100 INVESTMENTS LIMITED v IAG NEW ZEALAND LIMITED [2018] NZHC 3244

100 INVESTMENTS LIMITED v IAG NEW ZEALAND LIMITED [2018] NZHC 3244 [11 December 2018]IN THE HIGH COURT OF NEW ZEALANDCHRISTCHURCH REGISTRYI TE KŌTI MATUA O AOTEAROAŌTAUTAHI ROHECIV-2016-409-888[2018] NZHC 3244BETWEEN 100 INVESTMENTS LIMITED for itselfand in the name of LICHFIELDVENTURES LIMITEDPlaintiffAND IAG NEW ZEALAND LIMITEDDefendantHearing: 5 November 2018Counsel: P W Michalik and H M Weston for PlaintiffN A Till QC and K Welsford for DefendantJudgment: 11 December 2018JUDGMENT OF THOMAS J[1] 100 Investments Ltd has been engaged in a protracted battle with the Insurer,IAG New Zealand Ltd (IAG), in respect of an insurance claim relating to a propertydamaged by the 2010/2011 Canterbury earthquakes. They have now reached asettlement as to the sum payable under the insurance policy. This judgment relates tothe outstanding issue between the parties and that is the entitlement of 100 Investmentsto receive the insurance proceeds. IAG does not oppose 100 Investments' claim inthis regard.[2] This decision follows what was effectively a formal proof hearing.Background[3] At the time of the Canterbury earthquake sequence of 2010 and 2011,110 Lichfield Street, Christchurch (the Property) was owned by Lichfield VenturesLtd. On the Property was a two-storey brick commercial building.[4] The Property was insured with NZI, a division of IAG, under a materialdamage policy. The sum insured was $2,715,920 excluding GST and the insurancewas provided on the basis that replacement value conditions applied. Mortgagees ofthe Property were named on the policy as Interested Parties, including PropertyfinanceFunding Nominees Ltd as first mortgagee. The material damage section of theinsurance policies contained a clause specifically stating that cover was extended toany person or entity having an insurable interest in the Property.[5] Lichfield Ventures was in receivership during the earthquake period and placedinto liquidation on 16 December 2010. The insurance was renewed for the period1 June 2011 to 1 June 2012. Hanover Capital Ltd was noted as an Interested Party.[6] The Property was damaged in the earthquakes of 4 September 2010,26 December 2010 and 22 February 2011. The estimated cumulative cost of repairwas considerable. On 15 February 2012, the Chief Executive of the CanterburyEarthquake Recovery Authority issued a notice under s 38(4) of the CanterburyEarthquake Recovery Act 2012 requiring demolition of the building on the Property.In March 2012, the Canterbury Earthquake Recovery Authority, through its demolitioncontractors, carried out the demolition of the building on the Property.[7] Lichfield Ventures made claims under the insurance policies.[8] In October 2014, Property Finance Securities Ltd (PFSL) acquired byassignment the first registered mortgage over the Property.[9] In early December 2015, NZI paid $789,929.92 including GST to the receiversappointed by PFSL. This indemnity payment was neither paid nor received in full andfinal settlement of the insurance claims.[10] In October 2018, NZI accepted 100 Investments was entitled to receive afurther payment in respect of the indemnity value of the unrepaired earthquakedamage, plus interest. By the settlement agreement with 100 Investments, it has alsoaccepted 100 Investments' entitlement to a further sum to settle all claims under theinsurance policies, subject to this decision.100 Investments[11] In March 2005, Lichfield Ventures as debtor entered into a General SecurityAgreement with PFSL as the secured party (the GSA). The GSA is the first registeredsecurity agreement under the Personal Property Securities Register in respect ofLichfield Ventures' personal property.[12] As noted above, Lichfield Ventures was placed into liquidation in December2010. By September 2015, Lichfield Ventures owed PFSL at least $3.5 million.[13] On 4 September 2015, PFSL entered into an agreement to assign debt andsecurity with Lichfield Securities Ltd (or nominee) (the Agreement to Assign).Lichfield Securities is a company in common ownership with 100 Investments.Pursuant to the Agreement to Assign, PFSL agreed to assign to Lichfield Securities:(a) its rights in the debt Lichfield Ventures owed it;(b) all loan documents between PFSL and Lichfield Ventures; and(c) all securities given by Lichfield Ventures in favour of PFSL, includingall guarantees, mortgages of land and security interests.[14] The consideration for the Agreement was $1.997 million. The assignment datewas to be 25 September 2015, on which date Lichfield Securities was to pay thebalance of the consideration and PFSL was to provide an executed deed of assignmentof debt and security in an agreed form.