PVG SECURITIES TRUSTEE LTD v 100 INVESTMENTS LTD [2019] NZHC 1847

PVG SECURITIES TRUSTEE LTD v 100 INVESTMENTS LTD [2019] NZHC 1847 [31 July 2019]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2018-404-002838[2019] NZHC 1847BETWEEN PVG SECURITIES TRUSTEE LIMITEDPlaintiffAND 100 INVESTMENTS LIMITEDDefendantHearing: 19 March 2019Appearances: K Francis and K M Moon for the PlaintiffP Michalik for the DefendantJudgment: 31 July 2019JUDGMENT OF HINTON JThis judgment was delivered by me on 31 July 2019 at 4.45 pmpursuant to Rule 11.5 of the High Court RulesRegistrar/Deputy RegistrarCounsel/Solicitors:Meredith Connell, AucklandPaul Michalik, Barrister, WellingtonIntroduction[1] A building at 110 Lichfield St in Christchurch was severely damaged in the2010 and 2011 Christchurch earthquakes. It was owned by a company called LichfieldVentures Ltd (LVL), and was insured with IAG New Zealand Ltd. It was subject totwo mortgages. The first was to a company called Property Finance Securities Ltd(PFSL), which had priority for $3.33 million. The second mortgage eventually cameto be assigned to the plaintiff, PVG Securities Trustees Ltd.[2] PFSL sold the property (and assigned the right to the insurance proceeds) atmortgagee sale to the defendant (100 Investments). PFSL received less than itspriority sum of $3.33 million in that transaction, and its debt exceeded that figure.IAG later made an insurance settlement payment to 100 Investments. PVG claims itshould have received most of that money.[3] IAG paid the insurance proceeds to 100 Investments following a settlementagreement between them and following an unopposed proceeding between thosetwo parties. The amount paid was $2,947,197. The Court proceeding was necessarybecause IAG required a ruling that 100 Investments Ltd was entitled to the funds. Theliquidator of LVL intervened and was heard in opposition, although on short notice.Thomas J ruled that 100 Investments was the party entitled to the settlement payment.1[4] PVG and the liquidator of LVL have the same interests, and are in substanceone and the same, which I explain below at [23]-[24].[5] PVG says that since it was not a party to the proceeding, it is not bound by theruling of Thomas J and it wishes to make arguments that the liquidator did not havean opportunity to make before Thomas J.[6] PVG seeks a declaration that it is entitled to a substantial part of the IAGsettlement payment. Specifically, it seeks declarations that it has an equitable chargeover the settlement payment to secure sums owed to it by LVL, and that it is entitled1 100 Investments Ltd v IAG New Zealand Ltd [2018] NZHC 3244.to receive the settlement payment to the extent it (together with other realisations underthe first mortgage) exceeds PFSL's priority amount under the mortgage.[7] 100 Investments accepts the Court has jurisdiction, despite the ruling ofThomas J. PVG is represented by the solicitor who represented the LVL liquidatorand similar, though not identical, arguments are advanced as before Thomas J.[8] I rather reluctantly proceed on the basis that Thomas J's judgment does notbind PVG, and that I must decide the matter afresh.Background[9] Lichfield St was owned by LVL from 2003 until 23 December 2015.[10] LVL granted two mortgages over the property:(a) a first mortgage to PFSL with a priority sum of $3.33 million; and(b) a second mortgage to Hanover Finance Ltd, which was assigned tovarious parties and ultimately to PVG on 17 August 2018.[11] The property was insured by IAG for $2,715,920.[12] LVL was placed in liquidation on 16 December 2010. The (then) liquidatordisclaimed the property on 22 December 2010 (LVL's having no equity in it), and itvested in the Crown bona vacantia, subject to the two registered mortgages.[13] The building was demolished by order of the Canterbury Earthquake RecoveryAuthority in March 2012.[14] There was a longstanding dispute over an insurance claim made by LVL underthe IAG policy.[15] In December 2015, IAG paid $789,929.92 to PFSL, as first mortgagee, onaccount of the insurance claim, on a without prejudice basis.[16] On 17 December 2015, PFSL exercised its right as first mortgagee to sellLichfield St to 100 Investments for $1,320,500. As part of this transaction PFSLassigned the benefit of any residual insurance claim to 100 Investments.[17] On 23 December 2015 the mortgagee sale settled and 100 Investments tookpossession of the property.