THE HONG KONG AND SHANGHAI BANKING CORPORATION LIMITED V IVAN VLADIMAR JOSEPH ERCEG AND ORS HC AK CIV-2010-404-2835

THE HONG KONG AND SHANGHAI BANKING CORPORATION LIMITED V IVAN VLADIMAR JOSEPH ERCEG AND ORS HC AK CIV-2010-404-2835 23 July 2010IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2010-404-2835BETWEEN THE HONG KONG AND SHANGHAI BANKING CORPORATION LIMITED Applicant AND IVAN VLADIMAR JOSEPH ERCEG First Respondent AND SENSATION NEW ZEALAND LIMITED Second Respondent AND SENSATION YACHTS LIMITED (IN RECEIVERSHIP) Third Respondent AND CK & S LIMITED Fourth Respondent AND DORCHESTER FINANCE LIMITED Fifth Respondent AND BALENIA LIMITED Sixth Respondent Hearing: 16 July 2010 Appearances: BJ Burt for Applicant P Dale for Second Respondent (given leave to withdraw) GJ Kohler for Sixth Respondent Judgment: 23 July 2010 at 11:30 amJUDGMENT OF ASHER JThis judgment was delivered by me on 23 July 2010 at 11:30 am pursuant to Rule 11.5 of the High Court Rules .. Registrar/Deputy Registrar .. DateIntroduction[1] Hong Kong and Shanghai Banking Corporation Limited ("HSBC") has issued these proceedings against various parties by originating application, and seeks permission from the court to do so. It seeks substantive orders relating to the vacant possession of the premises it occupies as mortgagee in possession, for the removal of chattels on the mortgaged property. The chattels include large yacht hulls. One of the parties with an interest in the chattels is the sixth respondent, Balenia Limited ("Balenia"), for whom the hulls were being constructed. Balenia opposes the application and submits that leave should not be given for the proceedings to commence by originating application. [2] A hearing was also set down to determine formal proof claims by HSBC against the parties who had not sought to defend the application. It is submitted by Balenia that these formal proof claims also should not be dealt with by way of originating application.Background[3] The background facts, while they have a considerable legal history, can be stated relatively shortly. The third respondent, Sensation Yachts Limited (In Liquidation and Receivership) ("SYL"), was a boat builder of large super yachts. SYL was controlled by the first respondent, Ivan Erceg. Mr Erceg owned a commercial property at 5-11 Selwood Road, Henderson, Auckland, which had significant buildings on it. SYL constructed super yachts on this property. [4] The sixth respondent, Balenia Limited ("Balenia") is a company incorporated in the Cayman Islands. On 25 February 2004 SYL and Balenia entered into a contract whereby SYL agreed to design and build five luxury super yachts for Balenia. The first super yacht was to have been completed by April 2005, and the remaining yachts were to be completed progressively over the following month, the last to be produced by May 2007. The construction price for each yacht wasUS$13.9 million and the total value of the contract in New Zealand dollars exceeded $100 million. [5] Building work commenced. There are now three hulls on the property constructed in accordance with the Balenia contract. The hulls are for very large yachts. They are over 50 metres in length, and ten metres wide. Each hull weighs in excess of 100 tonnes. The hulls are known as SY32, SY34 and SY35. SY32 is completed to approximately 60 percent, SY34 is completed as to the hull and superstructure and engine cage, and SY35 as to the hull module only. In clause 14.1 of the agreement to construct the vessels between SYL and Balenia of 24 February 2004, it was provided that Balenia would have title to the vessel whether wholly or partially completed, to the extent of payments made by it to SYL on account of the purchase price. A similar clause at 14.2 applied to materials. [6] On 4 May 2007 HSBC lent Mr Erceg $6,468,000 pursuant to a facility letter. In return Mr Erceg granted HSBC a mortgage over the Selwood Road property. HSBC brings this claim as mortgagee in possession. Mr Alexander Bentley, the credit manager of HSBC, has generally described the items on site. In addition to the three hulls there is also on the site a damaged vessel named 'Symphonia', stock, a computer server and other IT componentry, a telephone system, business records of the second respondent, Sensation New Zealand Limited, business records of SYL and other miscellaneous office equipment. All work has stopped on the hulls and SYL is in receivership and liquidation. There have been hard fought proceedings between Mr Erceg and companies that he controls, and various creditors. Mr Erceg is now bankrupt. [7] The HSBC mortgage is now significantly in default. In October 2008 HSBC issued Property Law Act Notices to Mr Erceg and began to market the property for sale as mortgagee. It was not at that stage in possession. It is asserted by Mr Bentley that HSBC was unable to sell the property and a significant factor causing this was the ongoing presence of the chattels on the property, including the hulls. On 14 October 2009, HSBC took possession of the property pursuant to an order of this Court. There is no dispute about the fact that it is lawfully mortgagee in possession.