[15] Lichfield Securities nominated 100 Investments to take the benefit of theAgreement to Assign. As subsequent events disclose, there was also some variationto the Agreement to Assign.[16] The parties to the Agreement to Assign clearly revised their approach to theassignment of debt and securities so far as the Property was concerned. Rather thanthe mortgage to PFSL being assigned to 100 Investments, the mortgagee sale routewas followed. On 17 December 2015, PFSL, as first mortgagee of the Property,entered into an agreement to sell the Property to 100 Investments for the purchaseprice of $1,320,500 (the Sale and Purchase Agreement). The Sale and PurchaseAgreement included the following clauses:18. Vendor selling as mortgagee18.1 The Vendor is selling as first mortgagee and in exercise of the powerof sale vested in it as mortgagee under Mortgage number 7114247.15.The Purchaser shall assume without evidence that the events havehappened and the required period has elapsed entitling the Vendor toexercise its power of sale.28. Assignment of any residual Insurance Claim in relation to theProperty28.1 The Vendor will assign the benefit of any residual insurance claim inrelation to material damage relating to the Christchurch earthquakesin respect of the Property to the Purchaser on settlement.[17] Between the date of the Agreement to Assign and the Sale and PurchaseAgreement, NZI had made the December 2015 payment in respect of the insuranceclaim to PFSL. In light of the Agreement to Assign, PFSL gave 100 Investments creditfor that indemnity payment and reduced the price in the Sale and Purchase Agreementfor the Property by the amount of that indemnity payment.[18] Settlement of the sale and purchase of the Property took place on 23 December2015.[19] 100 Investments is now registered as proprietor of the Property pursuant to theexercise of PFSL's power of sale as mortgagee. The subsequent mortgages areextinguished by virtue of the power of sale having been exercised and are so recordedon the Land Transfer Act Register.[20] On 27 January 2016, PFSL executed a deed to assign debt and security (theDeed) in favour of 100 Investments. Although the Deed was dated 27 January 2016,it recorded the assignment date as 23 December 2015. Given the sale and purchase ofthe Property had settled, the assignment consideration was recorded as $660.01,reflecting the final balance required to settle the Agreement to Assign. Relevantly, andin contrast to the Agreement to Assign, the Deed did not include mortgages of landunder the definition of Security (the Property having been sold to 100 Investments byPFSL as mortgagee).[21] Because NZI challenged 100 Investments' right to the insurance proceeds, on1 September 2016 100 Investments exercised its right under the GSA to enter intopossession of Lichfield Ventures' charged personal property pursuant to s 156 of theProperty Law Act 2007.[22] 100 Investments relies primarily on its right as assignee from PFSL of theinsurance claim proceeds pursuant to its acquisition of the Property from PFSL, sellingas mortgagee. In the alternative, 100 Investments relies on its rights under the GSAand/or its rights as mortgagee in possession, having given notice under the PropertyLaw Act.Intervention of Lichfield Ventures' liquidator[23] Following the formal proof hearing, counsel for the liquidator of LichfieldVentures filed a memorandum with the Court. The liquidator claimed an interest inthe proceedings for two reasons. First, because 100 Investments was purporting to suein the name of Lichfield Ventures but had neither sought the liquidator's consent to doso, nor had a Court order been made permitting this.1 Secondly, the liquidator, onbehalf of Lichfield Ventures' creditors, claimed an interest in potential recoveriesunder Lichfield Ventures' insurance policies.1 Companies Act 1993, s 248.[24] The liquidator sought the opportunity to provide brief submissions to the Courtas to 100 Investments' entitlement to the insurance proceeds.