CUMMINS v BODY CORPORATE 172108 [2022] NZCA 658

CUMMINS v BODY CORPORATE 172108 [2022] NZCA 658 [21 December 2022]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA305/2022[2022] NZCA 658BETWEEN ROBERT JAMES CUMMINSAppellantAND BODY CORPORATE 172108RespondentHearing: 27 September 2022Court: Goddard, Ellis and Dunningham JJCounsel: K P Sullivan for AppellantJ B Orpin-Dowell for RespondentJudgment: 21 December 2022 at 3.00 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant must pay the respondent costs for a standard appeal on aband A basis with usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Goddard J)Background[1] This appeal arises out of a long-running dispute concerning the repair of aleaky unit title apartment building, Hobson Apartments. The respondent(the body corporate) is the body corporate for that building.[2] The dispute has come before this Court on five previous occasions.1 The issuebefore the Court on this appeal is however relatively confined, and the relevant factscan be briefly stated.[3] Manchester Securities Ltd (Manchester) is, and was at all relevant times,the registered owner of Unit 12A in Hobson Apartments. Manchester was thesole trustee of the Manchester Securities Trust (the Trust). In that capacity it incurredliabilities to the body corporate which have not been discharged. The body corporateapplied to put Manchester into liquidation. That application was opposed byManchester and by Mr Cummins. The High Court made an order putting Manchesterinto liquidation.2 The High Court subsequently awarded costs of $32,818.45 in favourof the body corporate against Manchester and Mr Cummins (the judgment debt).3[4] Meanwhile, Mr Cummins had arranged for himself to be appointed as a trusteeof the Trust, and for the retirement of Manchester as a trustee. So he is now thesole trustee of the Trust. But title to the unit remains in the name of Manchester,for reasons that need not be canvased here.[5] The body corporate is a creditor of Manchester not only in respect ofthe judgment debt, but also in respect of large amounts of unpaid levies.The body corporate claims that it is entitled to be subrogated to Manchester's right ofindemnity as a (former) trustee out of the Trust assets in respect of debts incurred byManchester in its capacity as a trustee, and to Manchester's lien over the Trust assetsto protect that right of indemnity. The body corporate has lodged a caveat over the titleto Unit 12A, founded on that claim.[6] The body corporate served a bankruptcy notice on Mr Cummins in respect ofthe judgment debt. Mr Cummins applied to set that notice aside. That application wasunsuccessful.4 Mr Cummins appeals from that decision.1 Manchester Securities Ltd v Body Corporate 172108 [2017] NZCA 527, (2017) 19 NZCPR 65;Manchester Securities Ltd v Body Corporate 172108 [2018] NZCA 190, [2018] 3 NZLR 455;Manchester Securities Ltd v Body Corporate 172108 [2019] NZCA 408 [Stay appeal]; Cumminsv Body Corporate 172108 [2021] NZCA 145, [2021] 3 NZLR 17; and Cummins v Body Corporate172108 [2022] NZCA 68 [Joinder appeal].2 Body Corporate 172108 v Manchester Securities Ltd [2020] NZHC 198.3 Body Corporate 172108 v Manchester Securities Ltd (in liq) [2021] NZHC 1852.4 Body Corporate 172108 v Cummins [2022] NZHC 211.The issue: is the body corporate a secured creditor of Mr Cummins?[7] Section 14 of the Insolvency Act 2006 provides that the court must not makean order of adjudication on the application of a secured creditor unless the creditor hasestablished that the amount of the debt exceeds the value of the charge by at least$1,000. Mr Cummins contends that the body corporate is a secured creditor for thepurposes of s 14, so is not entitled to seek an order adjudicating him bankrupt.[8] Mr Cummins says that the body corporate has security for the judgment debtagainst both Manchester and himself as a result of its claim to be subrogated toManchester's lien over the Trust assets. He says this is also a charge over his propertybecause, as sole trustee of the Trust, he is the beneficial owner of the Trust's assetsincluding Unit 12A. And he says that the body corporate has priority over his othercreditors because the body corporate's claim to an indemnity out of the Trust assetsthrough Manchester, the former trustee, has priority over his equitable interest inthe Trust assets as a successor trustee.[9] It is helpful to address this argument in stages. We begin by considering thesimple scenario where a creditor of a trustee may be entitled to be subrogated to a rightof indemnity out of trust assets and to the supporting lien over those assets. Does thatmean the creditor is a secured creditor for the purposes of the Insolvency Act? We thenconsider the more complex scenario that arises in this case, involving an originaltrustee, a successor trustee, and a claim by the creditor against both trustees.Is a creditor of a trustee a secured creditor for the purposes of the Insolvency Act?[10] Where a trustee incurs a debt for the purposes of the trust, the trustee ispersonally liable for that debt.5 If the trustee meets the debt out of their own resources,they are entitled to an indemnity out of the assets of the trust.6 The trustee has a lien(also sometimes described as a charge) over the trust property to protect that right ofindemnity.75 Trusts Act 2019, s 81(1).6 Section 81(2)(a); and Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367.7 Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington,2009) at [5.3.1(6)(g)], [16.6.6] and see [16.6.6], n 133.