[18] On 27 January 2016, but with an effective date of 23 December 2015, PFSLand 100 Investments entered into a separate deed assigning to 100 Investments all ofLVL's debt to PFSL, for a consideration of $660.01.2[19] In 2016, 100 Investments, in its own name and on behalf of LVL, commencedproceedings against IAG for the residual insurance rights. LVL was by this time inliquidation. (100 Investments did not obtain the consent of the liquidator to bring theaction on LVL's behalf or inform them of the proceeding. It also did not serve theproceeding on the second mortgagee. Nothing turns on these points.)[20] 100 Investments and IAG reached the settlement referred to earlier, on5 November 2018. It was conditional on a declaration from the High Court in termsthat 100 Investments:(a) was entitled to bring the proceeding in its own name and/or on behalfof LVL;(b) was entitled to enter into an agreement for discharge of the insuranceclaim and settlement of proceedings between IAG, 100 Investmentsand LVL;(c) was entitled to receive any further proceeds that may have been payableby IAG in respect of LVL's insurance policy; and2 This document is not in evidence, but not much seems to turn on it. Both parties are agreed theinsurance rights/proceeds were assigned, either in the mortgagee sale or through this document.(d) IAG should pay 100 Investments the sum of $2,947,197 inclusive ofGST (if any), interest and costs.[21] Thomas J granted the application and made a declaration (albeit not exactly onthe terms sought) that 100 Investments has the right to the outstanding insuranceproceeds in respect of the property and had the ability to settle any insurance claims.She held that 100 Investments did not require recourse to a general security agreementor its right as mortgagee in possession. She specifically noted that it was irrelevantthat 100 Investments did not seek the consent of the liquidator, given it was entitled tothe insurance proceeds in its own name.3[22] The funds are currently held in 100 Investments' solicitor's trust accountpending determination of this proceeding.[23] The liquidation of LVL and this proceeding is one of many similar situationsthat have arisen from the collapse of another company, Property Ventures Ltd (PVL),which is also in liquidation. PVL had a number of subsidiaries, including LVL, whichPVL wholly owned. The PVL group was under the control of Mr David Henderson,prior to his bankruptcy in 2010.[24] PVG is a company set up by the liquidator of PVL (and LVL) to take anassignment of securities held over entities in the PVL group, which are held on trustfor the creditors of PVL. As I have said, the second mortgage was ultimately assignedto PVG. The defendant disputes the validity of the assignment to PVG, because itoccurred after Lichfield St was sold in the mortgagee sale, but I have not found itnecessary to consider that point.The plaintiff's case[25] Although the plaintiff's submissions are lengthy, they boil down to twopropositions. First, it says it has an equitable charge over the insurance proceeds, and,second, that this charge survived the mortgagee sale and assignment of the insuranceproceeds.3 100 Investments Ltd v IAG New Zealand Ltd [2018] NZHC 3244 at [46].[26] PVG's argument in support of the first point is advanced as follows:(a) Because of PFSL's priority amount, PFSL was only able to recover upto $3.33 million from the sale of Lichfield St and the insuranceproceeds combined. It had to account to PVG for any amount in excessof this.(b) Where there is a covenant to insure in a mortgage, the mortgagee'sinterest in the insurance proceeds is protected by way of an equitablecharge. For this, the plaintiff cites the Privy Council's decision inColonial Mutual General Insurance Co Ltd v ANZ Banking Group(New Zealand) Ltd.4(c) Therefore, because PFSL's interest in the insurance proceeds waslimited by its priority amount, any amounts recovered above thatpriority were subject to PVG's equitable charge. The plaintiff refers tothe following passage from Colonial Mutual in support of thisproposition:5If the policy is effected in the name of the mortgagee, he isentitled in law to payment of the proceeds. But his interestremains by way of charge to secure the mortgage debt, and hewill be accountable to subsequent mortgagees or themortgagor for any surplus.[27] So, says the plaintiff, when PFSL assigned the insurance proceeds to100 Investments, the proceeds were encumbered by PVG's charge. The plaintiffsubmits that the mortgagee sale and the assignment did not remove PVG's charge.The plaintiff cites Colonial Mutual for this proposition as well.