BRYAN JAMES STOKES, ALEXANDRA MARY STOKES and OWEN NEIL WILLIAMS as trustees of the STOKES FAMILY TRUST v INSIGHT LEGAL TRUSTEE COMPANY LIMITED and GRAHAM KEITH HEENAN as trustees of the R M COLEBROOK FAMILY TRUST [2014] NZHC 2475

BRYAN JAMES STOKES, ALEXANDRA MARY STOKES and OWEN NEIL WILLIAMS as trustees of the STOKES FAMILY TRUST v INSIGHT LEGAL TRUSTEE COMPANY LIMITED and GRAHAM KEITH HEENAN as trustees of the R M COLEBROOK FAMILY TRUST [2014] NZHC 2475 [8 October 2014]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2010-404-001317CIV-2011-404-000399[2014] NZHC 2475BETWEEN BRYAN JAMES STOKES,ALEXANDRA MARY STOKES andOWEN NEIL WILLIAMS as trustees ofthe STOKES FAMILY TRUSTApplicantsAND INSIGHT LEGAL TRUSTEE COMPANYLIMITED and GRAHAM KEITHHEENAN as trustees of the R MCOLEBROOK FAMILY TRUSTRespondentsHearing: 11 July 2014Appearances: A Steele for the ApplicantsR Hindle for the RespondentsJudgment: 8 October 2014JUDGMENT OF ASSOCIATE JUDGE SARGISSONThis judgment was delivered by me on 8 October 2014 at 5.00 p.m.pursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDate.......................................Solicitors:R Hindle, AucklandMartelli McKegg, AucklandIntroduction[1] The applicants apply for an order to sustain a caveat that they have lodged over two properties owned by the respondents under s 145A of the Land Transfer Act 1952. The application is opposed.1[2] The applicants are the trustees of the Stokes Family Trust. The respondents are the current trustees of the R M Colebrook Family Trust.[3] This caveat proceeding arises out of the purchase of the applicants' propertyat Bucklands Beach by a Ms Colebrook. In 2007 Ms Colebrook agreed to buy the property for $1.8 million at the height of the property boom. She was at that time a trustee of the Colebrook Trust. The market collapsed before the settlement date and she defaulted.[4] The applicants have pursued Ms Colebrook to judgment for just over $940,000, which is the shortfall that they suffered when they on-sold the property to another buyer. She is insolvent and has been unable to pay the judgment sum (though she has not been bankrupted).[5] The applicants see the Colebrook Trust assets as their only hope of recovery. They hope to sell the two properties that the Colebrook Trust owns. These are the caveated properties.[6] In the applicants' pursuit of recovery against these assets there has beenlitigation in the High Court and in the Court of Appeal against the Colebrook trustees. To date the applicants have reaped little in the way of success. They rest their hopes on a further appeal to the Court of Appeal, which has not yet been heard.1 The respondents have made a "counter" application seeking to have the caveats removed. Thisapplication is made under s 143. I put aside momentarily the respondent's application, on the basis that if the Stokes' application is successful and the caveats are sustained, the respondent'sapplication must fail.[7] Currently the overall position is that the applicants:(a) Still have a judgment against Ms Colebrook for the $940,000 shortfall, which they cannot collect because she is insolvent, and(b) Have failed in their attempts to date to secure relief against theColebrook Trust and the Trust's assets.[8] There is also an interim order made in this caveat proceeding that the caveat not lapse pending further order.The caveat[9] The caveat is caveat 8709606 lodged against certificates of title NA87D/834 and NA 87D/833 (North Auckland Registry). The caveat states that the caveators have an interest in the subject properties in the form of:an equitable lien arising out of the Caveator's [sic] right to be subrogated to Elaine Margaret Colebrook's right (as a former trustee of the R. MColebrook Family Trust (Trust)) to be indemnified out of the Trust's assetsto meet the amount owed to the Caveator, the registered proprietors of the [and being the current trustees of the Trust.Issue[10] In order to succeed in their application to sustain the caveat, it is common ground that the applicants must show that they are not merely creditors of Ms Colebrook, but that they have a reasonably arguable case for the interest claimedin the caveat (an equitable lien over the Colebrook Trust's properties arising out of aright of subrogation); and that such interest is of the kind referred to in s 137 of the Land Transfer Act 1952.[11] Before considering the respective positions of the parties it is necessary to refer further to the litigation in the High Court and Court of Appeal, and the relevant principles applicable to the application.Overview of the litigation[12] The applicants commenced proceedings in the High Court in 2012 against the same respondents as in this caveat proceeding. Their objective has been to demonstrate that Ms Colebrook's co-trustee, Ms Carr, ratified the agreement for sale and purchase for and on behalf of the Colebrook Trust; that Ms Colebrook is therefore entitled to be indemnified from (and to have an equitable lien over) theTrust's assets for the judgment debt against her; and that they, the vendors, are entitled to subrogate to that right of indemnity, and to take the benefit of the lien.