FAI MONEY LIMITED v VUJCICH [2021] NZHC 2267

FAI MONEY LIMITED v VUJCICH [2021] NZHC 2267 [31 August 2021]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2019-488-0063[2021] NZHC 2267UNDER Part 18 of the High Court Rules 2016IN THE MATTER OF a proceeding to determine priority ofcompeting equitable interests to the proceedsfor the sale of landBETWEEN FAI MONEY LIMITEDPlaintiffAND CAROLINA CATHARINA MARIAVUJCICH (AS EXECUTOR OF THEESTATE OF GERARDUS JOZEF MARIEMARTENS) AND ED JOHNSTON & COTRUSTEES LTDFirst DefendantsContinued overHearing: 3 May 2021Appearances: A R B Barker QC for PlaintiffN P Tetzlaff for First DefendantsD E Shortland for Fourth DefendantC Baker for Sixth DefendantNo appearance for Seventh DefendantJudgment: 31 August 2021JUDGMENT OF PETERS JThis judgment was delivered by Justice Peters on 31 August 2021 at 2 pmpursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate: ...................................AND WENDY RUTH JOHNSTONSecond Defendant (Discontinued)DONALD ANZAC GEORGE REYLAND,AILSA GLORIA REYLAND ANDEDWARD ERROL JOHNSTONThird Defendants (Discontinued)WAYNE MATTHEW MCKENNAFourth DefendantGRAEME MARK JESPERSENFifth Defendant (Discontinued)EDWARD ERROL JOHNSTONSixth DefendantSECRETARY OF THE TREASURY OFNEW ZEALANDSeventh DefendantSolicitors: Glaister Ennor, AucklandSmith & Partners, AucklandTeei & Associates, AucklandPrice Baker Berridge, AucklandCounsel: A R B Barker QC, AucklandD E Shortland, AucklandIntroduction[1] This judgment determines applications for orders vesting property disclaimedby the Official Assignee.1[2] Those seeking a share of the disclaimed property are the plaintiff, the first andfourth defendants, and the sixth defendant, Mr Edward Johnston, in whose bankruptcythe Official Assignee was acting at the date of the disclaimer, being 12 July 2016. Irefer to the applicants as "FAI", "the Trustee", "Mr McKenna" and "Mr Johnston"respectively.[3] Mr Johnston was adjudicated bankrupt in November 2012 and was dischargedin March 2016.[4] The disclaimed property was Mr Johnston's (one-fifth) "interest in theBroadpine No. 1 Partnership ..." ("property"). The partnership was formed in the1980s, to hold land, and then realise the value in radiata pine growing on that land("land").[5] The Official Assignee disclaimed the property on the basis it was "onerousproperty" in the sense of s 117 Insolvency Act 2006 ("Act").[6] In 2017, several of the partners applied for orders to facilitate a sale of the rightto harvest the trees on the land, whether by a sale of the land itself or by a sale of theright only. Fitzgerald J made the orders sought in October 2018, including orderslapsing caveats lodged against the certificate of title to the land, with the proceeds ofsale to be held in trust pending further order of the Court.2 The right to harvest thetrees was then sold. The land was retained.[7] As matters stand, the property comprises:(a) A one-fifth share in the land. In 2019, the assessed value of the landfor rating purposes was $170,000. On a pro-rata basis a one-fifth share1 Insolvency Act 2006, s 119.2 Jespersen v Secretary of the Treasury [2018] NZHC 2603.has a value of $34,000, and the parties have proceeded on the basis thatthis is the value to be attributed to that component of the property.(b) Mr Johnston's share of the proceeds of sale of the right to harvest thetrees, that share being $754,278.40 as of 15 April 2021.(c) Mr Johnston's share of the proceeds of sale of carbon credits attachedto the land which were sold in February 2021. Mr Johnston's share ofthese proceeds is $54,773.57, also as of 15 April 2021.[8] The combined value of the land and cash is $843,051.97. The cash is held oninterest bearing deposit in the trust account of UHY Haines Norton, a firm ofaccountants.Proceedings[9] This proceeding is a consolidation of proceedings which Mr Johnston issuedin late-2017 ("CIV-3038") and which FAI commenced in 2019 ("CIV-63"), eachseeking orders that the property vest in him or it pursuant to s 119 of the Act.