TEMPLE 88 LTD (in liquidation) v HASSINE and PRUETT [2021] NZHC 2351

TEMPLE 88 LTD (in liquidation) v HASSINE and PRUETT [2021] NZHC 2351 [10 September 2021]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2020-404-2315[2021] NZHC 2351UNDER Part 18 of the High Court RulesBETWEEN TEMPLE 88 LIMITED (in liquidation)PlaintiffAND LINDA PATRICIA BEN HASSINE andBLAIR SHELDON PRUETTDefendantsHearing: 8 September 2021Appearances: P C Murray for the PlaintiffJudgment: 10 September 2021JUDGMENT OF GAULT JThis judgment was delivered by me on 10 September 2021 at 3:00 pmpursuant to r 11.5 of the High Court Rules 2016.Registrar/Deputy RegistrarSolicitors / Counsel:Mr P Murray, Barrister, AucklandMs C Fisher (plaintiff's instructing solicitor), Fortune Manning, Auckland[1] The plaintiff, Temple 88 Ltd (in liquidation) (Temple 88), is the former trusteeof the Clifton Realty Trust (the Trust). The defendants, Ms Hassine and Mr Pruett,are the current trustees of the Trust.[2] Temple 88 claims a right of indemnity out of Trust assets for liabilities incurredin its capacity as trustee, and seeks an order for the sale of an apartment property at30/8 York Street, Parnell, Auckland1 (the property) to satisfy those liabilities.Temple 88 also seeks an order for possession of the property, which is occupied by thedefendants. The defendants have refused access to the property despite the bodycorporate for the apartment complex obtaining a pre-liquidation judgment requiringTemple 88 to provide access for necessary repair works to be carried out.[3] The defendants were served but have not filed statements of defence.The claim proceeded by way of formal proof hearing.Factual background[4] The Trust was settled by Ms Hassine in 2001. She was one of three originaltrustees.[5] On 22 February 2007 the Trust purchased the property.[6] Temple 88 was incorporated on 1 December 2014. Ms Hassine was its soledirector. The three original trustees of the Trust resigned as trustees and Temple 88was appointed as the sole trustee. Temple 88's sole activity was to act as trustee of theTrust.[7] On 7 May 2015 the property was transferred to Temple 88 and it granted anall obligations mortgage over the property to ASB Bank Ltd (ASB).[8] On 24 February 2017 and 8 July 2017 Temple 88 entered into loan facilityagreements with ASB. The lending was secured by the mortgage.1 NA100D/482.[9] Under a deed of retirement and appointment of trustee dated 17 February 2020executed by Temple 88 and the defendants, Temple 88 retired as trustee of the Trustand the defendants were appointed as the new trustees. Despite that, the property wasnot transferred to the defendants – Temple 88 remains the registered proprietor.[10] Temple 88 was the defendant in a High Court proceeding commenced in 2018by Body Corporate 166208. On 14 July 2020 the High Court entered judgment againstTemple 88,2 declaring that it was in breach of its obligations under the Unit Titles Act2010 and an implied term of a contract with the body corporate, and ordering it toperform its obligations under the contract to allow the body corporate and its agentsaccess to the property to complete the necessary repair and maintenance works,together with costs.[11] Temple 88 did not allow the body corporate or its agents access to the propertyand did not pay the costs award. On 28 August 2020 the High Court placed Temple 88into liquidation on the application of the body corporate. Ms Fatupaito and Ms Keeneof KPMG were appointed liquidators.[12] Ms Hassine has not cooperated with the liquidators.[13] The liquidators have received creditor claims in the liquidation totalling$477,527.72 including from the body corporate. The body corporate has also givennotice of likely future claims.[14] As at 2 September 2021, the total amount owing by Temple 88 to ASB securedby the mortgage was $774,641.06. ASB has agreed not to take steps to enforce itsmortgage on the basis that Temple 88 has sought a sale order in this proceeding.[15] A current market appraisal values the property at $2.5 to $2.8 million.2 Body Corporate 166208 v Temple 88 Ltd [2020] NZHC 1678.Temple 88's recourse to Trust assets to meet Trust liabilities[16] Mr Murray, for Temple 88, acknowledges that while Temple 88 is the legalowner of the property, it can only have recourse to the Trust assets to meet Trustliabilities with the Court's assistance.[17] This proceeding was commenced before the Trusts Act 2019 (the Act) cameinto force on 30 January 2021. Mr Murray submitted that, under the transitionalprovisions in cl 2 of Schedule 1, the Act applies in this case. In any event, he alsoreferred to provisions of the Trustee Act 1956.[18] A trustee has a right of indemnity against trust assets for liabilities incurred inthe performance of the trustee's duties, whether expressly provided for in the trustdeed, implied in equity, or pursuant to the Act.3 Here, Temple 88 has an express rightof indemnity under the Trust deed.[19] Mr Murray relied on Edwards J's summary of the applicable principles inCamray Farms Ltd (in liq) v BL (Nature Sunshine) Trustee Ltd:4[59] The right of indemnity against trust assets exists where a trustee haspaid trust expenses from their personal funds and they seek recoupment ofthose funds (the right of recoupment). It also exists where liabilities have beenincurred, but have not yet been paid. In that case, the trustee seeks to pay theliabilities out of trust assets, that is, it seeks to be exonerated for thoseliabilities (the right of exoneration).5 It is the right of exoneration that is inissue in this case.