[13] Justice Rebecca Ellis delivered her judgment on 25 July 2012.2 The applicants contended that Ms Colebrook was acting as an agent with the actual but undisclosed authority of the Colebrook Trust when she signed the agreement to purchase the property. Her Honour found as a fact that Ms Colebrook intended to bind the Colebrook trustees and acted as the undisclosed agent of the Colebrook Trust with the authority of Ms Carr. The trustees were therefore liable for the failure to settle the sale and purchase agreement. Justice Ellis held that as a trustee, Ms Colebrook would be entitled to look to the Colebrook Trust to indemnify her.[14] The respondents appealed this decision to the Court of Appeal.3[15] On appeal, the applicants' case diverged from the case advanced at trial. This was because the applicants conceded that Ellis J's finding of agency (thatMs Colebrook acted with the implied authority of Ms Carr) could not be sustained. The Court noted however that the unanswered question was whether Ms Carr in her capacity as trustee consented to the agreement retrospectively.[16] The Court of Appeal upheld Ellis J's finding that Ms Colebrook signed the agreement in her capacity as a trustee and with the intention of binding her co-trustee, but it held that there was incomplete evidence on which to find thatMs Carr gave retrospective consent to Ms Colebrook's purchase. The Court of Appeal was concerned that this result would lead to a real risk of injustice as the applicants would be deprived of the opportunity to argue and to have determined2 Stokes v Insight Legal Trustee Co Ltd [2012] NZHC 1822.3 Insight Legal Trustee Co Ltd v Stokes [2013] NZCA 148.their claim that Ms Carr consented retrospectively to the agreement. It held that the proper course was to remit the proceeding back to the High Court to determine the issues of whether:(a) Ms Carr consented to Ms Colebrook's purchase of the property forand on behalf of the Colebrook Trust; and if so(b) Ms Colebrook is entitled to an indemnity from the assets of the Colebrook Trust for her liability to the applicants.[17] The amended cause of action, based upon ratification, was dismissed by Peters J in a judgment of the High Court delivered on 21 March 2014.4 Peters J determined that on the evidence before her, she could not draw an inference that Ms Carr consented to the purchase of the property. The applicants have appealed this decision to the Court of Appeal.The law[18] A caveat is a creature of statute and may only be lodged by a person upon whom a right to lodge it has been conferred by statute.5[19] Section 137 relevantly provides:137 Caveat against dealings with land under Act(1) Any person may lodge with the Registrar a caveat [[in the prescribed form]] against dealings in any land or estate or interest under this Act if the person—(a) claims to be entitled to, or to be beneficially interested in, the land or estate or interest by virtue of any unregistered agreement or other instrument or transmission, or of any trust expressed or implied, or otherwise;4 Stokes v Insight Legal Trustee Co Ltd [2014] NZHC 543.5 Guardian Trust and Executors Co of New Zealand Ltd v Hall [1938] NZLR 1020 (CA) at 1025.[20] Under s 137, the claim must be to an interest in existence when the caveat is lodged, not to an inchoate interest.6 Caveats protect existing proprietary rights. They do not improve those existing rights, nor do they create new rights.7[21] The procedure for removing or sustaining caveats is prescribed in ss 143, 145 and 145A of the Land Transfer Act. The applicants seek an order that the caveat not lapse in reliance on s 145A. Section 145A provides:145A Early lapse of caveat against dealings(1) The registered proprietor of any estate or interest in the land protected by a caveat against dealings (other than a caveat lodged by the Registrar) may apply to the Registrar for the caveat to lapse.(2) The Registrar must give the caveator notice of an application under subsection (1).(3) The caveat lapses with the close of the prescribed period after the date on which the notice under subsection (2) is given unless—(a) the caveator has earlier given to the Registrar notice that an application for an order to the contrary has been made to the High Court; and(b) an order to that effect has been made and served on the Registrar within the prescribed period after the date on which the notice under paragraph (a) is given to the[22] Applications under ss 143, 145 and 145A do not provide an appropriate forum in which genuinely disputed questions of fact or law should be determined. Generally, once the caveator has shown an arguable case for the caveatable interest, the caveat must remain until the merits of the whole matter have been tried by substantive