OAKS HOTELS & RESORTS NZ LIMITED v BODY CORPORATE 358851 [2013] NZHC 2695

OAKS HOTELS & RESORTS NZ LIMITED v BODY CORPORATE 358851 [2013] NZHC 2695 [16 October 2013]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2013-404-003971[2013] NZHC 2695IN THE MATTER of an application under s 210 of the UnitTitles Act 2010UNDER Parts 19 and 32 of the High Court RulesBETWEEN OAKS HOTELS & RESORTS NZLIMITEDApplicantAND BODY CORPORATE 358851RespondentHearing: 3 October 2013Counsel: C Bryant for ApplicantD Chisholm QC and BM Russell for RespondentJudgment: 16 October 2013JUDGMENT OF ASHER JThis judgment was delivered by me on Wednesday, 16 October 2013 at 4:00 pmpursuant to r 11.5 of the High Court Rules.Registrar/Deputy RegistrarSolicitors/Counsel:Hesketh Henry, Auckland.Lane Neave Lawyers, Christchurch.D Chisholm QC, Auckland.Introduction[1] Oaks Hotels and Resorts Ltd (Oaks) as a unit title owner, seeks a freezing order preventing Body Corporate 358851 (the Body Corporate) from disposing of or otherwise dealing with certain insurance proceeds. The building that is run by theBody Corporate, and in which the units are owned, is the iStay on Cashel hotel inChristchurch.[2] The present impasse has arisen out of the second Christchurch earthquake of 22 February 2011 and the damage it caused to buildings in the central businessdistrict. The hotel was damaged in the earthquake, but unlike most buildings in thearea remained structurally sound and, it is asserted by the applicant, was and isrepairable. The building has not been occupied since the earthquake.[3] The building is in the government designated red zone. In February 2013, theCrown gave notice pursuant to s 54 of the Canterbury Earthquake Recovery Act2011 of its intention to acquire the members' units and interests in the iStay building.It has made offers to purchase the freehold interest in the units, which are conditionalon the surrender of the registered leases on the titles. Although the position is not yetfinalised and unconditional as a matter of law, it is said to be very likely that theunits in the building will be acquired by the Crown whether pursuant to individualconditional offers already made or by compulsory acquisition of the units.[4] The difference between Oaks and the Body Corporate arises from the factthat Oaks ran the hotel using the rooms that were leased from the individual unit titleowners. Oaks itself did not own any of the rooms, but through its subsidiary, 187Cashel Management Ltd (187 CML), was the lessee of the individual rooms ownedby the unit title owners. Oaks was the unit title owner of Lot 101, the reception area.Under the lease, 187 CML paid rent to the unit owners and received income derivedfrom the rooms, which were run as a hotel. Another subsidiary of Oaks, 187 CashelApartments Ltd, had a management contract with the Body Corporate.[5] Oaks takes the position in this proceeding that notwithstanding the Crown'sproposed acquisition, the Body Corporate is still obliged to proceed to undertake thereinstatement and repair of the building with the insurance proceeds. It claims thatthe Body Corporate's resolution to the contrary is ultra vires. There is presently anarbitration on foot to determine whether the leases between the unit owners and 187CML are already terminated as a matter of law pursuant to a damage and destructionclause in the lease.[6] The primary relief sought by Oaks in this proceeding is orders declaring thatthe resolutions indemnifying unit owners in respect of legal costs and resolving notto reinstate are unjust or inequitable for Oaks as the minority unit owner, and thatthey are void ab initio. An order is also sought restraining the Body Corporate andits committee from any act or omission to act resulting from the resolutions.[7] The money that Oaks seeks to freeze in this application is the balance held ofa sum of money paid by the Body Corporate's insurer for interruption of the hotel'sbusiness as a consequence of the earthquake. The amount is $707,687. There is alsoa sum that has been received by the Body Corporate in respect of the hotel's materialdamage policy, totaling $5,635,000. For reasons that are not connected to the issuesthat arise in this proceeding, the Body Corporate accepts that the $5,635,000 shouldbe retained and not distributed in the meantime, and has provided an undertaking tothat effect. It is not prepared to give any undertaking in relation to the $707,687, andthis has given rise to the present application.