[11] The trustee's lien does not equate to beneficial ownership of the trust assets, asNettle J explained in Karingal 2 Holdings Pty Ltd v Commissioner of State Revenue:8A trustee whose only claim in respect of trust assets is a right of indemnitydoes not in that sense hold trust assets on trust for himself beneficially.He holds the assets on trust beneficially for the beneficiaries, albeit subject toa right, which is treated in equity as proprietary, to satisfy obligations out ofthe trust fund. The existence of the right of indemnity, proprietary though itmay be, is not sufficient to change the essential nature of the beneficialinterests which are held for the beneficiaries.[12] A creditor of the trustee may in some circumstances be entitled to besubrogated to the trustee's right of indemnity, and to the lien.9 But the primary remedyof the creditor is to claim the debt from the trustee. If it is not paid, the creditor maybankrupt the trustee.10 The creditor can prove in the trustee's bankruptcy, and isentitled to be paid out of the trustee's general assets, ranking equally with all otherunsecured creditors. The trustee's right of indemnity out of the trust assets, andsupporting lien, are assets that form part of the estate of the bankrupt trustee. All ofthis is elementary, and was not disputed before us.[13] Under the Insolvency Act, "secured creditor" is defined to mean a personentitled to a charge on or over property owned by a debtor.11 A charge is definedto include a right or interest in relation to property owned by a debtor, by virtue ofwhich a creditor of the debtor is entitled to claim payment in priority to other creditors.It does not include a charge under a charging order issued by a court in favour of ajudgment creditor.12[14] The entitlement of a creditor of a trustee to be subrogated to the trustee's rightto indemnity out of the trust assets does not amount to a charge for the purposes of theInsolvency Act, for two reasons. First, it is not a right or interest in property ownedby the debtor trustee: a claim to be subrogated to the trustee's rights in relation totrust property is a claim to exercise a right of the trustee against the trust property,not a right in property owned by the trustee. Second, it does not entitle that creditor to8 Karingal 2 Holdings Pty Ltd v Commissioner of State Revenue [2002] VSC 431, (2002) 51 ATR190 at [73].9 Trusts Act, s 86; and Octavo Investments Pty Ltd v Knight, above n 6, at 367.10 Levin v Ikiua [2010] 1 NZLR 400 (HC) at [121].11 Insolvency Act 2006, s 3.12 Section 3.payment in priority to other creditors. All creditors of the trustee in respect oftrust debts have the same entitlement to subrogation; none has priority over the others.They are in an analogous position to an unsecured creditor with a right of recourse toproperty under a charging order made by a court: it is precisely because a chargingorder does not confer any priority over other creditors that it does not qualify as acharge for the purposes of the Insolvency Act.[15] It follows that a creditor of a trustee in respect of a trust debt is not asecured creditor for the purposes of the Insolvency Act.[16] Although there is no New Zealand authority on this point — perhaps becausethe argument to the contrary is so plainly misconceived — there is some Australianauthority. In Aluma-Lite Products Pty Ltd v Simpson, Kiefel J gave short shrift to anargument that the ability to subrogate to a trustee's right of indemnity makes atrust creditor a secured creditor:13 in the event of a trustee's bankruptcy, creditors are subrogated to thetrustee's right to indemnity from the trust estate That does not, in my view,equate a creditor of a trust to a secured creditor ... All creditors may have resortto the assets of the trust, though they may not know what they are, and whatthe other creditors of the trust are, at the time the trustee is sued. That is not,however, a mortgage, charge or lien securing their individual debts, whichsecurity would have enabled them to take steps against the property offered assecurity without the benefit or requirement of a judgment.[17] That argument was also rejected by the Queensland Supreme Court inLerinda Pty Ltd v Laertes Investments Pty Ltd.14[18] Mr Sullivan, who appeared for Mr Cummins, was not able to identify anyauthority to support the proposition that a creditor of a trustee is a secured creditor byvirtue of their ability to subrogate to the trustee's right of indemnity. In the course ofargument he accepted that in this straightforward scenario the creditor is not asecured creditor of the trustee.13 Aluma-Lite Products Pty Ltd v Simpson [1999] FCA 1105 at [5].14 Lerinda Pty Ltd v Laertes Investments Pty Ltd [2009] QSC 251, [2010] 2 Qd R 312 at [8] and [14].[19] It follows that even if Mr Cummins is right that he incurred the judgment debtin a capacity that entitles him to indemnity out of the Trust assets, a proposition onwhich we express no view, that would not of itself mean that the body corporate is asecured creditor of Mr Cummins. Nor did Mr Sullivan contend that this was the case.Rather, he says that:(a) The body corporate is entitled to be subrogated to Manchester's claimto indemnity and to a lien in respect of the Trust assets.