MERCHANT FINANCE LTD v XU [2022] NZHC 1111

MERCHANT FINANCE LTD v XU [2022] NZHC 1111 [19 May 2022]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2019-404-1860[2022] NZHC 1111BETWEEN MERCHANT FINANCE LIMITEDPlaintiffAND RU XU and KARL EDWARD LITTDefendantsAND GDL MORTGAGES LIMITEDFirst third partyAND WEIPING GESecond Third PartyHearing: On the papersAppearances: DK Wilson for the PlaintiffCR Goode and D Oh for the DefendantsMJW Lenihan for the Third PartiesJudgment: 19 May 2022JUDGMENT (No. 2) OF FITZGERALD J[As to quantum of payment by plaintiff to defendants]This judgment was delivered by me on 19 May 2022 at 3.00pm, pursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy Registrar Date.Solicitors: Davenports City Law (G Whiteford), AucklandLoo & Koo (B Lee), AucklandTo: D Wilson, AucklandC Goode, AucklandM Lenihan, AucklandA Kashyap, AucklandIntroduction[1] I delivered my substantive judgment in this proceeding on 21 December 2021.1The detailed factual background to the claims in this proceeding are fully set out inmy substantive judgment and are not repeated here.[2] By way of very brief summary, the plaintiff (Merchant Finance), a second tierlender, advanced a loan to the defendants, the loan being secured by a mixed useproperty owned by the defendants (the Property). The defendants defaulted on theloan and Merchant Finance sold the Property at a mortgagee sale. In this proceeding,Merchant Finance sought to recover from the defendants the shortfall after the netsales proceeds from the Property had been applied to the outstanding loan balance. Inresponse, the defendants counterclaimed, alleging Merchant Finance breached variousof its disclosure and other obligations under the Credit Contracts and ConsumerFinance Act 2003 (the Act), and requesting the Court to reopen the loan contract andgrant relief on the basis of oppression. The defendants also brought a third partyproceeding against the third parties, the mortgage broker which arranged the loanbetween Merchant Finance and the defendants.[3] I found that Merchant Finance had breached a number of its obligations underthe Act, namely s 17 (failure to give initial disclosure), s 18 (failure to providecontinuing disclosure), s 38 (charging interest in advance) and s 41 (charging anunreasonable establishment fee). I otherwise dismissed the defendants' counterclaimand its third party claim against the third parties.[4] As I noted in my substantive judgment, the implication of Merchant Financefailing to give initial disclosure was that s 99(1A) of the Act applied.2 Pursuant tos 99(1A), because Merchant Finance had failed to provide initial disclosure (and at notime did it provide corrected initial disclosure), the defendants were not liable to paythe costs of borrowing during the period of Merchant Finance's breach (these costsprimarily being interest and default interest). As also noted in my substantivejudgment, and pursuant to s 99(1C) of the Act, s 99(1A) did not apply to fees paid by1 Merchant Finance Limited v Xu [2021] NZHC 3589.2 At [246].Merchant Finance to third parties (such as real estate agent and lawyers' fees), so longas the third parties were not associated with Merchant Finance.3 Accordingly, despitethe defendants not being liable to pay the costs of borrowing, Merchant Finance wasentitled to "pass on" to the defendants certain fees paid by it, pursuant to s 99(1C).[5] I observed at the conclusion of my judgment that, given the defendants werenot liable to pay interest or default interest, and in light of the sale price achieved forthe Property, Merchant Finance might in fact be required to pay a sum of money to thedefendants, being the "surplus" of net sales proceeds once applied to the outstandingloan balance (excluding the costs of borrowing). I accordingly called for furthersubmissions from the parties on this topic. I rather optimistically observed that "thecalculations ought to be relatively straightforward".4[6] My optimism was misplaced. In the event, while it was not in dispute thatMerchant Finance was obliged to refund monies to the defendants (MerchantFinance's position being that it would need to pay the defendants $143,189), there isa dispute between the parties about the quantum of the refund.[7] In the event, the following post-judgment steps have been taken:(a) the defendants filed submissions on quantum on 11 February 2022;(b) Merchant Finance filed submissions on quantum on 25 February 2022;(c) the defendants filed submissions in reply on 4 March 2022;(d) I convened a telephone conference with counsel on 29 March 2022 andmade timetabling orders for the filing of further evidence;(e) Merchant Finance subsequently filed an affidavit sworn by BibianaLee, the solicitor at Loo & Koo acting on the mortgagee sale forMerchant Finance;3 At [247].4 At [341(d)].