[8] Ms Bryant for Oaks submits that Oaks has a good arguable case against therespondent on these causes of action, as necessary for the purposes of the freezingorder jurisdiction. She asserts that the hotel can be repaired or reinstated and theBody Corporate has the physical ability to enter the property and undertake therepairs. Such a course of action, she submits, will produce a better financialoutcome for Oaks than termination of the leases and sale. Ms Bryant submits thatthe Body Corporate has a mandatory duty to undertake the repairs, and it does nothave the power to resolve not to reinstate the property. She claims that theresolutions not to reinstate are ultra vires. She asserts that the Body Corporate hasno interest in the leases as they are between 187 CML and the individual owners.She claims that there is a fiduciary relationship between the Body Corporate and itsmembers, and that in breach of those duties the Body Corporate has failed to fulfil itsduty to repair, preferred the interests of certain owners, and acted ultra vires. She does not accept the Crown acquisition is inevitable.[9] Ms Bryant states that the insurance proceeds are an asset within thejurisdiction of the Court, and that there is a real risk of the dissipation, disposal ordealing with that $707,687 unless the freezing orders are granted. She points to aBody Corporate resolution to the effect that the Body Corporate secretary isauthorised to distribute the insurance proceeds less certain deductions to owners ormortgagees at the owners' direction and in accordance with the owners' interests.Accordingly, she submits there is a risk that if Oaks succeeds in its claim, anyjudgment in its favour will be wholly or partly unsatisfied because the money willhave been passed on from the Body Corporate to the unit owners. She points outthat there is no evidence that any unit owner will suffer hardship if they do not, in themeantime, receive their share of the fund.[10] Mr Chisholm QC for the Body Corporate submits that the freezing orderjurisdiction does not apply, and that the application is misconceived. The BodyCorporate has a duty to unit owners to pay out the insurance proceeds. Thegovernment offer is above market value and the Body Corporate supported by theunit owners except Oaks should be able to accept it. He submits that this applicationhas a tactical purpose and is designed to make it more difficult for unit owners tofund the pending arbitration. He submits that the inevitability of the Crown purchasemakes the proceeding futile, and that there is no good arguable case for relief.The issue[11] This application raises issues as to the nature of the freezing orderjurisdiction. The Body Corporate has finite funds and limited assets, and if it paysout the $707,687 it will have very limited immediate resources to meet anyjudgment. However, it does have the ability to obtain payments from individual unitowners so that it can meet its debts. There can be no doubt that should Oaksultimately obtain a judgment against the Body Corporate, the debt will ultimately berecoverable, if necessary, by the Body Corporate being placed in liquidation and theliquidator pursuing the individual owners. The individual owners have not beenshown to be without assets, and it can be assumed, given that they own units, that they would meet such a modest levy. Ms Bryant pointed to the inconvenience of such a process, and the fact that it would mean that the individual owners would have to be pursued for debts of approximately $5,000 each. She accepted, however,that Oaks could achieve recovery by going down this route, albeit with cost anddelay.[12] The issue is whether the fact that any judgment in Oaks' favour willultimately be recoverable from the Body Corporate is fatal to this freezing orderapplication.The Mareva jurisdiction[13] The Mareva jurisdiction1 was recognised in New Zealand from 1978 in anumber of High Court decisions.2 It was formally recognised by r 236B of the HighCourt Rules in 1989.3 This original rule referred only to restraining a party "fromremoving from New Zealand, or otherwise dealing with, assets in New Zealand". Itdid not set out the relevant criteria.