[60] The trustee's right of indemnity takes priority over the beneficiaries'interest in the trust property.6 The rationale is that it is inequitable for abeneficiary to benefit from the property without also bearing the burdenassociated with that property.7 However, a trustee can only call on theindemnity if a liability has been properly incurred. If a trustee is in breach ofthe trust, then the right of indemnity might be lost.83 Trusts Act 2019, s 81; and see Trustee Act 1956, s 38(2).4 Camray Farms Ltd (in liq) v BL (Nature Sunshine) Trustee Ltd [2019] NZHC 2536.5 Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington,2009) at [16.6.1(2)].6 Lynton Tucher, Nicholas Le Podevin and James Brightwell Lewin on Trusts (19th ed, Sweet &Maxwell, London, 2015) at [22.037]; and HAJ Ford and WA Lee Principles of the Law of Trusts(looseleaf ed, Thomson Reuters, 2018) at [14.250].7 Hardoon v Belilios [1901] AC 118 (PC) at 123.8 Levin v Ikiua [2010] 1 NZLR 400 (HC) at [126].[61] Similarly, the trustee retains the right of indemnity, and its equitablelien, even after it has resigned as trustee or been replaced. The new trusteetakes the trust property subject to the former trustee's equitable proprietaryinterest arising out of the right of indemnity.9 [62] Protection and enforcement of the trustee's right of indemnity is byway of an equitable lien over the assets of the trust. There is no dispute thatthis creates a proprietary interest in the trust property in favour of the trusteewhere the right is one of recoupment.10 There has, however, been debate aboutwhether the right of exoneration creates a proprietary interest in the trustproperty. The current position in New Zealand appears to be that it does.11The parties proceeded on this basis – as do I. The equitable lien thereforesupports the registration of a caveat, and may be enforced just like any othercharge over land, that is, by order of sale or court order.[63] The lien comes into existence when the right of indemnity arises, thatis at the time the liability was incurred.12 It is not always necessary for theamount of the liability to be determined in order for the trustee's charge or liento arise. [20] Here, just as Temple 88 would be entitled to recoupment if it had paid theliabilities personally, it is entitled to pay the liabilities out of trust assets; that is, it isto be exonerated for those liabilities (the right of exoneration).[21] Temple 88 retained its right of indemnity from the Trust's assets when it wasreplaced as a trustee in February 2020. As Mr Murray submitted, the "no indemnity"clause in the deed of retirement is irrelevant. Temple 88 is not seeking to enforce anypersonal indemnity against the defendants. It relies on the right of indemnity from theassets of the Trust. This is not a personal claim against the defendants. It is anequitable lien against the Trust asset (the property).9 HAJ Ford and WA Lee Principles of the Law of Trusts (looseleaf ed, Thomson Reuters, 2018) at[14.250] and [14.370].10 Re Suco Gold Pty Ltd (in liq) (1983) 7 ACLR 873 (SASC), cited with approval in Official Assigneev Menzies HC Auckland CIV 2010-404-5457, 14 February 2011.11 LSF Trustee Ltd v Footsteps Trustee Co Ltd (in liq) [2017] NZHC 2619, [2017] NZAR 1676 at[19]; see also Official Assignee v Menzies at [28]. Whether a right of indemnity by way ofexoneration from the trust assets gives rise to a caveatable interest has been questioned by somecommentators: see HAJ Ford "Trading Trusts and Creditors' Rights" (1981) MULR 1; BillPatterson "Trustees Indemnities, equitable liens, subrogation and caveats: has the law taken awrong turn?" (paper presented to New Zealand Law Society Trusts Conference, June 2011); andAndrew Steele "Trustees Indemnities, Equitable liens, Subrogation and Caveats" (2013) 15 BCB155.12 Ford and Lee Principles of the Law of Trusts at [14.250] and the cases cited at footnote 6 ofCamray Farms Ltd (in liq) v BL (Nature Sunshine) Trustee Ltd [2019] NZHC 2536: ChiefCommissioner of Stamp Duties (NSW) v ISPT Pty Ltd (1998) 45 NSWLR 639 at 653; CustomCredit Corp Ltd v Ravi Nominees Pty Ltd (1992) 8 WAR 42 at 52–53; and Scaffidi v ScaffidiHoldings Pty Ltd [2010] WASC 29.[22] Temple 88's right of indemnity takes priority over the defendants' beneficialinterest in the Trust property (as trustees). The new trustees took a beneficial interestin the Trust property subject to Temple 88's equitable interest arising out of the rightof indemnity.[23] While a trustee may retain trust property until it has been indemnified for trustliabilities and may realise trust assets to meet expenses and liabilities, a former trusteemay only have recourse to trust assets with the Court's assistance.13[24] Protection and enforcement of Temple 88's right of indemnity is by way of anequitable lien over the assets of the Trust. Whether or not the right of exonerationcreates a proprietary interest, Temple 88's equitable lien may be enforced by judicialprocess, including an order for sale.