HONG KONG AND SHANGHAI BANKING CORPORATION LIMITED V ERCEG AND ORS HC AK CIV 2009-404-004035

HONG KONG AND SHANGHAI BANKING CORPORATION LIMITED V ERCEG AND ORS HC AK CIV 2009-404-004035 14 October 2009IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2009-404-004035BETWEEN HONG KONG AND SHANGHAI BANKING CORPORATION LIMITED Plaintiff AND IVAN VLADIMAR JOSEPH ERCEG First Defendant AND SENSATION YACHTS LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION) Second Defendant AND SENSATION NEW ZEALAND LIMITED Third Defendant Hearing: 12 October 2009 Counsel: MD Arthur and BJ Burt for plaintiff PG Revell for first and third defendants Appearance: PR Jollands, one of the receivers appointed by the first defendant in respect of the second defendant Judgment: 14 October 2009 at 4:30 pmJUDGMENT OF ASSOCIATE JUDGE FAIRE [on application for summary judgment]Solicitors: Chapman Tripp, PO Box 2206, Auckland for plaintiff Corban Revell, PO Box 21 180, Waitakere City for first and third defendants And To: Jollands Callander, PO Box 106 141, Auckland, receiversThe application[1] The plaintiff applies for summary judgment against the first and third defendants. The judgment sought seeks: a) An order against the first and second defendants for possession of a property at 5-11 Selwood Road, Henderson, Auckland contained in Certificates of Title NA49D/666 and NA124C/157; and b) A declaration that the property is not subject to any lease to which the plaintiff has given its consent. This second order was refined in submissions to: c) A declaration that the property is not subject to any lease given by the first defendant to the third defendant and which the plaintiff has consented to. [2] No orders are sought against the second defendant. That company was put into liquidation on 31 July 2009. At that time the Court appointed Peri Finnigan and Boris van Delden as liquidators. The liquidators have not consented to this proceeding. Nor has the Court ordered the continuation of this proceeding pursuant to s 248(1)(c) of the Companies Act 1993. The plaintiff recognises that position and, for that reason, seeks no relief in this application against the second defendant.The opposition[3] The first and third defendants oppose the orders in the application for summary judgment. They plead: a) The plaintiff is not entitled to possession because of the possessory rights to the property at 5-11 Selwood Road, Henderson, which are enjoyed by the third defendant;b) The third defendant is a lessee from the first defendant pursuant to a deed of lease dated 3 April 2007; and c) The plaintiff has consented to the lease. [4] The first and third defendants' opposition relies principally on ss 138 of the Property Law Act 2007 and 119 of the Land Transfer Act 1952. Section 138 of the Property Law Act 2007, which in effect is substantially the same as its predecessor provides, in subs 1 as follows:138 Mortgagee may not enter into or take physical possession if mortgagee has consented to lease(1) If a mortgagee has consented to a lease of all or part of the mortgaged land or goods, the mortgagee may not, in accordance with section 137(1)(a), enter into or take physical possession of any land or goods that are subject to the lease, except in the exercise of a power conferred by section 147.[5] Section 119 of the Land Transfer Act 1952 provides:119 Lease not binding on mortgagee without consentNo lease of mortgaged or encumbered land shall be binding upon the mortgagee except so far as the mortgagee has consented thereto.The issue raised by this application[6] The issue raised by this application is whether the plaintiff has consented to a lease. The lease concerned is that said to be granted by the first defendant in favour of the third defendant by a deed dated 3 April 2007. [7] The defendants acknowledge that this lease has not been the subject of any express consent by the plaintiff. [8] For the defendants Mr Revell submitted that the plaintiff could not discharge the onus on it to show that the defendants did not have a defence that there had been a consent by implication to the subject lease. That consent was said to arise from a settlement deed which the plaintiff's Auckland credit manager says was executed on16 March 2009. That document was executed by the plaintiff, the first defendant, the second defendant and the first defendant's mother, Mrs Millie Martha Erceg. I will examine the content of that settlement deed shortly.The Court's approach to an application for summary judgment by a plaintiff[9] I set out a short summary of the general approach which the Court takes in relation to a summary judgment application by a plaintiff. Rule 12.2 requires the plaintiff to satisfy the Court that the defendant has no defence. [10] The no defence position and the obligations that the Rules impose on the parties have been examined in a number of authorities. In Pemberton v Chappell[1987] 1 NZLR 1 at 3 the Court of Appeal said as follows:In this context the words "no defence" have reference to the absence of any real question to be tried. That notion has been expressed in a variety of ways, as for example, no bona fide defence, no reasonable ground of defence, no fairly arguable defence.[11] The Court added at 4:Satisfaction here indicates that the Court is confident, sure, convinced, is persuaded to the point of belief, is left without any real doubt or uncertainty. ...