[14] This changed when a new r 32 of the High Court Rules was introduced by a2008 amendment and came into effect on 1 February 2009. The 2008 amendmentwas a far more wide reaching reform. It called the new type of order a "freezingorder". Rule 32.2 set out the basis of the jurisdiction, restraining a respondent from"removing any assets located in or outside New Zealand or from disposing of,dealing with, or diminishing the value of, those assets". It is stated at r 32.2(4) thatan application for a freezing order can be made by interlocutory application ororiginating application. This particular application is in the latter category, in thatthe freezing order is sought as part of the primary relief claimed in the originatingapplication.1 Named after the English case which first recognised the jurisdiction, Mareva Compania Naviera SA v International Bulkcarriers SA [1975] 2 Lloyds' Rep 509 (CA).2 Barker J detailed the jurisdiction's early history in the first case where the High Court'sjurisdiction to issue Mareva injunctions was challenged, Hunt v BP Exploration Co (Libya) Ltd[1980] NZLR 104 (HC) at 115–118. His Honour considered Mosen v Donselaar (1978) 2 PRNZ 482 (HC) to be the earliest instance of the power being exercised in New Zealand.3 Rule 236B was revoked and substituted by r 239 by r 5 of the High Court Amendment Rules 2003 (SL 2003/280).[15] In r 32.5, there are detailed provisions setting out the ambit of thejurisdiction. The rule applies pre-judgment if the applicant has a good arguable caseon an accrued or prospective cause of action.4 Rule 32.5(4) provides:32.5 Order against judgment debtor or prospective judgment debtor or third party(4) The court may make a freezing order or an ancillary order or both against a judgment debtor or prospective judgment debtor if the court is satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because—(a) the judgment debtor, prospective judgment debtor, or another person might abscond; or(b) the assets of the judgment debtor, prospective judgment debtor, or another person might be—(i) removed from New Zealand or from a place inside or outside New Zealand; or(ii) disposed of, dealt with, or diminished in value (whether the assets are in or outside New Zealand).(emphasis added)[16] Further limitations were placed on the jurisdiction in rr 32.6(2) and (3):32.6 Form and further terms of freezing order(2) If the likely maximum amount of the applicant's claim is known, the value of the assets covered by the freezing order must not exceed that amount together with interest on that amount and costs.(3) The freezing order must not prohibit the respondent from dealing with the assets covered by the order for the purpose of—(a) paying ordinary living expenses; or(b) paying legal expenses related to the freezing order; or(c) disposing of assets, or making payments, in the ordinary course of the respondent's business, including business expenses incurred in good faith.4 High Court Rules, r 32.5(1)(b).[17] It was established in Bank of New Zealand v Hawkins5 that a Marevainjunction could be granted without nefarious intent on the prospective debtor's partbeing proven, despite some observations in other common law jurisdictions to thecontrary.6 This is reflected in the wording of r 32.5(4)(b)(ii) which does not refer toassets being "dissipated" but rather "disposed of, dealt with or diminished in value".[18] There is no doubt that Oaks has shown that an asset (the $707,687) is to be disposed of (paid out to unit owners). However, assuming for the purposes of thepresent issue that there is a good arguable case, the fact that an asset is to bedisposed of is in itself not enough to invoke the jurisdiction. The heart of thejurisdiction is a real risk that a judgment or award may go unsatisfied.7 There mustbe a danger that the prospective judgment creditor's ability to recover will bedefeated because assets have been disposed of.8 In Bank of New Zealand v Hawkinsit was observed that there had to be a "... real risk that the defendant will dissipate ordispose of assets so as to render himself 'judgment proof'".9 This is now expresslystated at r 32.5(4), which provides that the Court "may" make an order if it issatisfied having regard to all the circumstances that there is a danger that thejudgment or prospective judgment will be wholly or partly unsatisfied because of theremoval or disposal. As Lawton LJ observed in Third Chandris ShippingCorporation v Unimarina SA, there must be facts from which the commercial court,like a prudent sensible commercial person, could properly infer a danger of default ifassets are removed.10 This test is "not unduly exacting".115 Bank of New Zealand v Hawkins (1989) 