[25] In Camray Farms, Edwards J also considered the consequences of liquidation.A trustee's right of indemnity and equitable lien passes to a liquidator.14 Edwards Jaddressed whether the assets recovered are generally divisible among creditors,referring to several cases.15 In summary, relevant to this case, I agree that a liquidatoris entitled to have recourse to trust property for the purposes of meeting the costs andexpenses of liquidation insofar as they relate to the trust.16 A liquidator's right toremuneration is regarded as a debt incurred in performing the duties of the trustee.[26] Here, I am satisfied that Temple 88, when it was trustee of the Trust, properlyincurred liabilities to the body corporate for $443,215.72 (and any further liability tothe body corporate) and to Vicki Ammundsen Trust Law Ltd for $34,312. In addition,all the costs and expenses of the liquidation relate to the activities of the Trust.As indicated, Temple 88's sole activity was to act as trustee of the Trust. Therefore,13 LSF Trustees Ltd v Footsteps Trustee Company Ltd (in liquidation) [2017] NZHC 1676 at [16]and [19]; and Camray Farms (in liq) v BL (Nature Sunshine) Trustee Ltd [2019] NZHC 2536 at[62].14 Camray Farms at [65].15 At [65]–[71], referring to Re Suco Gold Pty Ltd (in liq) (1983) 7 ACLR 873 (SASC); Levin v Ikiua[2010] 1 NZLR 400 (HC); Re Secureland Mortgage Investments Ltd (No 2) (1988) 4 NZCLC64,266 (HC); Re Francis James Nominees Ltd (in liq) (1988) 4 NZCLC 64,279 (HC); and NeeeatHoldings (in liq) [2013] FCA 61.16 Camray Farms at [66], citing Re Suco Gold Pty Ltd.the liquidators may have recourse to Trust property for the purposes of meeting thecosts and expenses of liquidation as a debt incurred in performing Temple 88's duties.Sale order[27] Temple 88 seeks an order that the property be sold to satisfy its lien on suchterms and conditions as the Court considers fit.[28] As a former trustee and the holder of an equitable lien over the propertysecuring the right of indemnity, Temple 88 has a right of realisation by judicial process;that is, by the Court ordering a sale.17[29] I consider it is just and equitable that the property be sold. Temple 88 hasincurred liabilities in relation to the property that ought to be paid. Its right ofindemnity takes priority over the defendants' interest as beneficiaries of the Trustproperty (as trustees). As Mr Murray submitted, it would be inequitable for thedefendants to benefit from the property without also bearing the burden associatedwith it and for the property to pass to them without the liabilities being paid. Basedon the market appraisal, the anticipated sale price will significantly exceed theamounts to be paid under the right of indemnity and the mortgage, leaving a surplusfor the defendants as the current trustees of the Trust.Possession[30] The defendants currently occupy the property. Despite request, the defendantshave not provided a tenancy agreement.[31] Mr Murray submitted that irrespective of the equitable interests that thedefendants as trustees have in the property, it is just and equitable that the Court alsomake an order for recovery of possession of the property. The defendants, in theirpersonal capacities, do not have any right to occupy the property and are not payingany rent.17 I need not decide whether such an order may also be made under s 133 of the Act given thatTemple 88 is no longer a trustee.[32] In addition, Temple 88 is required under the Court's pre-liquidation judgmentto provide the body corporate with access to the property to allow repair work to beundertaken. The liquidators are also concerned at the disruptive impact that thedefendants could have on a sale process and ultimately a sale price.[33] Mr Murray advised that the liquidators have yet to decide whether the repairwork should be undertaken before sale. They have not yet been able to inspect theproperty.[34] I accept that the defendants, in their personal capacities, have no right tooccupy the property. As Mr Murray submitted, if there were a tenancy the liquidatorswould exercise their right to terminate it on appropriate notice. I also accept theliquidators need access to the property to arrange repair work or sale, in whicheversequence they decide.[35] In these circumstances, I consider it is just and equitable that an order also bemade for recovery of possession of the property from the defendants but giving thedefendants a reasonable period to vacate. I accept Mr Murray's proposal of 90 days,with a right of access to inspect in the meantime.Result[36] I make the following orders:(a) The plaintiff is entitled to possession of the property within 90 days;that is by 9 December 2021.(b) Within that 90 day period, the defendants are to provide access to theproperty for inspection purposes on two working days' notice.(c) That the property be sold to satisfy the plaintiff's equitable lien on thefollowing terms and conditions:(i) settlement of any sale is not to occur within 90 days;(ii) the proceeds of sale be distributed in the following order:(1) paying the costs and expenses of sale;(2) discharging the total amount owing to ASB under themortgage;(3) paying the liquidators a sufficient sum to satisfy the amountof all current and future admitted claims in the liquidationand the liquidators' costs and expenses, including costs andexpenses to complete the liquidation; and(4) paying any surplus to the defendants as the current trusteesof the Trust.(d) The plaintiff is entitled to 2B costs and disbursements as fixed by theRegistrar.________________________________Gault J