[10] Many of the original defendants to the proceeding have fallen away, whetherby disclaiming any interest in the property, hence the discontinuances referred to inthe intituling, or by failing to take steps in the proceeding.[11] A five day fixture was to be held in May 2021. However, shortly before then,FAI, the Trustee and Mr Johnston agreed that FAI and the Trustee would be paid sumsthat would leave a balance of $100,000, which those parties agreed would be paid toMr Johnston. Mr McKenna did not agree to that distribution.[12] Having been informed of the agreement, and of Mr McKenna's position, on21 April 2021, Moore J directed the matter proceed by way of a formal proof.[13] By the time I heard the proceeding, it was common ground between allconcerned that I should vest in FAI and the Trustee the sums which had been agreed,but with Mr Johnston and Mr McKenna each claiming the better entitlement to thebalance of $100,000.[14] Notwithstanding the agreement, I must satisfy myself as to jurisdiction unders 119.Sections 118 and 119 Insolvency Act 2006[15] Sections 118 and 119 of the Act provide:118 Effect of disclaimerA disclaimer by the Assignee—(a) brings to an end, on and from the date of the disclaimer, therights, interests, and liabilities of the Assignee and thebankrupt in relation to the property disclaimed:(b) does not affect the rights, interests, or liabilities of any otherperson, except in so far as is necessary to release the Assigneeor the bankrupt from a liability.119 Position of person who suffers loss as result of disclaimer(1) A person suffering loss or damage as a result of disclaimer by theAssignee may—(a) claim as a creditor in the bankruptcy for the amount of the lossor damage, taking account of the effect of an order made bythe court under paragraph (b):(b) apply to the court for an order that the disclaimed property bedelivered to, or vested in, that person.(2) The bankrupt may also apply for an order that the disclaimed propertybe delivered to, or vested in, the bankrupt.(3) The court may make an order under subsection (1)(b) or (2) if it issatisfied that it is fair that the property should be delivered to, orvested in, the applicant.[16] Having regard to these provisions, the issues to be determined are whether eachapplicant, other than Mr Johnston, has suffered "loss or damage as a result of" thedisclaimer and, if so, whether it is fair, in the sense of s 119(3), that the property orpart of it should be vested in that applicant or Mr Johnston.[17] In Goldstone v Goldstone, Toogood J set out relevant considerations indetermining whether an order would be fair:3(a) the applicant's former interest in it, if any;(b) how and when such interest was acquired;(c) if the applicant had no interest in the disclaimed property, what otherrelationship formerly existed between the applicant and the property;(d) whether the applicant has maintained or increased the value of theproperty to be vested or prevented its transfer to a third party;(e) the circumstances in which the disclaimed property became vested inthe Assignee through bankruptcy;(f) the rights and interests of third parties, if any, and, in particular,whether they consent to the vesting; and(g) the consequences of any vesting for the applicant and any otherpersons.The parties' claimsFAI[18] FAI's claim is put on two grounds. Either it does not require an order unders 119, by virtue of the operation of s 118, or it does require an order in which case thegrounds for making one are made out. The background to FAI's claim is as follows.[19] In December 2009, FAI advanced $300,000 to Mr Johnston. The advancewas secured by, inter alia, a General Security Agreement dated 21 December 2009("GSA"). FAI knew of Mr Johnson's interest in the property because he had includedit in a statement of assets and liabilities as at 24 April 2009.[20] In June 2011, after various defaults, FAI and Mr Johnston executed anamendment deed which recorded the balance then owing as $386,267.96.[21] Following further default(s), on 14 August 2012 FAI obtained judgment bydefault against Mr Johnston for $423,517.50, interest of $60,381.96, and costs of3 Goldstone v Goldstone [2019] NZHC 1649 at [41].