1 PRNZ 451 (HC) at 454.6 Z Ltd v A-Z and AA-LL [1982] 1 QB 558 (CA) at 585, where it was suggested by Kerr LJ that thejudgment creditor must "take steps designed to ensure that [any assets] are no longer available ortraceable"; Derby & Co Ltd v Weldon (Nos 3 and 4) [1990] Ch 65 (CA) at 76. See also Home Insurance Co v Administration Asigurarilor de Stat, unreported, 29 July 1983 referred to by Kerr LJ in Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft mbH & Co KG [1983] 1 WLR 1412 (CA) at 1422.7 Property Marine Australia Pty Ltd v Condor Yachts (Bermuda) Ltd (1987) 1 PRNZ 251 (HC) at 255.8 Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft mbH & Co KG, above n 6, at 1422.9 Bank of New Zealand v Hawkins, above n 5, at 454, endorsed by the Court of Appeal in Shaw v Narain [1992] 2 NZLR 544 (CA) at 548.10 Third Chandris Shipping Corporation v Unimarina SA [1979] QB 645 (CA).11 Raukura Moana Fisheries Ltd v The Ship "Irina Zharkikh" [2001] 2 NZLR 801(HC) at [122].[19] It is the issue of the danger of default, and the question of whether there is agood arguable case, that commonly give rise to argument and have been the subjectof submissions in this hearing. The importance of these two issues is indicated bythe fact that in the form of freezing order attached to the schedule in the rules,12 it isrequired to be stated that the applicant has a good arguable case, and that the Court issatisfied there is a danger that the judgment in favour of the applicant will be whollyor partly unsatisfied. These are essential requirements.[20] The jurisdiction is not designed to provide an applicant with pre-judgmentsecurity. The general rule that a respondent can deal with its assets withoutconstraint, which applied to the original Mareva jurisdiction,13 is still reflected in thenew detailed rule, if only indirectly. Even if the disposal will result in insufficientfunds to pay a plaintiff, a Court is unlikely to interfere if the disposition is genuineand in the ordinary course of business.14 That limitation of the common law regimeapplies under the new rules and is indicated in r 32.6(3), which states that thefreezing order must not prohibit the respondent from dealing with the assets for thepurpose of paying ordinary living expenses and legal expenses related to the freezingorder, but also " disposing of assets or payments, in the ordinary course of therespondent's business, including business expenses incurred in good faith". Theprospective judgment debtor must be able to continue to trade or carry on business inthe usual way.[21] In short, the common law restrictions on the ambit of the remedy remain, and it will not be permitted to be used by an applicant to force a respondent who couldultimately pay the judgment debt to hold funds for the benefit of its opponent.Assessment[22] In my view, Oaks has not shown any real risk that any judgment it may get will go unsatisfied. A prudent sensible commercial person could not properly infer a12 High Court Rules, sch 1, form G 38.13 Barclay-Johnson v Yuill [1980] 1 WLR 1259 (HC); Property Marine Australia Pty Ltd v Condor Yachts (Bermuda) Ltd, above n 7, at 253; and Laws of New Zealand Creditors' Remedies (online ed) at [13].14 Whitmarsh v A'mon Corporation Ltd (1988) 2 PRNZ 576 (HC) at 582, and High Court Rules,r 32.6(3)(c).danger of default by the Body Corporate if judgment was entered against it. There are no indications that it is trying to defeat any judgment. The payment out that itproposes to make to individual unit owners from the insurance policy proceeds forbusiness interruption is a payment that it could be expected to make in the ordinaryconduct of its business (putting to one side the issues of lawfulness now raised in thisproceeding). It has no obligation to hold onto the funds in case there is a judgmentagainst it in the future, and it can be seen as a perfectly normal business step to payout the money to unit owners for whose ultimate benefit the insurance policy wastaken out.[23] The parties of course disagree as to whether in terms of ss 134–136 of the Unit Titles Act 2010 the Body Corporate is able to pay the insurance money out to the unit owners. That is one of the issues to be determined. The issues of statutoryinterpretation that arise are not straight forward. I am satisfied that the BodyCorporate holds the genuine view, based on legal advice, that it may make thepayment and proposes paying out in good faith. But I do not need to determinewhether there is a good arguable case. The application can be determined on a moresimple point.