(b) Because Mr Cummins has now been appointed sole trustee of the Trust,Manchester holds the legal title to Unit 12A on a bare trust forMr Cummins. He is the equitable owner of the Trust assets. He thenholds that equitable interest on trust for the Trust's beneficiaries.(c) Manchester's right of indemnity out of the Trust assets takes priorityover Mr Cummins' equitable interest in those assets. The former trusteeis entitled to be indemnified before the current trustee can have recourseto the assets, and before the beneficiaries have any claim to those assets.(d) The body corporate's prior right of access to the Trust assets(via Manchester) ahead of Mr Cummins' right of access to those assetsin his capacity as successor trustee amounts to a charge overMr Cummins' equitable interest in the Trust assets. That is a chargeover property owned by Mr Cummins for the purposes of theInsolvency Act. So the body corporate is a secured creditor ofMr Cummins.[20] We turn to consider this elaborate argument.The scenario involving original and successor trustees[21] If Manchester had continued as a trustee of the Trust, the body corporate'sclaim to be subrogated to Manchester's right of indemnity and lien over theTrust assets would not mean that the body corporate held a charge over any propertyof Manchester. As explained above, it would not be a secured creditor of Manchesterfor the purposes of the Insolvency Act.[22] That position would not change merely because Manchester retired as a trusteeand was replaced by some other person. The appointment of a successor trustee doesnot by some mysterious alchemy convert a right that did not amount to a charge overproperty of Manchester into such a charge. That is because nothing material changes:it remains the case that the body corporate's claim to be subrogated to the trustee'sright of indemnity and lien (a) does not amount to a right or interest in property ownedby Manchester, and (b) does not confer priority over other creditors of Manchester inits capacity as trustee.[23] If the body corporate's claim to subrogation vis-à-vis Manchester does notrender the body corporate a secured creditor of Manchester for the purposes of theInsolvency Act, it is difficult to see how it could be suggested that this claim rendersthe body corporate a secured creditor of the successor trustee, whether or not thatsuccessor trustee is jointly liable for the relevant debt. To the contrary, the argumentfor secured creditor status is if anything weaker.[24] The priority that Manchester's claim to an indemnity has over any claimMr Cummins may have to indemnity out of the Trust assets is a red herring.That priority as between successive trustees is quite different from the concept ofpriority as between creditors. The body corporate does not have a charge over anyproperty owned by Mr Cummins; rather it has a (competing) prior claim to beindemnified out of assets to which Mr Cummins may also be entitled to have recourse,after Manchester. The Trust assets are not assets owned by Mr Cummins in therelevant sense any more than they were owned by Manchester when it was a trustee.[25] Mr Sullivan relied on two Australian decisions to support his argument to thecontrary. In Harvey v Commercial Bank of Australia,15 the registered owner of landexecuted a declaration of trust in respect of that land in favour of a company of whichhe was a director. The landowner was also a guarantor of the company's obligationsto its bank. He gave a mortgage of the land to a bank to secure the debt owed by the15 Harvey v Commercial Bank of Australia Ltd (1937) 58 CLR 382.company to the bank. The bank did not know of the declaration of trust. The companywent into liquidation. The bank lodged a proof of debt in the company's liquidation.That proof was rejected on the basis that the bank was a secured creditor of thecompany that had not surrendered its security.[26] As Dixon J explained, the mortgage operated to confer upon the bank themeans of satisfying the debt owing by the company out of what was in fact the propertyof the company.16 The bank had a right of prior recourse to property beneficiallyowned by the company to satisfy the debt owed to it by the company. It would beunfair for the company to prove in the liquidation for the whole of its debt, receive adividend, and then make good any deficit out of its security. Rather, if it wishedto prove in the liquidation, it would have to surrender its security over the propertybeneficially owned by the company for the benefit of all creditors.17[27] That case is very different from the case before us. Mr Cummins andManchester are joint obligors in respect of the judgment debt, as were the landownerand the company in Harvey. But there the similarity ends. The body corporate doesnot hold any security granted by Manchester over property beneficially owned byMr Cummins. Mr Cummins is not the beneficial owner of the Trust assets. The Trustassets would not form part of his bankrupt estate. As already explained, there are noassets beneficially owned by Mr Cummins to which the body corporate is entitledto have recourse to meet Mr Cummins' obligations in priority to other creditors.