(f) the defendants filed further submissions in response to Ms Lee'saffidavit on 26 April 2022; and(g) I convened a further telephone conference with counsel on 5 May 2022and gave my preliminary indication that I had sufficient material beforeme to finalise my judgment in this matter. I confirm that having nowreviewed the materials in more detail, and subject to the question ofinterest referred to at [45] below, that remains the position.[8] Finally by way of background, while the precise date is not clear from thematerials before me, Merchant Finance has paid the defendants the sum it says isowing, namely $143,189.[9] In the next section of this judgment, I summarise the remaining matters indispute, the parties' respective submissions and my decision on each.Remaining areas of disputePrincipal amount of loan[10] The parties are agreed that the principal loan amount advanced, excludinginterest and fees, was $1,629,104.Broker fee[11] There is a dispute as to the correct broker fee, and whether it ought to bepayable by the defendants at all. Merchant Finance says that this is a third party feewhich it is entitled to pass through to the defendants pursuant to s 99(1C) of the Act,despite not otherwise being able to recover interest, default interest and other costs ofborrowing.[12] The defendants submit that the broker fee ought not to be passed on to them,given it represents an agent's fee that Merchant Finance paid in order to breach, or toassist it to breach, the Act, and therefore recovery would be against public policy.Alternatively, the defendants say that to permit Merchant Finance to pass on the brokerfee would be to permit Merchant Finance to benefit from its own wrong.[13] In the alternative, if the broker fee is recoverable, the defendants submit itshould be calculated at the percentage rate (one percent) of the correct principal loanamount (namely that referred to at [10] above), not the incorrect principal loan amountinitially relied on by Merchant Finance.[14] I have already ruled in my substantive judgment that Merchant Finance isentitled to recover the third parties' broker fee.5 That is the position pursuant tos 99(1C) of the Act in any event. The defendants do not suggest that the third partiesare "associated persons" of Merchant Finance, and in my substantive judgment, Irejected the defendants' submission that the third parties acted as Merchant Finance'sagent in connection with the loan.6[15] I do not accept the defendants' submission that to permit Merchant Finance topass this fee on to the defendants is contrary to public policy or permits MerchantFinance to benefit from its wrong. Rather, it simply reflects the application of s 99(1C)of the Act. In other words, the legislative scheme is that even where a borrower is notliable to pay the costs of borrowing pursuant to s 99(1A), the lender is neverthelessentitled to pass on to the borrower third party fees paid by it, so long as the third partyis not an associated person of the lender.[16] I accept, however, the defendants' submission that the third parties' broker feeshould be calculated at the rate of one percent of the correct principal amount set outat [10] above, rather than the slightly higher, but incorrect, principal amount relied onby Merchant Finance at the time of originally calculating and paying the broker fee.The broker fee is accordingly reduced to $16,291, being one percent of $1,629,104.5 At [341(c)].6 At [254].Loo & Koo's fees[17] Merchant Finance seeks recovery of its solicitors' (Loo & Koo's) fees, both inconnection with the establishment of the loan and the conduct of the mortgagee sale.Merchant Finance submits that such costs are payable by the defendants under the loancontract.[18] The defendants submit that given Loo & Koo acted as Merchant Finance's"administrator" in relation to the loan, it would be wrong to permit recovery of thelegal fees, Merchant Finance's breaches of the Act essentially being "carried out" byLoo & Koo.