaches of duty by the receiver. The circumstances of the sale to a related company of Crown Finance Ltd invite quite closer scrutiny. There is enough evidence to show an arguable case that Crown Finance Ltd was involved in the receiver’s decision to sell to Dacia Properties Ltd, a related company. As that transaction requires scrutiny, so does Crown Finance Ltd’s participation in it. So far, the court has limited information as to its involvement. There will be a fuller picture after discovery and after the receiver and Mr Arbuckle have given evidence. At this stage, the matter is not clear enough to say that the receiver made his decision to sell to Dacia independently of any influence by Crown Finance Ltd. The matter needs to be tried in the normal way.
The no set-off argument
[36] Crown Finance Ltd says that Mr Cronin cannot run these arguments, because they raise set-offs and he is barred from running set-off arguments. It relies on cl 6.2 of the guarantee:
6.2 All amounts payable by the Guarantor under this deed shall be paid:
(a) free and clear of any restriction or condition;
(b) free and clear of and (except to the extent required by law) without any deduction or withholding on account of any tax; and
(c) without any deduction or withholding on account of any other account, whether by set-off, counterclaim or otherwise.
There are no set-off provisions in the other agreements. Clause 12.1 of the loan agreement says:
12.1 All payments to be made to the Lender under this Agreement or the Security Documents or any of them shall be made without set-off, counterclaim or deduction (other than as this agreement may provide). ...
The general security agreement provides, at cl 2.1:
2.1 ... Each part of the Moneys Secured shall be paid free and clear of any restriction or condition and (except to the extent required by law) without any deduction or withholding on account of any tax and any other amount, whether by way of set-off, counterclaim or otherwise.
(Emphasis added)
[37] These are “pay-now-argue-later” procedural provisions. They do not purport to bar claims by debtors and guarantors that they otherwise have at law, but they require them to bring separate proceedings to make out their claims instead of withholding payments due to the security-holder.
[38] In Public Trust v Ottow, Asher J considered the effect of a “no-set off” clause in a guarantee when a mortgagee had exercised a power of sale under a mortgage.14 He held that the duty under s 176 of the Property Law Act 2007 was mandatory and that Parliament must have intended that the duty could not be excluded by contract. In finding that, he referred to s 177 which bars a mortgagee from raising a defence that the mortgagee was acting as the agent or under a power or attorney from an apparent mortgagor or a former mortgagor, and that the mortgagee is not entitled to be
14 He followed Associate Judge Faire’s decision in Crown Money Corporation Ltd v Pink-Martin
HC Auckland CIV 2008-404-297, 5 September 2008 at [77].
compensated or indemnified from the mortgaged property or from the current mortgagor or any former mortgagor or covenantor. Under s 177(3), it is not possible to contract out of that section. The counterpart to s 177 of the Property Law Act 2007 is s 20 of the Receiverships Act 1993:
Notwithstanding any enactment or rule of law or anything contained in the deed or agreement by or under which a receiver is appointed,—
(a) it is not a defence to proceedings against a receiver for a breach of the duty imposed by section 19 that the receiver was acting as the grantor’s agent or under a power of attorney from the grantor:
(b) a receiver is not entitled to compensation or indemnity from the property in receivership or the grantor in respect of any liability incurred by the receiver arising from a breach of the duty imposed by section 19.
[39] I respectfully agree with Asher J’s reasoning in Public Trust v Ottow.15 As s 20 is in substantially the same terms as s 177 of the Property Law Act 2007, the same approach applies. Accordingly, the no set-off provisions in the term loan agreement, the general security agreement and the guarantee are ineffective to bar Mr Cronin from raising breaches of s 19 of the Receiverships Act by way of defence to the claim by Crown Finance Ltd.
[40] There is, I suggest, a further reason why the no set-off clauses do not apply. No set-off clauses apply where the defendant wishes to make a money claim (liquidated or otherwise) against the creditor’s money claim. But a no set-off clause does not bar a debtor from raising affirmative defences that do not involve a countervailing monetary claim. In some cases, the law recognises that a creditor’s claim may abate because its breaches of contract. The classic examples are deductions from the price for defective workmanship under a contract for services under Mondel v Steel16 and the buyer’s remedy for breach of warranty under a sale of goods.17 The same approach is open in the case of mortgagees’ sales. In practice, mortgagors sued for shortfalls following mortgagee’s sales allege a breach of s 176 of the Property Law Act as an affirmative defence without pleading set-off. They say that their liability for the shortfall is less than that claimed by the mortgagee because of the failure of the
15 Public Trustee v Ottow [2009] NZHC 2904; (2009) 10 NZCPR 879 (HC) at [13]–[14].
16 Mondel v Steel [1841] EngR 61; (1841) 8 M &W 858.
17 Contract and Commercial Law Act 2017, s 195(3)(a).
mortgagee to comply with the duty under s 176 to obtain the best price reasonably obtainable as at the time of the sale. In other words, a mortgagee’s failure to comply with his duty under s 176 goes directly to the amount it can recover in a claim against a mortgagor or covenantor, without the matter being run as a set-off. The practice seems correct. It applies the same principles that led to the decision in Mondel v Steel. That decision sought to avoid the procedural difficulties of a claim for the price being run separately from claims for defective workmanship. In mortgagee shortfall claims, the contest goes to the measure of the shortfall. It is procedurally messy to separate the mortgagee’s shortfall claim from the mortgagor’s or guarantor’s claim that the shortfall is less because of a breach of s 176.