[25] Predictably, 100 Investments objected to this course, noting that the liquidatorhad known about the proceedings since at least September 2018, had been providedwith copies of the pleadings and advised that the case would be heard commencing5 November 2018. Mr Michalik, for 100 Investments, pointed out that it was notablethe liquidator had not applied to be joined as a party, nor sought any other formalinvolvement in the proceedings. Furthermore, if the liquidator had a claim, then it wasfor the liquidator to take appropriate proceedings in due course.Is 100 Investments entitled to the insurance proceeds?Effect of the liquidation[26] While the liquidator claimed he may but was not obliged to exercise powers inrelation to charged property,2 a liquidator's powers do not affect a secured creditor'srights over secured property. Section 248 of the Companies Act provides:248 Effect of commencement of liquidation(1) With effect from the commencement of the liquidation of acompany,—(a) the liquidator has custody and control of the company'sassets:(b) the directors remain in office but cease to have powers,functions, or duties other than those required or permitted tobe exercised by this Part:(c) unless the liquidator agrees or the court orders otherwise, aperson must not—(i) commence or continue legal proceedings against thecompany or in relation to its property; or(ii) exercise or enforce, or continue to exercise orenforce, a right or remedy over or against property ofthe company:(d) unless the court orders otherwise, a share in the company mustnot be transferred:2 Companies Act 1993, s 254(a).(e) an alteration must not be made to the rights or liabilities of ashareholder of the company:(f) a shareholder must not exercise a power under the constitutionof the company or this Act except for the purposes of this Part:(g) the constitution of the company must not be altered.(2) Subsection (1) does not affect the right of a secured creditor, subjectto section 305, to take possession of, and realise or otherwise dealwith, property of the company over which that creditor has a charge.[27] Section 305 then sets out the rights and duties of secured creditors which, asrelevant to this case, provides:305 Rights and duties of secured creditors(1) A secured creditor may—(a) realise property subject to a charge, if entitled to do so; or(b) value the property subject to the charge and claim in theliquidation as an unsecured creditor for the balance due, ifany; or(c) surrender the charge to the liquidator for the general benefitof creditors and claim in the liquidation as an unsecuredcreditor for the whole debt.(2) A secured creditor may exercise the power referred to in paragraph (a)of subsection (1) whether or not the secured creditor has exercised thepower referred to in paragraph (b) of that subsection.(3) A secured creditor who realises property subject to a charge—(a) may, unless the liquidator has accepted a valuation and claimby the secured creditor under subsection (6), claim as anunsecured creditor for any balance due after deducting the netamount realised:(b) must account to the liquidator for any surplus remaining fromthe net amount realised after satisfaction of the debt, includinginterest payable in respect of that debt up to the time of itssatisfaction, and after making any proper payments to theholder of any other charge over the property subject to thecharge.The mortgage to PFSL[28] Lichfield Ventures' indebtedness to PFSL was secured by various means,including a first mortgage over the Property. The mortgage over the Property was inthe Auckland District Law Society standard form which provides that, where themortgage is over land, then: the party granting the security mortgages to the security holder all of itsright title and interest (present, future, legal and equitable) in the land andassigns to the security holder absolutely all of its right title and interest(present, future, legal and equitable) in land proceeds.[29] The definition of "land proceeds" includes any proceeds of any insurance.[30] The proceeds of a claim under a material damage insurance policy are anaccrued contractual right in existence as from the time of the damage to the insuredproperty.3 At the date PFSL sold the Property to 100 Investments, it had an accruedpresent right to the outstanding insurance proceeds which are specifically included asland proceeds under the mortgage. PFSL validly assigned that entitlement to100 Investments when it sold the Property to 100 Investments in the exercise of itspower of sale as first mortgagee.