[12] And further at 4:Where the only arguable defence is a question of law which is clear cut and does not require findings of disputed facts or the ascertainment of further facts, the Court should normally decide it on the application of summary judgment, just as it will do on an application to strike out a claim or defence before trial on the ground that it raises no cause of action or no defence.[13] The Court also commented on the position where a defence is not evident on a plaintiff's pleading and said at 3:If a defence is not evident on the plaintiff's pleading I am of opinion that if the defendant wishes to resist summary judgment he must file an affidavit raising an issue of fact or law and give reasonable particulars of the matters which he claims ought to be put in issue. In this way a fair and just balance will be struck between a plaintiff's right to have his case proceed to judgment without tendentious delay and a defendant's right to put forward a real defence.[14] That position was further reinforced in Australian Guarantee Corporation (NZ) Ltd v McBeth [1992] 3 NZLR 54 at 59 where the Court said:Although the onus is upon the plaintiff there is upon the defendant a need to provide some evidential foundation for the defences which are raised. If not, the plaintiff's verification stands unchallenged and ought to be accepted unless it is patently wrong[15] Hypothetical possibilities in vague terms, unsupported by any positive assertion or corroborative documents advanced by defendants will not frustrate the obligation on a plaintiff to discharge the onus of proof: SH Lock (NZ) Ltd v Oremland HC AK CP641/86 19 August 1986. [16] The Court of Appeal in Tilialo v Contractors Bonding Limited CA50/93 15 April 1994 at 6 raised a caution and said:The Courts must of course be alert to the possibility of injustice in cases in which some material facts to establish a defence are not capable of proof without interlocutory procedures such as discovery and interrogatories. That does not mean that defendants are to be allowed to speculate on possible defences which might emerge but for which no realistic evidential basis is put forward.[17] A Court is not required to accept uncritically any or every disputed fact: Eng Mee Yong v Letchumanan [1980] AC 331 at 341. However, the Court will not reject even dubious affidavit evidence, even though there must be suspicion as to the good faith of the deponent, if there is an essential core of complaint that supports a defence. In essence, the inquiry is whether or not the person's assertion passes the threshold of credibility: Pemberton v Chappell; Orrell v Midas Interior Design Group Ltd (1991) 4 PRNZ 608 (CA) at 613. [18] In Tilialo v Contractors Bonding Limited the Court of Appeal at 6 observed:Drawing the line between mere assertions of possible defences and material which sufficiently raises an arguable defence so that the defendant shouldnot be denied the opportunity to employ interlocutory procedures and have a trial is a matter of judgment. Views may well differ.[19] The authorities have also referred to a residual discretion as to whether judgment should be entered. Although, as expressed by Casey J in Pemberton v Chappell at 5:It is very difficult indeed to conceive of circumstances where the Court should not give judgment for the plaintiff It can only be a discretion of the most residual kind.The discretion was the subject of comment in Waipa District Council v Electricity Corporation of New Zealand [1992] 3 NZLR 298 at 303. [20] It is appropriate to comment on the position where there are disputed issues of material fact. The matter was the subject of comment in Westpac Banking Corporation v MM Kembla (New Zealand) Ltd [2001] 2 NZLR 298. Although that was a defendant's application for summary judgment, and a different test applies, the Court's comments in relation to disputed issues of material fact apply equally to a plaintiff's application for summary judgment. The Court said:[62] Application for summary judgment will be inappropriate where there are disputed issues of material fact or where material facts need to be ascertained by the Court and cannot confidently be concluded from affidavits. It may also be inappropriate where ultimate determination turns on a judgment only able to be properly arrived at after a full hearing of the evidence. Summary judgment is suitable for cases where abbreviated procedure and affidavit evidence will sufficiently expose the facts and the legal issues. Although a legal point may be as well decided on summary judgment application as at trial if sufficiently clear (Pemberton v Chappell [1987] 1 NZLR 1), novel or developing points of law may require the context provided by trial to provide the Court with sufficient perspective. [63] Except in clear cases, such as a claim upon a simple debt where it is reasonable to expect proof to be immediately available, it will not be appropriate to decide by summary procedure the sufficiency of the proof of the plaintiff's claim.