[41] That position is not likely to arise so often with sales by receivers because in the general run of cases, receivers, acting only as agents of the company, sell assets independently of the security-holders. But where the secured creditor has become involved in the sales process to such an extent as to become liable for breach, it should also be liable with the receiver for breach of duty under s 19. There seems to be no reason why a surety should not be able to raise the breach of duty in a claim by the security-holder as an affirmative defence of abatement.
Judgment for a reduced sum?
[42] Crown Finance Ltd says that even if the properties had sold for $1.16m each, as Mr Cronin asserts, there is still a shortfall which it is entitled to recover from him. It calculates the shortfall at $342,546.97 and says that there cannot be any dispute as to that amount. I do not agree with its calculations. Without going through them in detail I set out an alternative approach.
[43] The debt at 18 November 2016 was $1,369,847.71. Crown is entitled to interest on that sum at the default rate of 20 per cent per annum. On settlement of the sales on 26 September 2017 the interest came to $234,187.66, giving a total of
$1,604,035.37. Crown will not accept the interest calculation, because under the term loan interest is capitalised monthly, but for the present I want to keep matters simple.
[44] Crown has charged interest for the advances made to the receiver at the default rate. It is arguable for Mr Cronin that those advances were not made under the loan agreement of 10 September 2015. The loan had reached its expiry date. Crown had called up all monies payable under that loan. The loan agreement makes no provision for the lender to make further advances after the loan has matured and has become repayable in full. Accordingly any advances by Crown Finance Ltd during the receivership were made under a separate agreement. The evidence is not clear whether the advances were to the company or to Mr Tietjens personally. Crown Finance Ltd has not put in evidence any documents evidencing the advances. As Mr Tietjens would be personally liable to repay the advances under s 32(1)(a) of the Receiverships Act and as Crown made the advances to help him in the receivership, it would not be surprising for Mr Tietjens to borrow the money interest free. There is no suggestion of default by Mr Tietjens or the company in repaying the advances. If Mr Tietjens and the company in receivership are not liable to pay interest on the advances, Mr Cronin’s liability as guarantor of the company’s indebtedness cannot be more extensive.
[45] I take the prices of notional sales of the townhouses as $940,000 each. It is not realistic for Mr Cronin to contend for sales at prices higher than the top bid in the tender. The valuer recognised that there should be a discount from assessed current market value for a forced sale. The caveat, absence of code compliance certificate and limited warranties make it improbable to take the assessed market value as achievable.
[46] I take $559,115.35 as the total of Crown’s advances during the receivership from Crown’s record of advances in that time. I have used Crown’s records of withdrawals during the receivership.
[47] I take the costs of the receivership as $626,853.52. That comes from the costs shown in the receiver’s third report but deducting GST and adding $50,000 for real estate commission on the sale. I assess the GST on the receivership at $271,839.27 as 15% of the difference between price and costs.
[48] That gives this calculation:
Loan at 18 November 2016 1,369,847.71
|
Interest
Loan at 26 September 2017 Receipts
|
234,187.66
|
$1,604,035.37
|
|
Sales
|
$1,880,000.00
|
|
|
Advances
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$559,115.35
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$2,439,115.35
|
|
Payments
|
|
|
|
Costs of receivership
|
$626,853.52
|
|
|
GST
|
$271,839.27
|
|
|
Balance available for Crown
|
|
$1,540,422.56
|
|
Shortfall at 26 September 2017
|
|
$63,612.81
|
[49] Interest runs on the shortfall figure at 20% per annum. The calculation is intended to set a minimum figure for Mr Cronin’s liability which can be established in this summary judgment. A later hearing may establish a higher figure but I cannot say now what it should be.
Costs
[50] Under cl 10.1 of the guarantee Crown is entitled to recover all costs and expenses on a full indemnity basis for enforcement and attempted enforcement of its rights under the guarantee. It says that it cannot claim a GST input credit for its legal fees in this proceeding. It has incurred legal fees of $44,761,33. Mr Cronin does not dispute any of the legal invoices in evidence. Instead he proposes that Crown’s partial success should be reflected by the court awarding only half the costs now. I do not accept that suggestion. Crown is entitled to its costs under cl 10.1 regardless of the extent of success and to have judgment for them now.
Outcome
[51] Mr Cronin has an arguable defence to the claim under the guarantee that the receiver did not comply with his duty under s 19 of the Receiverships Act 1993 to obtain the best price reasonably obtainable at the time of sale and that Crown is arguably also liable for that breach. It is not a complete defence because even if he
succeeds on it, there is a balance for which he is liable. As Crown Finance Ltd has succeeded only in part, further case management directions are required.
[52] I make these orders:
[a] I grant the summary judgment application in part. Crown Finance Ltd has judgment against Mr Cronin for $63,612.81 plus interest at the default rate from 26 September 2017 to the date of judgment;
[b] Mr Cronin shall pay costs of $44,761,33 to Crown Finance Ltd;
[c] Mr Cronin is to file and serve a statement of defence by 25 June 2018;
[d] Crown Finance Ltd is to file and serve any reply by 9 July 2018;
[e] By 23 July 2018 the parties are to file and serve affidavits of documents, making standard discovery and complying with the protocol under Part 2 of Schedule Nine of the High Court Rules 2016;
[f] The Registrar is to allocate a case management conference after 1 August 2018 to give further directions, including setting a close of pleadings date and timetabling for hearing;
[g] The case has a fixture for three days beginning 4 February 2019 (that is, 4, 5 and 7 February 2019);
[h] Leave is reserved to apply for further directions.
.....................................
Associate Judge R M Bell
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URL: http://www.nzlii.org/nz/cases/NZHC/2018/1289.html