[31] Lichfield Ventures' indebtedness to PFSL as at the date of the mortgagee saleexceeded $4.5 million. PFSL's priority sum under the mortgage of the Property was$3.330 million. As mortgagee exercising its power of sale, PFSL was under statutoryobligations to obtain the best price reasonably obtainable and to apply the proceeds ofsale to that secured by the mortgage, with any balance to those holding a subsequentmortgage or security interest.4[32] The effect of the mortgagee sale was to discharge the first and all subsequentmortgages over the Property, as the Land Transfer Act Register of the Propertyconfirms.3 Ridgecrest NZ Ltd v IAG New Zealand Ltd [2014] NZSC 129, [2015] 1 NZLR 40 at [50(d)].4 Property Law Act 2007, ss 176 and 185.Issues raised by the liquidator[33] In his memorandum to the Court dated 20 November 2018, counsel for theliquidator addressed two issues. First, he raised an issue as to the extent of 100Investments' rights as an assignee of PFSL, Lichfield Ventures' mortgagee.Mr Francis noted authority to the effect that an assignment of a reinstatementinsurance claim is prevented.5 In this case, however, although 100 Investments' claimincluded reference to the cost of reinstatement, the total amount of the insurancepayout pursuant to the settlement is less than either party's estimate of fullreinstatement value and, as such, any issues concerning assignability of areinstatement claim pursuant to those authorities do not arise. Furthermore, the caseson which Mr Francis relies concern property sold in circumstances where the vendor'sreinstatement insurance was contingent on rebuilding, a contingency which was notcompleted before sale. Neither was a mortgagee sale. Again, these are distinguishingfactors. Not only was the sale in the present case a mortgagee sale but rights pursuantto the insurance policy had accrued; they were not contingent.[34] Mr Francis then submitted that, if a mortgagee obtains a surplus, whether froma mortgagee sale or insurance claims, this needs to be accounted for to other parties,either secured creditors or the mortgagor. He observed that, if the mortgagee's rightsare so qualified, then the rights of its assignee must also be so qualified. Mr Francisreferred to the fact that the insurance policy noted the interest of the second mortgageeof the Property, originally Hanover Finance, and its mortgage contained a covenant tokeep the Property insured. He then submitted that PFSL was unable to assign theinsurance claim to 100 Investments free of the second mortgagee's equitable interests.He relied on the authorities summarised in Insurance Claims in New Zealand:6In some cases where there are multiple insured interests, only parts of aninsured's rights may be assigned. In Colonial Mutual General Insurance CoLtd v ANZ Banking Group (NZ) Ltd,7 the owners of a property held twomortgages. The second mortgage, with ANZ, contained a covenant to insure.The insurance was effected in the names of the insured, with the secondmortgagee, ANZ, noted as an interested party. The covenant to insure was5 Bryant v Primary Industries Insurance Co Ltd [1990] 2 NZLR 142 (CA) affirmed in Xu v IAG[2018] NZCA 149 at [25] (leave granted to appeal: Xu v IAG New Zealand Ltd [2018] NZSC 68).6 Paul Michalik and Christopher Boys Insurance Claims in New Zealand (LexisNexis, Wellington,2015) at [11.2.10].7 Colonial Mutual General Insurance Co Ltd v ANZ Banking Group (New Zealand) Ltd [1995]3 NZLR 1 (PC).seen as an assignment of the insured's rights to ANZ. [The property wasdestroyed by fire and Colonial Mutual paid the mortgagor rather than ANZ] ANZ argued that payment to the owners did not satisfy Colonial Mutual'sobligations to it as assignee. The Privy Council agreed, finding that a covenantto insure can only have effect if it assigns the mortgagee an interest in theproceeds of the relevant policy.[35] The obligation on a mortgagor to insure property is, as one would expect, astandard obligation in a mortgage of land. This case is no different. Clause 8 of theADLS standard form of mortgage, which was the form used for Lichfield Ventures'mortgage to PFSL, includes an obligation on the mortgagor to insure the property. Asreferred to above, the ADLS standard form also provides that the mortgagor assignsto the security-holder absolutely its rights in proceeds of insurance. The principlebehind these provisions is obvious. A mortgagee advances money to a mortgagor.Repayment of that money is secured by an interest in the mortgaged property. Amortgagee needs to be satisfied that the value of the mortgaged property is (and willcontinue to be) sufficient to protect its position as lender so that, if the mortgagordefaults on its loan obligations, the mortgagee can realise the property and recoup itslosses. A mortgagee is therefore undeniably interested (in all senses of the word) ininsurance.[36] A subsequent mortgagee is obviously interested in insurance in the same way.Its interest is, however, subject to the rights of those with priority.