[21] That statement of principle was endorsed by the Privy Council in Jones v Attorney-General [2004] 1 NZLR 433.Background[22] There has been considerable background to the dispute between these parties. It is not necessary for the purpose of this judgment that I review all that has occurred, including the various applications to the High Court. That is because the relevant facts that are required to be analysed in this application can be stated within a short compass. [23] The plaintiff Bank agreed to make a loan to the first defendant in 2007. Security was to be provided by a mortgage over a commercial property at 5- 11 Selwood Road, Henderson, Auckland. The amount owing under the mortgage was not at any time to exceed 60% of the value of the security. The continued availability of the loan was conditional upon the plaintiff receiving and being satisfied in all respects within twelve months from the drawdown date or other period as agreed to by the plaintiff in its sole discretion, with a copy of a deed of lease between the first defendant (as the landlord) and Sensations Yachts Limited, the tenant, in respect of the property. [24] The terms of the loan agreement were set out in a facility letter dated 3 May 2007 which was countersigned by the first defendant on 3 May 2007, together with the plaintiff Bank's general conditions. [25] The first defendant failed to provide the plaintiff with a copy of the deed of lease. In addition, the first defendant made defaults in his obligations under the loan. Property Law Act notices were served and expired without being remedied. Upon expiry of the Property Law Act notices the plaintiff became entitled to possession of the property. [26] In March 2009, as a result of negotiations, the first defendant, the first defendant's mother, the second defendant and the plaintiff entered into a deed of settlement. Annexed to that deed is a sale and purchase agreement. Under that agreement the first defendant's mother agreed to buy from the first defendant the land in question. The deed of settlement provides that the plaintiff will on settlement of that sale discharge its mortgage over the subject property on payment to it of theconsideration. In addition, the deed permits the plaintiff to literally step into the shoes of the first defendant to enforce the agreement against the defendant's mother. The sale and purchase contract makes reference to a tenancy. The tenant is described as Sensation New Zealand Limited. [27] There are two companies that must be distinguished. Sensation Yachts Limited, the second defendant, is the company that is currently in liquidation and in receivership. Its sole shareholder and director is the first defendant. A separate company, Sensation New Zealand Limited is the third defendant. Its sole director and shareholder is the first defendant. [28] I now review the evidence concerning knowledge of and a possible consent to a lease between the plaintiff and the third defendant. The following matters arise from the evidence placed before me: a) No mention is made of a lease between the first and third defendants in the documents which make up the loan agreement in May 2007. The only reference to a tenant is to the second defendant; b) The first defendant provided to his valuers, Seagar and Partners, a lease between himself and the second defendant dated 1 July 2007. That exercise was required for the purpose of valuing the subject property with a view to the first defendant's trusts taking an interest in it. The existence of a lease to the second defendant is inconsistent with a lease to the third defendant; c) The lease with the third defendant contradicts evidence which was given on the first defendant's behalf in a separate application to the High Court where the first defendant's lawyers referred to the second defendant as the lessee. Indeed, the lease with the third defendant is inconsistent with the case advanced by the first defendant in support of his application for an injunction to restrain the plaintiff from selling the property;d) Despite the terms of the mortgage the first defendant entered into with the plaintiff which require consent to any leasing to be obtained, the first defendant has sought no consent to the grant of a lease to the third defendant; e) The only evidence which the first defendant gives concerning the plaintiff's knowledge of the lease is that he alleges that the plaintiff was aware of the existence of a lease when the settlement deed was signed in 2009. He does not say that a copy of that lease was sent to the plaintiff. He gives no evidence of any discussion with the plaintiff about its terms and conditions; and f) There is a bald reference in the deed of settlement annexure, being the sale and purchase contract, under the heading Tenancies, to Sensation New Zealand Limited. No further information about the tenancy is contained in the contract. Indeed, because particulars are not provided the first defendant is required to give vacant possession on settlement. That would indicate that there is no lease. [29] I extract the following propositions from the authorities dealing with consent: a) Mere knowledge by a mortgagee of the existence of a lease is not enough: Registered Securities Ltd v Christensen Potato Company LtdCA 121-88 1 September 1989; b) What is required is that there must be some recognition by the mortgagee of a right of occupation by the tenant. That may be by a positive act, such as a written or oral acceptance, or implied acceptance by conduct. Unless that can be shown the mortgagee's title will not be defeated: Cashmere Capital Ltd v Crossdale Properties Limited (2009) NZCA 185; and c) Mere acquiescence in a state of affairs is not enough to amount to consent. In New Zealand Fisheries Ltd v Napier City Council (1990)1 NZConvC 190,342 the Court of Appeal described what is required as follows at 190,344:consent requires a positive affirmative act such as written or oral acceptance or even an implied acceptance by conduct.