[19] Again, I have already ruled in my substantive judgment that Merchant Financeis entitled to pass through to the defendants Loo & Koo's fees, to the extent they arepayable by the defendants under the loan contract and do not exceed the amountMerchant Finance has paid to Loo &Koo.7[20] The loan contract expressly provides for payment by the defendants of Loo &Koo's legal fees associated with establishing the loan, in the sum of $4,125. Further,the loan contract also provides for the payment by the defendants of MerchantFinance's costs of default (clause 8(f)). This includes legal fees on the mortgagee sale.Merchant Finance seeks to recover $3,432.38 on this basis. A copy of the invoice isbefore the Court. There is no suggestion that Merchant Finance has not paid Loo &Koo its fees in this amount. The amount charged by Loo & Koo for a mortgagee saleappears on its face to be reasonable and there is no basis to reduce that amount.[21] Loo & Koo's fees of $4,125 and $3,432.38 are accordingly payable by thedefendants.Real estate agent's fees[22] Like the broker and solicitors' fees, Merchant Finance says the real estate agentcommission is properly payable by the defendants. The defendants submit that as7 At [341(c)].enforcement of the loan was prohibited by s 99 of the Act, the real estate commissionought not to be payable by the defendants.[23] Again, I do not accept the defendants' position.[24] As noted in my substantive judgment,8 it would have been open to thedefendants to seek interim relief prohibiting the sale of the Property in light ofMerchant Finance's failure to provide initial disclosure. The defendants did not seeksuch relief. The sale accordingly proceeded, and the real estate agent fees are a costactually incurred by Merchant Finance in connection with the sale. As a third partycost, Merchant Finance is entitled to pass this on to the borrowers.9[25] Moreover, a theme of the defendants' case at trial was that the MerchantFinance loan should never have been advanced to them in the first place. Had thatbeen the case, the Property would have been sold in any event, either at a mortgageesale conducted by the prior lender (Southern Cross), or through some "managed sale"process agreed between the defendants and Southern Cross. In both those scenarios,real estate agents' fees would have been paid. That would have also been the case hadMs Xu's attempts to sell the Property in mid-2018 (through Ray White) beensuccessful.10[26] Accordingly, Merchant Finance is entitled to charge the defendants the realestate commission on the mortgagee sale.GST – mortgagee sale price[27] This issue is the most significant between the parties, at least in terms ofquantum.8 At [245].9 Credit Contracts and Consumer Finance Act 2003, ss 45 and 99(1C). See also cl 8(f) of the loancontract, the agents' commission being a cost of default.10 Discussed in my substantive judgment, at [124] and [128].[28] Merchant Finance's position is that it sold the Property for $1,790,000, beingthe sale price which was recorded as "plus GST if any". Merchant Finance says andprovides evidence that it did not recover any GST on the sale, having formed the view(after taking advice) that the sale was appropriately GST zero-rated.[29] The defendants say that the sale was at an undervalue, given the sale was for$1,790,000 "plus GST". The defendants' position, prior to the receipt of Ms Lee'saffidavit, was either that Merchant Finance did receive GST on top of the sale price of$1,790,000, and therefore this should also be accounted for by further reducing theresidual amount owed by the defendants, or alternatively, that the additional amountof GST ought to have been recovered, namely that the sale price ought to have been$2,058,500 inclusive of GST.[30] Following the filing of Ms Lee's affidavit, the defendants submit that had acorrect approach to GST been adopted, the purchaser might have offered a higher pricebecause of more favourable downstream tax treatment.[31] I do not accept the defendants' submissions on this point either.[32] There are effectively two issues arising from the parties' memoranda andevidence filed on the GST issue:(a) First, a question of fact, namely what was the sale price actuallyreceived by Merchant Finance?(b) Second, if the sale price actually received was $1,790,000, shouldMerchant Finance have obtained a higher price of $2,058,500, with theentirety of that amount being available to offset against the balance ofthe loan owed by the defendants (that is, Merchant Finance not havingto account to the Commissioner of Inland Revenue (the IRD) for anyGST portion of that higher sale price)?[33] On the first issue, the evidence establishes that the sale price actually receivedby Merchant Finance was $1,790,000. GST was not charged or recovered byMerchant Finance on the sale of the Property.[34] Turning to the second issue, it is incorrect for the defendants to submit (as theydid in their memorandum dated 4 March 2022) that Merchant Finance "clearly soldthe property for $1,790,000 plus GST". The agreement was for a sale price of$1,790,000 "plus GST (if any)" (emphasis added).