[24] That point is the first issue of whether on an objective assessment there is agenuine danger of default. Critically, if the Body Corporate is proven to have beenwrong in its belief that it can pay out, it will be able to recover the money back fromthe individual unit owners. It can be assumed that unit owners who own units insuch a building will be well able to each meet a payment in the sum of $5,000.There is no suggestion that they will not be able to meet any such demand to pay,and even if some are unable to make the payment, the funds could be recovered fromthose who are solvent and available.[25] Thus, what is fatal to this application is that it is not at all likely that therewill in the long term be any default, should the applicant succeed in obtaining ajudgment debt. That judgment debt can be enforced upon the grounds available bythe usual methods. The payment of the insurance moneys is the sort of payment thatit could be expected that a Body Corporate would make in the ordinary course of itsbusiness, subject of course to the conflicting arguments as to the provisions of the Unit Titles Act and the duty of the Body Corporate in this particular circumstance.[26] Consistent with the common law Mareva jurisdiction, r 32.5(4) requires theCourt to be satisfied that there is a danger of the prospective judgment beingunsatisfied because of the payment. It is my assessment that there is no appreciabledanger that Oaks will be left with an unsatisfied judgment if it succeeds in its currentround of proceedings. It may be left with an inconvenient enforcement procedure,but that is not enough. For that reason, I am not prepared to grant the freezing order.Interim injunction[27] As I put to counsel during the hearing, it is possible to see this application asan interim injunction application. The applicant is arguing that the Body Corporatehas no legal right to make the proposed disposition. It could follow that if there wasan arguable case that there was no legal right to make the disposition, an interiminjunction order should be made preventing it.[28] However, even if that position were reached, the applicant would fail toobtain an interim injunction on the balance of convenience. There is no factorarising that requires the Court's urgent interim intervention. There is no risk that ifthe payment is made, and it was unlawful, that there will be irremediable harm. Themoney could be recovered.[29] The convenient way to proceed is for the substantive proceeding to continue.If it does and the applicant is successful, it should be able to recover. There is nopractical need for the Court to intervene to ensure that any judgment is not renderednugatory.[30] Mr Chisholm submits that there is a tactical purpose to this application,which is to inhibit the unit owners from accessing their share of the businessinterruption proceeds, and to thereby create pressure for a settlement in accordancewith the applicant's wishes, and to inhibit unit owners from financing the arbitration.That could be an abuse of procedure.15 I do not have to reach a view on that issue. Nevertheless, I record that in my view, if the unit owners wish to use the proceeds to finance the arbitration, that is something that they should be permitted to do. The Court should not intervene. If the Body Corporate ultimately loses, the unit owners will have to pay the money back.Conclusion[31] In the end the Court should stand back in relation to any freezing orderapplication or interim injunction application, and consider the overall justice of thecase. Given that the Body Corporate is ultimately able to levy its members for anydebts that it has, including the cost of reinstatement of the building (if the applicantsucceeds and such an order was made ultimately), there is no need for the Court tointervene. There is nothing to show that the members of the Body Corporate couldnot pay back any money that they received. In the meantime, the members should bepermitted to access the funds and use those funds as they wish. The applicant cannothave pre-judgment security.Result[32] The application for a freezing order and ancillary order is declined.[33] Counsel were agreed that 2B costs should follow the event. Oaks is to paythe Body Corporate's costs and reasonable disbursements on a 2B basis...Asher J15 Z Ltd v A-Z and AA-LL, above n 6, at 585.