[8] On 15 October 2009, HSBC's lawyers wrote to SYL terminating its access to the property. In response SYL's receivers wrote saying that nothing should be done to disturb or move the hulls. On 20 October 2009, Balenia through its lawyers contacted HSBC's solicitors. It is clear from the correspondence that there are disputes between Balenia, SYL and possibly other parties as to the ownership or extent of ownership of the hulls and chattels on the property. Balenia asserts a right as owner to have the hulls on the property. [9] On 27 October 2009, HSBC's lawyers wrote to the various respondents to this proceeding asking them to settle their disputes so that the chattels could be dealt with. No agreement was reached and it became clear that another finance company, Dorchester Finance Limited, the fifth respondent, was claiming an interest in the yacht 'Symphonia', Balenia was claiming an interest in the hulls, and it was not agreed that they should be moved. Balenia's position was that the three hulls, which were its property, could not be legally touched by SYL. Moreover, it was asserted in the correspondence and in these proceedings that it is not physically practical to move the hulls because of their immense size. It is said for Balenia that they can only be removed by sea as they are too large to go on roads. If they were removed by barge they would have to be taken to another significant site, and there is no significant site available. [10] There has been extensive correspondence, but no party has been prepared to remove any of the chattels. The response of HSBC has been to issue this originating application, listing as respondents all parties that might have an interest in the chattels. It seeks in that originating application the following orders that:(a) the applicant may commence this proceeding by way of originating application; (b) within 10 working days of the date of this order, the respondents remove from the property at 5-11 Selwood Road, Henderson, Auckland all chattels currently located on the property, in which they claim an interest; (c) the applicant shall be under no liability to any party, or anyone claiming through any party, for permitting the removal of the chattels by one or more of the respondents; and(d) the applicant may dispose of or deal with (however it sees fit) all chattels not removed from the property within 10 working days of the date of this order.[11] The proceedings have taken sometime to serve and there have been orders for substituted service. A consent order was made at an earlier hearing relating to the yacht 'Symphonia', which resolved the issues between HSBC and Dorchester Finance Limited. The only party other than Dorchester Finance Limited to take formal steps in the proceedings has been Balenia. It opposes the making of the orders in relation to the hulls and other related chattels, and also submits that the issues are too complex for any orders to be made in respect of the chattels without a full hearing. [12] At the outset of the hearing this morning Mr Paul Dale appeared on instructions from Sensation New Zealand Limited ("SNZ"). He did not have formal instructions to oppose or support the orders, and sought only to register his appearance and then to be excused. He did indicate that the reason that he could not take a fuller role was because he had not been funded by SNZ at this point, but did indicate that SNZ claimed an interest in some of the chattels at issue. [13] Therefore, for the purposes of this application the only party that can be said to be opposing the application is Balenia. By a Minute of 17 June 2010 Duffy J set down this issue of whether the application should proceed by way of originating application. She also directed that HSBC could pursue formal proof against the other parties that had taken no steps, but recorded that the issue of whether orders following formal proof should be made could also be argued at this hearing. Mr Kohler does object to any formal proof orders being made, submitting that the originating application procedure is wholly inappropriate.The positions of the parties[14] Mr Burt for HSBC submits that the proceedings have been properly initiated by way of originating application. He has done a careful and extensive analysis of the case law and submits that given the narrow ambit of the issues, the strength of HSBC's case, and the broad availability of the originating application procedure, thatthere can be no objection to the process. Mr Kohler, on the other hand, submits that these proceedings should have been commenced in the usual way by way of notice of proceeding and statement of claim. He submits that there are significant issues at stake involving substantive rights, and that his client is entitled to a fully particularised statement of claim, and discovery. He submits that it is inappropriate to consider giving formal proof in an originating application, as there is overlap between the formal proof issues and Balenia's claims, that the orders sought are mandatory, and that all matters need to be determined by ordinary proceedings.Case law[15] Mr Burt and Mr Kohler rely on a number of decisions, but each focus on a different High Court decision, which it is asserted sets out the correct position. [16] In Jones v HW Broe Limited, 1 McGechan J stated:The r 458D [now Part 