[35] Ms Lee (as noted, the solicitor acting on the mortgagee sale), formed the viewthat the sale ought to be zero-rated for GST purposes. However, she deposes that anaccountant for Merchant Finance was of the view that Merchant Finance was entitledto collect GST on the purchase price and would be entitled to keep that GST (ratherthan pay it on to the IRD). In light of this, and prior to settlement, Ms Lee soughtexpert GST advice from a third party, a Mr Brandt. She produces Mr Brandt's opinionon the GST issue, the essence of which is as follows:11(a) Mr Brandt was aware that Merchant Finance's accountant had advisedMerchant Finance that it was entitled to collect GST on the sale priceand to keep the GST for itself.(b) Mr Brandt advised that he agreed with Ms Lee that Merchant Finance'saccountant was wrong.(c) Mr Brandt set out what he considered to be the relevant provisions ofthe Goods and Services Tax Act 1985 (the GST Act) which applied.Mr Brandt also proceeded on the basis that the purchaser would be GSTregistered prior to settlement.12(d) While Merchant Finance itself was not registered for GST (as it carrieson business of provision of financial services, an exempt activity),11 I do not ascribe weight to this opinion for the truth of its contents, given it is hearsay. Rather, therelevance of it for present purposes is the fact that Merchant Finance sought expert advice on GSTprior to the settlement of the sale of the Property.12 As the defendants observe, the purchaser's settlement statement indicates that the purchaser wasregistered for GST.when a mortgagee steps in and sells a secured property, there is adeemed supply under s 5(2) of the GST Act.(e) If the sale had attracted GST, Merchant Finance would, because of thedeemed supply, be required (whether or not registered) to make aspecial return in the prescribed form and to pay the GST charged on thesupply to the IRD.(f) That although s 5(2) of the GST Act deemed Merchant Finance to bemaking a taxable supply and required a GST return to be filed, this didnot override the remainder of the GST Act, including the compulsoryzero-rating rules. Mr Brandt then provided his opinion on what wouldbe required in order for the transaction to be zero-rated, and how thesale price might be apportioned between the commercial part of theProperty (zero-rated) and the residential part (exempt if certainevidence held).[36] As counsel for the defendants notes in her submissions in reply to Ms Lee'saffidavit, there is some complexity around the GST position, including because theProperty was of mixed use and being sold by mortgagee sale. Despite this, however,I have concluded that it is not necessary or appropriate to call for further evidenceand/or conduct a further hearing on the GST issue. I have reached this conclusion forthe following reasons.[37] First, the fact remains that Merchant Finance did not receive any more than thesum of $1,790,000 from the sale of the Property (net of the costs of sale).[38] Second, even if Merchant Finance should have charged the purchaser thepurchase price plus GST (so that it received a sale price of $2,058,500, inclusive ofGST), Merchant Finance would have been required to account to the IRD for the GSTcomponent of that price. It would not have been available for Merchant Finance to"keep it for itself", thus making it available to offset against the remaining balance ofthe loan.[39] Third, and as to whether Merchant Finance should have taken a differentapproach to GST on the sale of the Property, such that a purchaser might have paid aslightly higher price, it is far too late in my view for this matter to be raised now. Thisis a new and quite different claim to that pursued by the defendants at trial. It was notraised on the pleadings. I accept that in their statement of defence, the defendantssuggested that the Property was sold at an undervalue, but that was said to be on thebasis that the defendants were not given an opportunity to fix a leak in the Property'sroof before the mortgagee sale. No issue was raised around GST on the sale. Nor wasthis issue raised at any time in the lead up to trial, or at trial, despite the defendantshaving a copy of the sale and purchase agreement (which clearly specified the saleprice as "$1,790,000 plus GST (if any)"), and Merchant Finance's position being thatit received sales proceeds of only $1,790,000 (net of the costs of sale).