proceedings.8[23] The applicable principles which apply when considering applications pursuant to ss 143, 145 and 145A are well established. They are stated succinctly in6 Cotton v Keogh [1996] 3 NZLR 1 (CA) at 8 refers to Couchman v Taylor CA172/95, 29 April 1996 at 7.7 Bennion and others New Zealand Land Law (2nd ed, Thomson Reuters, Wellington, 2009) at [4.1.01].8 Orams Marine (Auckland) Ltd v Ports of Auckland Ltd (1994) 6 TCLR 88 (CA).the judgment of Faire J, then Associate Judge Faire, in Chen v ANZ National Bank Ltd:9(a) Sections 143, 145 and 145A of the Land Transfer Act 1952 give no guide as to the circumstances in which the court may make an order that a caveat be removed: Catchpole v Burke;(b) If it is clear that there was no valid ground for the lodging of a caveat,or that the interest which in the first place justified the lodging of thecaveat no longer exists, such a caveat should be removed: Sims vLowe;(c) The onus under s 143 of the Land Transfer Act 1952 lies on the caveator to show that he has a reasonably arguable case for the interest he claims: Castle Hill Run Ltd v NZI Finance Ltd;(d) The caveat, being a creature of statute, may be lodged only by a person upon whom a right to lodge it has been conferred by statute. It is not enough to show that the lodging and continued existence of the caveat would be in some way advantageous to the caveator: Guardian Trust & Executor Co of New Zealand Ltd v Hall;(e) What the caveator must establish is an arguable case for claiming an interest of the kind referred to in s 137 of the Land Transfer Act 1952; and(f) Even if the caveator establishes an arguable case for the interest in theland claimed, the court retains a discretion to make an order removing the caveat although it will be exercised cautiously: Pacific Homes Ltd (in rec) v Consolidated Joineries Ltd.[24] Traditionally, caveat applications were approached as if they were interlocutory applications for interim injunctions. That is to say, the courts often considered whether the balance of convenience favoured sustaining the caveat. More recent cases have now cast doubt on this approach. In Orams Marine (Auckland) Ltd v Ports of Auckland Ltd, Ellis J said:10Other cases in this Court (Castle Hill Run Ltd v NZI Finance Ltd [1985] 2 NZLR 104; Holt v Anchorage Management Ltd [1987] 1 NZLR 108; andShell Oil NZ Ltd v Wordcom Investments Ltd [1992] 1 NZLR 129) confirm that while consideration of the balance of convenience may be required in exceptional cases, once a reasonably arguable case has been established, justice will require the maintenance of the caveat. However, where the9 Chen v ANZ National Bank Ltd [2012] NZHC 1083 at [7].10 Orams Marine (Auckland) Ltd v Ports of Auckland Ltd, above n 8.evidence shows that on the evidence before the Court the caveator cannot succeed at trial, the caveat should be allowed to lapse, or be discharged.Discussion[25] The applicants' grounds for an order to sustain the caveat are essentially thatthey have a good arguable case that:(a) Ms Carr ratified the agreement for sale and purchase for and on behalf of the Colebrook Trust; that Ms Colebrook is therefore entitled to beindemnified from (and to have an equitable lien over) the Trust'sassets for the judgment debt against her; and that(b) They, as vendors and creditors, are entitled to subrogate to that right of indemnity and have the same equitable lien as the trustees over theTrust's assets; and(c) The equitable lien over the two caveated properties is a caveatable interest under s 137.[26] The respondent's grounds of opposition (and their grounds for an order toremove the caveat) are in essence that the High Court has already determined that Ms Carr did not ratify the agreement, and as that determination is one of fact, the appeal against it is hopeless; but should the appeal succeed against all odds, the applicants cannot demonstrate a reasonably arguable case that a right of indemnity and an equitable lien existed when the caveat was lodged. Additionally, even if theseinsuperable hurdles were overcome, a trustee's equitable lien does not constitute aproprietorial claim sufficient to constitute a caveatable interest in Trust property. Lastly, and in any event, this is a case where the Court should exercise its discretion against the applicant.[27] Both counsel made extensive submissions on each ground at the hearing. I have considered all of the arguments put before me. It is unnecessary to discuss them at length here. I confine my discussion to the arguments that are determinative in the decision I have reached. My decision is that the caveat cannot stand.[28] My reasons can be stated briefly.[29] The first reason is that the applicants face an extremely difficult hurdle to overturn the finding of fact made by Peters J that Ms Carr did not retrospectivelyratify or consent to Ms Colebrook's purchase of the applicants' property. As counsel for the applicants recognises, to succeed the applicants are required to demonstrate that the finding was one that could not reasonably be made on the evidence—yet there was no attempt before me to identify what the evidence before Peters J was, nor was there any attempt to show why that evidence could not support her finding.