19] originating application procedure was designed as a genuine exception, and as an expedient for cases where there was in reality no opposing party, avoiding clumsy and unnecessary use of a full statement of claim and notice of proceeding. It was not intended for routine use in cases where there was another likely party with contrary interests.Mr Kohler emphasised this statement. The decision on which Mr Burt relies on heavily is CIR v McIlraith,2 where Randerson J considered McGechan J's statement in HW Broe Limited and stated: 3 However, I am satisfied that matters have moved well beyond the position which applied in 1989 and a review of the matters now specifically included under r 458D shows that Part IVA is intended to have much wider application than earlier envisaged. The same point is also demonstrated by the number and variety of cases in which leave has been granted to use the part IVA procedure under the "interests of justice" provision: see McGechan on Procedure, para HR 458D.09.[17] Two leading procedure texts, McGechan on Procedure and Sim & Cain Code of Civil Procedure, both quote McGechan J's statement in Jones v HW Broe Limited. While Randerson J's statement in CIR v McIlraith is not referred to in Sim & Cain1 Jones v HW Broe Limited (1989) 5 PRNZ 206 at 207.2 CIR v McIlraith (2003) 21 NZTC 18,112.3 At [16].Code of Civil Procedure, a number of cases that quote from CIR v McIlraith are mentioned. [18] Counsel reviewed a considerable number of decisions where permission has been granted or refused to proceed by way of originating application. In addition toJones v HW Broe Limited and CIR v McIlraith, these included McCullagh v II Villaggio Ltd,4 Watercare Services Limited v Registrar of Companies,5 Chief Executive of Land Information New Zealand v Hanley & Anor,6 Body Corporate 322588 v K Mitchell Investments Limited,7 Tubbs v Urquhart,8 Winstone (Northland) Limited v Watson,9 Re Howes v Tindall & Associates Limited,10 Re Charter Corporation Limited (In Liquidation), Como Holdings Limited (In Receivership) v McCallum,11 Aburn v Terawhiti Farming Co Limited,12 Re Norman Kenneth Keast,13Vincent v Ranger,14 and Re Roberts (Dec'd).15Discussion[19] The primary procedure for determining disputes is that set out in Part 5 of the High Court Rules. Proceedings are to be commenced by way of notice of proceeding and statement of claim, which I will refer to as "standard proceedings". The rules in Part 5 ensure that parties are fully informed of the case they have to meet by the filing of a statement of claim, statement of defence, reply, and, if necessary, a counterclaim. There are a range of procedures available to the parties in standard proceedings to ensure that they can have a fair hearing, including discovery and interrogatories. The no ambushes, "cards on the table" approach prevails.4 McCullagh v II Villaggio Ltd (2006) 9 NZCLC 264,050.5 Watercare Services Limited v Registrar of Companies (2004) 17 PRNZ 191.6 Chief Executive of Land Information New Zealand v Hanley & Anor Unreported, HC New Plymouth CIV-2007-443-000265 15 May 2008, Associate Judge Abbott.7 Body Corporate 322588 v K Mitchell Investments Limited (2009) 10 NZCPR 611.8 Tubbs v Urquhart Unreported HC Auckland CIV-2009-404-6951 10 December 2009, Heath J.9 Winstone (Northland) Limited v Watson (1988) 4 NZCLC 64,175.10 Re Howes v Tindall & Associates Limited [1990] 2 NZLR 323.11 Re Charter Corporation Limited (In Liquidation), Como Holdings Limited (In Receivership) v McCallum (1992) 5 PRNZ 261.12 Aburn v Terawhiti Farming Co Limited HC Auckland CIV-2006-404-007541 20 February 2007, Associate Judge Gendall.13 Re Norman Kenneth Keast HC Christchurch CIV-2006-409-1623 26 July 2006, Chisholm J.14 Vincent v Ranger HC Wellington CIV-2009-485-1142 21 August 2009, Ronald Young J.15 Re Roberts (Dec'd) HC Auckland CIV-2003-404-6485 6 April 2004, McKenzie J.[20] The originating application procedure is, in contrast to standard proceedings, short and simple. It is initiated by an application, and there is no need for a statement of claim particularising the causes of action, or for statements of defence, replies or counterclaims. There are no procedures set out for discovery and interrogatories. The matter notionally can be set down immediately. Orders akin to those in standard proceedings could be made in originating applications utilising r 19.11, which applies r 7.9 to originating applications. Rule 7.9 gives a judge wide powers to make interlocutory orders to secure the just, speedy and inexpensive determination of a proceeding. Indeed, the court would in any event have inherent jurisdiction to do so in an originating application: Re Securitibank Limited (In Liquidation).16 However, it would be undesirable for the courts as a matter of course to allow parties to commence proceedings by way of originating application which required a statement of claim, statement of defence and other interlocutory procedures, and to then as a matter of course make such orders as are necessary under r 7.9 or the court's inherent jurisdiction. That would damage the procedural structures established by the Rules, and by practice. Rule 7.9 should not be invoked under r 19.11 as a way to bypass the need to file standard proceedings, when standard