[28] Repeated throughout its argument, the plaintiff says PFSL could not assign to100 Investments any greater rights than PFSL itself had.4 Colonial Mutual General Insurance Co Ltd v ANZ Banking Group (New Zealand) Ltd [1995]3 NZLR 1 (PC).5 At 4–5.[29] PFSL recovered $789,929.92 from the initial insurance pay-out, and$1,320,500 from the sale to 100 Investments, being $2,110,429.92 in total. So PFSLitself only had a right to recover a further $1,219,570.08 from the insurance proceeds.100 Investments recovered $2,947,197 from IAG. Therefore, says the plaintiff,100 Investments must account to PVG for the excess, because the excess is subject toPVG's charge.6Analysis[30] The defendant raises a number of arguments as to why the plaintiff's claimshould fail. They include that PVG is not a valid assignee of the second mortgage,that priority amounts do not operate as a charge over the land (and insurance proceeds),but are only operative as between mortgagees, and that even if there was a charge, itdid not survive the assignment to 100 Investments.[31] I consider the last point is the simplest, and that it is determinative of this case.The relevant provision is s 183 of the Property Law Act 2007 (the Act). It is in theseterms:183 Mortgagee may transfer or assign mortgaged property to purchaser(1) On the sale of mortgaged property by a mortgagee,—(a) the mortgagee's written receipt is a sufficient discharge to thepurchaser for payment of the purchase money or other consideration;and(b) the mortgagee may execute all assurances and do all other thingsnecessary to transfer or assign the property to the purchaser.(2) The mortgagee's powers under subsection (1)(b) include, in the case of amortgage over land under the Land Transfer Act 2017, the power to do eitheror both of the following:(a) execute a transfer instrument that may be registered under section103 of that Act:(b) register a transfer instrument under that Act.(3) However, if the mortgagee is the purchaser, the transfer or assignment mustbe executed or registered by the Registrar under section 196 or in accordancewith an order of a court made under section 200.6 These are the plaintiff's figures. The defendant disputes what the exact excess is, but there is noquestion that, on the plaintiff's argument, there is a reasonably significant excess.(4) A transfer instrument or other instrument executed or registered bythe mortgagee under subsection (1) or (2) transfers or assigns theproperty to which it relates to the transferee or assignee—(a) free from all liability on account of—(i) the mortgage under which the power of sale wasexercised; and(ii) any subsequent mortgage or other subsequentencumbrance over the property; but(b) subject to—(i) any mortgage or other encumbrance, estate, or interest overor in the property that has priority over the mortgagee'smortgage and has not been discharged or otherwiseterminated; and(ii) any other estate or interest in the property that is bindingon the mortgagee.(5) Subsection (4) is, in the case of an executed transfer instrument or otherinstrument, subject to the need for its registration under any enactment.(emphasis added)[32] The effect of s 183(4) is that mortgaged property assigned under a mortgageesale is taken by the purchaser free from all liability on account of any subsequentmortgage. "Property" is defined in the Act as follows:7property— (a) means everything that is capable of being owned, whether itis real or personal property, and whether it is tangible or intangible property;and (b) includes any estate or interest in property; and (c) in subpart 6 of Part 6,has the extended meaning given to that term in section 345(2).[33] The right to receive insurance proceeds is a thing (or a chose) in action. Athing in action has always been considered property.8 In fact, the Law Commission intheir report, A New Property Law Act, which was the genesis of the Act, expresslynoted their view that the definition of "property" included a thing in action.97 Property Law Act 2007, s 4 definition of "property".8 In Re Bank of Credit & Commerce International S.A. [1998] AC 214 (HL) at 226.9 Law Commission A New Property Law Act (NZLC R29, 1994) at 258. The definition of"property" which appeared in that report is identical to that which appears in the Act.[34] "Mortgage" is defined as any charge over property.10 So the Act applieswhether the relevant charge was legal or equitable.