[40] Nor am I persuaded it would be appropriate to grant leave to the defendants toamend their pleadings at this stage, following judgment having been delivered.13 Aclaim that Merchant Finance, as mortgagee, failed in its duty pursuant to s 176 of theProperty Law Act 2007 (the PLA) – a duty of reasonable care to obtain the best pricereasonably obtainable at the time – would require the calling of further and potentiallysubstantial evidence, and such a claim is in any event speculative. As to the additionalevidence, at the very least, expert evidence on GST, as well as evidence from thepurchaser on whether it would have paid a higher price had there been a different taxtreatment (if available), would need to be called. Expert evidence on marketconditions at the time, and whether a higher price might have been achieved with anyavailable different GST treatment, would also likely be necessary. That evidencewould have needed to have been assessed in the context of the obvious difficulties inselling the Property at the time, it not selling in mid-2018, or during the "grace period"following the loan going into default and Merchant Finance taking steps to sell theProperty as mortgagee. Further, Merchant Finance took expert advice on GST priorto the settlement of the mortgagee sale, which would also be relevant to any argumentthat it breached its duties as mortgagee under the PLA.13 No such application having been filed in any event.[41] Accordingly the point remains that as a matter of fact, Merchant Finance didnot receive a sale price higher than $1,790,000. Even if GST had been payable by thepurchaser on the sale, Merchant Finance would have had to pay that GST to the IRD.Any broader claim as to whether a different tax treatment (if available) might have ledto a higher purchase price is speculative and too late to raise now.[42] Accordingly, I am satisfied that the appropriate amount to "net off" in relationto the sales proceeds from the mortgagee sale is the sum of $1,790,000.[43] The above leads to a refund due to the defendants by Merchant Finance of$145,878, and I make an order that that amount is payable.[44] Merchant Finance has, as noted, already paid the large majority of this amountto the defendants, the slight difference being the broker fee of $16,291 rather than$18,980. There will accordingly need to be a further payment by Merchant Financeto the defendants of $2,689 and I make an order accordingly.Interest[45] A final point is interest. The surplus amount of $145,878 ought to have beenpaid by Merchant Finance to the defendants upon the settlement of the sale of theProperty and receipt by Merchant Finance of the net proceeds of sale (on 29 August2019). That sum14 was not paid to the defendants until very recently. The defendantshave not, at least in their post-judgment materials, made a claim for or addressed thequestion of interest on any amount to be paid by Merchant Finance to them.Nevertheless, my preliminary though not binding view is that it would be appropriatefor Merchant Finance to pay interest on the refund amount for the period 29 August2019 to the date of payment. The interest calculator established by the Interest onMoney Claims Act 2016 may be a useful reference point for this purpose.[46] Despite my misplaced optimism on the residual matters addressed earlier inthis judgment, I would hope that the parties can readily agree the interest payable. If14 Or more accurately, a slightly lesser sum, given the need to refund a further $2,689 in relation tothe broker fee.the parties are not able to agree, memoranda on interest may be filed in accordancewith the following timetable orders:(a) the defendant may file and serve a memorandum within 10 workingdays of this judgment;(b) Merchant Finance may file and serve a memorandum within10 working days of receipt of the defendants' memorandum; and(c) the defendants may file and serve a memorandum in reply within fiveworking days of receipt of Merchant Finance's memorandum.[47] No memorandum is to be longer than three pages in length (excluding anycalculation schedules). Unless I need to hear further from the parties, I will determinethe question of interest on the papers.Costs[48] There remains the question of costs. Should any party seek costs, they are tofile a memorandum on costs within 20 working days of the date of this judgment. Theopposing party may file a memorandum in reply within a further 10 working days. Nomemorandum (excluding any schedules) is to be longer than five pages in length.Unless I need to hear further from counsel, I will also deal with costs on the papers._____________________________Fitzgerald J