[30] The factual situation which I have summarised together with the fact that the only acknowledgement of the existence of the lease relied upon by the first and third defendants, is the naming of the third defendant in the sale and purchase agreement, draws attention not to a state of affairs that exists before Mrs Erceg becomes the registered proprietor but rather to that which occurs subsequent to that time if she settles. One can readily appreciate that the Bank's objective in signing the deed of settlement was to be paid a sum of money for which it was prepared to discharge its mortgage. Once the mortgage was discharged it would have no interest in whoever the tenant was or what the covenants in the lease involving that tenant were. I therefore can see no basis for implying a consent to the granting of a lease to the third defendant by the first defendant from any of the actions undertaken by the plaintiff in this case. In short, there is no foundation on the material that is available for such a defence to be raised. [31] The conclusion expressed in the last paragraph answers the pleaded basis in opposition advanced by the first and third defendants. Mr Revell, however, referred to s 179 of the Property Law Act 2007. That permits a mortgagee to adopt an agreement for sale and purchase which is entered into by a mortgagor at any time during which the mortgagee is entitled to exercise a power of sale in respect of the mortgaged property. If the mortgagee serves notice on the purchaser to adopt the agreement for sale, the mortgagee: a) Has all rights and powers in relation to the purchase that the current mortgagor will have as vendor; b) The mortgagee may execute all assurances and all other things necessary to effect the transfer or assignment of the property; andc) The mortgagee must account for the proceeds of sale as though the property had been sold by the mortgagee. [32] Mr Revell did not spell out precisely what the effect of an adoption of the sale and purchase agreement might be. The implication from his submission is that the mortgagee would be required in some way to execute a transfer of the interests of the first defendant in the lease as lessor in favour of the purchaser. I consider that, in the circumstances of this case, I consider, is totally unrealistic. The lease is between the first defendant and his company. The purchaser is his mother. The sale and purchase agreement makes no specific provision regarding the tenancy. Clause 3.1 of the standard terms refers to the property being sold with vacant possession unless particulars of a tenancy are included in the agreement. A reference back to the front page of the agreement shows no particulars of the tenancy. [33] My preliminary view is that the plaintiff has not adopted the agreement. The deed of settlement makes it clear that the plaintiff may adopt the agreement, but is not obliged to adopt the sale and purchase agreement. What I have seen of the correspondence indicates that the plaintiff was simply reserving its position. [34] However, even if there had been an adoption of the agreement, what consequence does it have in the circumstances of this case? Mrs Erceg would only have a right to possession if she is prepared to perform the obligations of purchaser under the sale and purchase contract. To do that she must be prepared to pay the contract price. The granting of an order for possession at this stage does not prevent the plaintiff from agreeing to sell to Mrs Erceg, if it should decide to do so. That matter simply does not require a decision on the current application. [35] I see nothing in the argument concerning adoption of the agreement that changes the view I reached and earlier expressed in this judgment. I am satisfied that there has been no consent to a lease between the first defendant and the third defendant in terms of s 138 of the Property Law Act 2007 or its predecessor that prevents the plaintiff from taking possession of the mortgaged land. That finding also means that, assuming there has been a lease granted by the first defendant to thethird defendant, it is not binding on the plaintiff because of the plaintiff's lack of consent to it by the operation of s 119 of the Land Transfer Act 1952.Judgment[36] I enter judgment for the plaintiff on the following terms: a) I order in respect of the first defendant and third defendant, that possession of the property at 5-11 Selwood Road, Henderson, Auckland be given to the plaintiff; and b) I declare the plaintiff has not given its consent to a lease of the property of 5-11 Selwood Road, Henderson, Auckland by the first defendant to the third defendant.Costs[37] I reserve costs. Mr Arthur confirmed my understanding that a specific order is not required. If, however, it needs to be pursued and counsel are unable to agree memoranda in support, opposition and reply shall be filed and served at seven-day intervals.Continuing stay of the proceeding[38] The proceeding is stayed so far as the second defendant is concerned in terms of s 248(1)(c) of the Companies Act 1993. _____________________ JA Faire Associate Judge