$12,327.50, being a total of $496,226.96.4 Interest continued to accrue at theprescribed rate.[22] FAI also brought proceedings against guarantors of the indebtedness. Aftercosts, FAI netted a small surplus which it applied in reduction of the debt.[23] FAI submits that, as at the date of hearing, it was owed a total of $683,028.10,excluding solicitor-client costs in the present proceeding to which FAI is entitled underthe GSA.[24] By cl 1 of the GSA, Mr Johnston charged in favour of FAI the "SecuredProperty" as security for, amongst other things, repayment of his present and futureindebtedness. "Secured Property" is defined as "all the right, title and interest (presentand future, legal and equitable) in the undertaking, property, assets and revenues ofthe Chargor", that is, of Mr Johnston.[25] By cl 3.1 of the GSA, the charge to which I have referred was to constitute:(a) a Security Interest over all Personal Property of Mr Johnston, includingAfter-Acquired Property (all these terms being defined); and(b) a fixed charge over any Secured Property other than Personal Property.[26] FAI referred me to Glover No 2 Ltd v Bank of New Zealand in which the Courtof Appeal confirmed that a charge in the nature of [25](b) above creates anequitable mortgage over any real property within the definition of Secured Property.5I am satisfied the land is within that definition.[27] Given that, FAI claims an equitable mortgage of the land as at the date ofdisclaimer. Although the proceeds of sale of the right to harvest the trees and thecarbon credits accrued subsequently, the GSA provides for or creates a security interest4 FAI Money Limited v Johnston HC Auckland CIV-2012-404-1201, 14 August 2012.5 Glover No 2 Limited v Bank of New Zealand [2016] NZCA 182, (2016) 17 NZCPR 236 at [37(a)]-[37(b)] and [40].over all after-acquired personal property. Thus the security interest continues in theproceeds of sale of the right to harvest and of the carbon credits.[28] FAI submits that the effect of s 118(b) is that its proprietary interest in the landis unaffected by the disclaimer. It cites Fish Man Limited (in Liquidation) v Hadfield,a decision of the Court of Appeal, to that effect.6It is stated expressly in s 118(b) of the Act that a disclaimer by the Assigneedoes not affect the rights, interests, or liabilities of any other person, exceptinsofar as is necessary to release the Assignee or the bankrupt from a liability.It is plain that any proprietary interest in the land is unaffected by a disclaimer.Therefore if The Fish Man has a proprietary claim in the Property, it hassurvived the disclaimer. Treating the Property as beneficially owned by theCrown, that beneficial interest is subject to all proprietary claims to theProperty, including any interest of The Fish Man. Such a conclusion mustinevitably follow from s 118(b).[29] If, however, FAI's proprietary interest did not survive the disclaimer, FAI willhave suffered loss or damage as a result, and may apply for an order under s 119(1)(b).FAI submits a vesting order under s 119(1)(b) would be fair as FAI had a clear interestin the property, and all other interested parties consent to the making of such an order.[30] FAI may well be correct as to the effect of the GSA and s 118(b) but in theabsence of any party in opposition, the better course is to deal with the matter unders 119(1)(b). I am satisfied it is fair to make the order FAI seeks under s 119(1)(b) andI do so accordingly.Trustee[31] On 9 February 2009, Mr Gerard Martens and Ed Johnston Trustees Ltd, astrustees of the Gerard Martens Family Trust, advanced $72,000 to Mr Johnston. Theadvance was secured by an unregistered mortgage over the land. Ms Vujcich, the first-named first defendant, is now the sole trustee of the trust, that is she is the Trustee.[32] Mr Johnston defaulted in repaying $70,560 on the due date, being 5 November2012. He was adjudicated bankrupt two weeks later.6 Fish Man Limited (in Liquidation) v Hadfield [2017] NZCA 589, [2018] 2 NZLR 428 at [60].[33] At the date of hearing, Mr Johnston's indebtedness (principal and interest) tothe Trustee was $166,473.93, net of any sum for costs. Regardless, the mortgagesecures the principal only, being $72,000.