[28] Second, Mr Sullivan relied on Re Florance, a decision of the Federal Court ofAustralia.18 In that case a vendor agreed to sell a property to a company. The companyexecuted a declaration of trust in respect of the land declaring that it held the land forthree beneficiaries, including Mr Florance, in equal shares as tenants in common.The company subsequently granted a mortgage over the property in favour of thevendor as mortgagee (it appears, to secure part of the purchase price). The obligationsof the company were guaranteed by Mr Florance and another guarantor. The companyfailed to meet its obligations to the vendor. The vendor brought proceedings against16 At 389.17 At 392–393.18 Re Florance, ex parte Turimetta Properties Pty Ltd (1979) 28 ALR 403 (FCA).the company, Mr Florance and the other guarantor, and obtained judgment foroutstanding amounts of principal and interest. The vendor then issued a bankruptcynotice against Mr Florance. The notice was challenged on the basis that the vendorwas a secured creditor of Mr Florance.[29] Lockhart J considered that the case was indistinguishable from Harvey.He said:19The [vendor] holds its mortgage over the land which is in law the property of[the company] but in equity the property of [Mr Florance and the otherguarantor], thus satisfying the first part of the definition of "secured creditor" namely that the [vendor] holds a mortgage on property of [Mr Florance].It is true that the [vendor] took the mortgage from [the company] as securityfor its debt without knowledge of the declaration of trust; but as both[the company] and [Mr Florance] have defaulted in their respectiveobligations to the [vendor], it holds the mortgage as security for the debt dueby [Mr Florance] as well as the debt due by [the company], the former beingthe ancillary and the latter the principal obligation. If the [vendor] were,for example, to exercise its power of sale, sell the land and recover the wholeof the principal and interest due under the mortgage, the debt of both[the company and Mr Florance] would be discharged.[30] So, Lockhart J said, the critical fact was that the mortgage had conferred on thevendor the means of satisfying the debt owed by Mr Florance out of what was in truthMr Florance's property.20[31] That case is distinguishable from the present case for essentially the samereason that Harvey is distinguishable. Mr Florance was a (joint) beneficial owner ofthe land. That land was subject to a charge in favour of the vendor which enabled thevendor to have recourse to that land to satisfy its claim against Mr Florance in priorityto all his unsecured creditors. It was immaterial that the mortgage had been executedby the company, not by Mr Florance, to secure the debt in respect of which thecompany was the principal obligor and Mr Florance was a guarantor. Here, bycontrast, the body corporate does not have a charge over any property that entitles itto have recourse to that property ahead of all the unsecured creditors of Mr Cummins.The Trust assets, to which the body corporate may be able to obtain access through19 At 414.20 At 415.Manchester, are not property beneficially owned by Mr Cummins: his right ofindemnity and lien is not a relevant ownership right, as explained above.[32] The answer in this case is clear as a matter of first principles. Nothing in theauthorities relied on by Mr Sullivan persuades us otherwise.Other issues raised by the parties[33] The body corporate sought to advance other arguments in opposition toMr Cummins' appeal. In particular, the body corporate argued that Mr Cummins doesnot have a right of indemnity out of the Trust assets for the judgment debt, as hisliability for costs was not incurred in his capacity as a trustee of the Trust. That is notan issue that we need to determine, as Mr Cummins' argument has failed at an earlierhurdle.[34] Nor need we determine Mr Cummins' argument that it would follow thatManchester's liability for costs under the judgment debt was not incurred for thebenefit of the Trust, so that it did not come within the scope of any right of indemnityto which the body corporate could be subrogated. As Mr Orpin-Dowell, counsel forthe body corporate, acknowledged, there is some force in that argument. But the issueis not relevant to this appeal, and we need not decide it.Costs[35] Costs should follow the event in the ordinary way.[36] The body corporate sought indemnity or increased costs on the basis that thisappeal is a continuation of Mr Cummins' attempts to take the rights associated withbeing a trustee while avoiding the associated obligations. The body corporate notesthat indemnity costs have been awarded by this Court on previous occasions and inparticular in the joinder appeal.2121 Stay appeal, above n 1, at [39]–[40]; and Joinder appeal, above n 1, at [69]–[70].[37] Although this appeal represents a further attempt by Mr Cummins to defendclaims by the body corporate, it raises distinct issues relating to his individual positionand whether he is liable to be adjudicated bankrupt in reliance on the judgment debt.Although the arguments presented on appeal were misconceived, and involved anelement of artifice, we do not consider that it could fairly be said that the appeal wasan abuse of process.[38] We therefore award costs for a standard appeal on a band A basiswith usual disbursements.Result[39] The appeal is dismissed.[40] Mr Cummins must pay the body corporate costs for a standard appeal on aband A basis with usual disbursements.Solicitors:Core Legal Ltd, Masterton for AppellantGrove Darlow & Partners, Auckland for Respondent