[35] Therefore, it is fundamentally incorrect to say, as PVG does, that an assigneeof rights on a mortgagee sale cannot acquire any greater rights than the mortgagee haditself. The purchaser/assignee does acquire greater rights than the mortgagee. Thepurchaser does not acquire a mere mortgage interest. They acquire the secured assetsbeing assigned, clear of any mortgages and charges. That is what happened here. Anycharge or interest the plaintiff may have had in the insurance rights was extinguishedwhen the rights were assigned.[36] PFSL as first mortgagee was entitled to sell the property and assign theinsurance proceeds under the standard terms of its mortgage, but it was clearly notselling as the owner of both items of property. It was selling as a firstmortgagee/charge-holder. It had to get the best price reasonably obtainable and it hadto account to subsequent mortgagees and to the owner of the secured property to theextent that its recovery from all of the secured assets exceeded its debt, or the prioritysum, whichever is lower.11[37] PVG therefore had the standard recourse available to a second mortgagee toprotect its interest, in that it could stop the mortgagee sale and/or sue PFSL if the assetswere undervalued and it could similarly hold PFSL to account for any sum realised byit, over and above the priority figure.[38] PVG did not make any claims against PFSL on either of these bases. Clearlyit had no claim to any of the proceeds of sale received by PFSL because they fell wellshort of the priority sum. That is not in dispute. It would seem further that PVG didnot take the view that the assets were under-sold by PFSL and of course PVG had thestandard opportunity as second mortgagee to bid on those assets.[39] Colonial Mutual does not assist the plaintiff here either. That case involved adispute over who was entitled to the proceeds of insurance arising from the destruction10 Property Law Act 2007, s 4 definition of "mortgage".11 Property Law Act 2007, s 185.of a house in Tauranga, which belonged to a Mr W. Mr W had given two mortgagesover the property. The mortgages both charged the property and any insuranceproceeds (just as here). The property was insured by Colonial Mutual. The firstmortgage was to Mr W's solicitors. The second was to the ANZ Bank. After theproperty was destroyed, the first mortgagee exercised their power of sale to sell theproperty. However, they did not purport to, and did not need to, assign the right to theinsurance proceeds, because the realisation from the house mortgagee sale was enoughto satisfy the loan owing under the first mortgage, with a balance left over, for whichthe first mortgagee accounted to ANZ. ANZ still faced a shortfall. It sought to recoverthat, via its charge over the insurance proceeds, but Mr W had somehow convincedColonial Mutual to pay him the proceeds. ANZ sued Colonial Mutual, seeking adeclaration that it had a charge over the insurance proceeds, and that the proceedsshould have been paid to ANZ rather than to Mr W.[40] The issues were whether the insurance policy had been validly assigned toANZ by Mr W, and whether the fact Mr W had changed insurers defeated ANZ'sinterest. The High Court, affirmed by the Court of Appeal and Privy Council, heldthat ANZ had a valid charge over the insurance proceeds.[41] The case does not stand for the proposition that a charge over an insuranceclaim survives an assignment of that claim in a mortgagee sale. At best, it may standfor the proposition that a second mortgagee's charge over insurance rights is notextinguished by the sale of the mortgaged land only. But this was not a focus of thecase. On the particular facts of Colonial Mutual, the charge did survive because thefirst mortgagee did not assign the insurance rights to realise its security, because it didnot need to. The second mortgagee therefore still had a charge over the insurancerights after the discharge of the first mortgage.[42] In this case, on the other hand, the first mortgagee realised and assigned to100 Investments all of the secured assets that were the subject of the mortgage and thesecond mortgagee's charge on those assets ended as set out above.Conclusion[43] For the above reasons, I decline to make the declarations sought by theplaintiff.Costs[44] The defendant is entitled to costs. If they cannot be agreed, the defendant is tofile a memorandum by Monday, 19 August 2019 and the plaintiff by Monday,2 September 2019.----------------------------------------------Hinton J