[34] The Trustee seeks an order that $72,000 of the disclaimed property be vestedin her in that capacity. I am satisfied it is fair to make the order sought, and do so.Mr McKenna[35] Mr McKenna's claim is problematic because I do not have any evidence fromhim.[36] I have Mr McKenna's statement of defence and several documents annexed toaffidavits sworn by other deponents, to which I refer below, but no affidavit from himverifying the allegations in the statement of defence.[37] The gist of the statement of defence is that Mr Johnston guaranteed repaymentof an advance he, Mr McKenna, made to Sentinel 35 Trustee Company Ltd("Sentinel") on 27 January 2012, with repayment due, but not made, on 18 January2013.[38] Annexed to Mr Scurrah's first affidavit, sworn on behalf of FAI, is a copy of aterm loan agreement dated 27 January 2012 which does record an advance byMr McKenna to Sentinel of $212,000 with ordinary interest at 12 percent per annumand default interest at 16 percent per annum. Although there is an indecipherablesignature where the guarantor is to sign, the loan agreement has not been executed bythe borrower, or at least that is the case on the copy before me.[39] Then there is an email dated 20 December 2012 (so after Mr Johnston'sadjudication) which is from Mr Johnston to a firm of solicitors. On its face, thisrecords a visit by Mr McKenna to the solicitors' office in which Mr McKenna had notbeen sufficiently able to express his instructions. Mr Johnston advised thatMr McKenna had wished to:... instruct you [the solicitors] on this occasion to register a caveat urgentlyagainst my interest in a forestry block. The caveat supports an unregisteredmortgage dated 18.11.09 between [Mr Kenna] as MORTGAGEE (caveator)and EDWARD ERROL JOHNSTON, the registered Proprietor of a one fifthshare in the subject property, as MORTGAGOR.[40] Then, annexed to the affidavit of the Trustee, is a copy of the certificate of titleto the land. This shows that Mr McKenna did lodge a caveat against the land on21 December 2012, which Fitzgerald J lapsed, along with all other caveats, by herorders of 7 November 2018. The caveat itself is also in evidence, in whichMr McKenna claims an interest as mortgagee pursuant to an unregistered mortgagedated 18 November 2009, between Mr McKenna as mortgagee and Mr Johnston asmortgagor.[41] I am not able to deduce from this evidence, such as it is, that Mr McKenna hassuffered loss or damage as a result of the disclaimer. Accordingly, I am unable to makean order in Mr McKenna's favour. I dismiss his application accordingly.Mr Johnston[42] Section 119(2) provides that the bankrupt may also apply for an order that thedisclaimed property be vested in him or her. Again, it is necessary that I be satisfiedit is fair to do so.[43] Mr Johnston contends it is fair that I should vest in him the balance of$100,000. His claim is based principally on the fact that the value of the propertyderives from his payment of all costs incurred in connection with the property over a27 year period, these costs being at least $150,000. Mr Johnston also relies on theconcessions made by FAI and the Trustee.[44] In the circumstances, I am satisfied that it is fair to make the order Mr Johnstonseeks, for the reasons he submits.Orders[45] By memorandum dated 15 April 2021, FAI, the Trustee and Mr Johnston setout the orders they proposed. I shall leave these parties to submit a further draft whichprovides for UHY Haines Norton's costs, and which sufficiently reflects theconstraints imposed by the current "Level 4" lockdown in Auckland. The Level 4restrictions may affect the time by which the parties can implement the various stepsrequired.[46] The draft orders should be circulated and submitted to the Court through thecase officer.[47] I expect costs and disbursements will lie where they fall but any party whowishes to contend for a different order may do so by brief memorandum, setting outwhy they should have a different outcome.[48] I reserve leave to apply.Peters J