[30] In the circumstances it is difficult to see any basis on which the High Court'sfinding could be set aside on appeal. This is not therefore a case where I can be confident that the applicants will have any reasonable chance of success on appeal. That being the case, they have not satisfied me that they have a serious argument that they will be able to cross a major hurdle they must confront in establishing that they have a reasonably arguable claim to a caveatable interest. Their claim to such an interest is fairly described as speculative or mere assertion.[31] The second reason is that the interest the applicants claim (an equitable lien) is not one that could have been held when the caveat was lodged. At that time they were, and they remain, mere creditors. Even if successful in overturning the finding of Peters J, their position as mere creditors will not change unless they succeed in an application for a declaration that they are entitled to subrogate to the trustees' right ofindemnity. As counsel for the applicants acknowledged, the creditor seeking subrogation must apply to the Court for discretionary relief by way of a declaration as to the existence of the trustee's indemnity, the creditor's entitlement to subrogate,and the existence of the equitable lien, along with orders seeking consequential relief directed at realisation of that interest by appropriate orders for sale of Trust assets.11As counsel recognises:By operation of law, a trust creditor will step into the shoes of an insolvent trustee, and so, become the holder of the indemnity right and the equitable lien or charge that accompanies that right.11 Levin v Ikiua [2010] 1 NZLR 400 (HC) at [123].(Emphasis added)[32] On the applicant's own case, it is plain that they cannot claim to be the holders of such a right or lien until they actually step into the shoes of the insolventtrustee. The right of a creditor to be subrogated into the trustees' right of indemnityis explained by Lewin on Trusts in the following terms:Although unsecured creditors and other claimants do not have a direct claim against the Trust property in respect to unsecured liabilities incurred by trustees in the administration of the Trust, and cannot levy execution upon the Trust property, they may by subrogation have a right to stand in the place of the trustee and enforce their liabilities against the Trust property to the extent that the trustee would be so entitled.12[33] In these circumstances the applicants cannot claim to be, or to have everbeen, the holders of an existing interest in the Colebrook trustees' properties basedon a right of indemnity and equitable lien. A caveat cannot protect an interest that has yet to come into existence. A caveat is lodged to protect an existing interest in property.13[34] Even if I am wrong in these findings, I am satisfied this is one of those cases where the Court should exercise the discretion to decline to make an order sustaining the caveat. Materially, this is not a case where the applicants risk losing the property over which they seek to maintain their caveat. They have no interest in the property other than for the purpose of indemnity. It is however a case where maintaining the caveat would have a serious impact on the respondents. At the hearing it was common ground that the caveat will prevent them from completing an agreement for the sale of the properties, on which settlement is imminent. They risk losing the very significant benefit of their agreement in circumstances where the amount of the judgment debt is significantly less than that benefit.[35] In such circumstances I do not think the interests of justice would be served by an order that the caveat not lapse. Rather, to allow the caveat to remain would be oppressive. In reaching this view I am mindful of the fact that the applicants have12 John Mowbray QC and others Lewin on Trusts (18th ed, Thomson Reuters, United Kingdon, 2007) at [21] to [38].13 Gordon v Treadwell Stacey Smith [1996] 3 NZLR 281 at 289; Butler v Fairclough (1917) 23 CLR 78 at 84; Bennion, above n 7, at [4.1.01].other avenues of relief open to them. It is open to them, for example, to seek injunctive relief against the proceeds of sale of one or other of the Trust properties.Result[36] The application to sustain the caveat is declined. There is an order that the caveat number 8709606 lodged against certificates of title NA87D/834 and NA 87D/833 (North Auckland Registry) shall lapse.[37] As costs follow the event under the statutory costs regime, I make an order for costs against the applicants in favour of the respondents on a 2B basis, plus disbursements as fixed by the Registrar._____________________Associate Judge Sargisson