[37] A mortgage over property grants mortgagees security for their loans in respectof the value of that property. Insurance is part and parcel of that. Effectively, it is aproperty interest. Once a bona fide purchaser for value becomes the registeredproprietor following a mortgagee sale, the mortgages, and therefore the interests of themortgagees in respect of the property, are extinguished.[38] The liquidator's second issue concerned the right of 100 Investments to retainthe settlement proceeds. The argument focused on the priority sum under themortgage, the liquidator's contention being that, if the settlement sum exceededPFSL's priority sum under the mortgage, then subsequent mortgagees would have aclaim in respect of that excess. Again, however, this is premised on amisunderstanding of mortgages.[39] As discussed above, when insured property is damaged, the contractual rightto the insurance proceeds accrues. In this case, as the Property was damaged beforethe mortgagee sale, the contractual right to the proceeds of the insurance claim hadalso accrued. PFSL's mortgagee sale sold the Property and the rights to the insuranceproceeds. As discussed, PFSL was obliged to obtain the best price reasonablyattainable. Subsequent mortgagees were entitled to bid for the Property. It is unknownwhether they did but, in any event, consistent with PFSL's statutory obligation, theoffer from 100 Investments must have been the best. The agreed sale price was, onthat basis, the best price reasonably obtainable for the Property (including the right tothe insurance claim proceeds).[40] Even if there is an argument to the effect that subsequent mortgagees had somesort of claim to the insurance proceeds, almost three years after date of settlement ofthe sale of the Property, that is a matter for them to pursue against PFSL.[41] Mr Francis submitted that it would be illogical if 100 Investments had greaterrights to retain insurance proceeds than PFSL would have had, had the assignment ofrights never taken place. This submission conflates the position of 100 Investmentswith that of PFSL.[42] The priority sum is relevant as between mortgagees.8 The priority sum doesnot operate as a limit on a first mortgagee's entitlement to the insurance proceedsper se. A mortgagee's entitlement is to the proceeds of sale sufficient to recover thedebt it is owed. There are two different concepts at play.[43] Had PFSL received more than the lesser of what it was owed or $3.33 millionwhen it sold the Property (including the insurance proceeds) to 100 Investments, itwould have been obliged to account for any surplus to the subsequent mortgagees.PFSL did not receive from the mortgagee sale more than the lesser of those two sums.The mortgagee sale recovery did not fully repay the debt owed to PFSL and did notexceed PFSL's priority sum. There was therefore no further balance to pay to anysubsequent mortgagees.8 Property Law Act 1952, s 80A. This provision applies as the mortgage came into operation priorto 1 January 2008: Property Law Act 2007, s 94.[44] As already discussed, on a mortgagee sale, the mortgages are extinguished.That means that the purchaser, in this case 100 Investments, takes the property,including land proceeds, free of any secured interest.[45] Questions as to s 185 of the Property Law Act and priority sums are issuesrelevant so far as the mortgagee sale is concerned. They do not affect what happensafter the sale or impose future obligations on the purchaser.Conclusion[46] It is therefore clear that 100 Investments has the right to the outstandinginsurance proceeds in respect of the Property and the ability to settle any insuranceclaims under the policies with NZI/IAG. There is no need to have recourse to the GSAor the rights of 100 Investments as mortgagee in possession of Lichfield Ventures'personal property. The fact 100 Investments purported to bring proceedings in thename of Lichfield Ventures without the consent of the liquidator was an unnecessarycomplication but, in the circumstances, irrelevant.Result[47] For the reasons given, I am satisfied 100 Investments is the party entitled tothe proceeds of the insurance claims under Lichfield Ventures' insurance policies withNZI in respect of the Property. 100 Investments has the right to enter into anagreement to settle and discharge the insurance claims.[48] I record there is no issue between 100 Investments and IAG as to costs in theproceedings.[49] 100 Investments wishes to be heard in respect of costs it has incurred as a resultof action taken by the liquidator. Any such memorandum is to be filed and served by31 January 2019, with any response three working days thereafter.Thomas JSolicitors:Canterbury Legal, Christchurch for PlaintiffYoung Hunter, Christchurch for Defendant