proceedings are appropriate. [21] The 1989 r 458d (now r 19.2) was significantly extended in February 2003. A number of the types of claim to which the originating application procedures now specifically apply under r 19.2, involve the determination of substantive rights. For instance, applications under the Habeas Corpus Act 2001 are to be commenced by way of originating application, as are applications under the Criminal Proceeds (Recovery) Act 2009. Given the wide range of types of application referred to in r 19.2, it would be unwise to try and limit the nature of originating application proceedings by attempting some definition by cause of action of the appropriate types of claim. [22] A traverse of the cases referred to indicates that the originating application procedure is permitted for applications not specifically referred to in r 19.2, where it can be seen that there is some analogy to the permitted r 19.2 applications. The r 19.2 applications generally involve the determination of a specific statutory16 Re Securitibank Limited (In Liquidation) [1978] 1 NZLR 97 at 106.discretion or power (although habeas corpus is in a different category). So do most of the cases where permission was granted. In CIR v McIlraith the application was by the Commissioner for an order that challenge proceedings commenced in the Taxation Review Authority be transferred to the High Court and be consolidated with High Court proceedings under s 138N(2) of the Tax Administration Act 1994. In McCullagh v II Villaggio Ltd the issue was whether the court should call a meeting of shareholders under s 123(1) of the Companies Act 1993. In Body Corporate 322588 v Kay Mitchell Investments Limited, the applicant had applied for an order under s 48 of the Unit Titles Act 1972 settling and sanctioning a scheme of arrangement. In Tubbs v Urquhart there had been an application under s 12(2) of the Receiverships Act 1993 for an order requiring a director to make available documents under his control. In Aburn v Terawhiti Farming Co Limited the application related to rectification of the company's share register in accordance with s 91 of the Companies Act 1993, and in Re Norman Kenneth Keast, the issue was whether an ex parte application for probate in solemn form that was not opposed should be granted. [23] Leave has been refused in a number of recent cases. Refusal was indicated and McGechan J quoted in Floorlines (NZ) Limited v The Commissioner of Inland Revenue 17 for an opposed application to restore a company to the Register. InWatercare Services Ltd v Registrar of Companies, Faire AJ refused leave to bring proceedings by way of originating application in relation to an application under s 329 of the Companies Act 1993 to restore a company to the Companies Register. He noted there was in fact an actual procedure in the relevant Act for bringing such an application. He observed:18Parties to litigation who genuinely oppose the applications are entitled to the full range of procedures provided by the High Court Rules. This particular application is no exception.[24] In Vincent v Ranger, permission was refused in relation to an application to establish a judgment debt against an estate, and on the basis of the judgment debt so created, to appoint the applicant as administrator of the estate under Part 17 of the17 Floorlines (NZ) Limited v The Commissioner of Inland Revenue HC Auckland M501/87 3 July 2001, at [9].18 At [21].Insolvency Act 1967. Ronald Young J considered that the interests of justice required a clear exposition of the applicant's case by way of pleading, and a clear response by the respondent. This could only be achieved by a proper set of pleadings. In Re Roberts (Dec'd), McKenzie J refused permission in similar circumstances. [25] These cases show that the type of proceeding suited to the originating application procedure is a straightforward application, not requiring detailed pleadings or interlocutory orders for its fair resolution. Such a type of proceeding tends to be an application under a specific statutory provision, where the issue that arises can be clearly defined, and the issues confined. The procedure is not well suited to the determination of substantive rights involving the application of common law doctrines as distinct from statutory tests. It is not well suited to cases involving multiple parties, and cases where there is the possibility of crossclaims or counterclaims. [26] I do not consider that the dicta of McGechan J and Randerson J, 19 present two mutually incompatible approaches. Randerson J's statement that the matters covered by the originating application procedure is much wider than earlier envisaged is, with respect, undoubtedly correct. It is no longer right to say that it cannot be utilised where there is an opposing party. Nevertheless, while the procedure is not limited to applications where there is no opposing party, it is nevertheless, in relation to contested proceedings not listed in r 19.2, an exceptional procedure. It is limited to cases where it is not necessary in the interests of justice for there to be the usual particularised pleadings, or interlocutory steps such as discovery, for the proper determination of the issues. While the types of proceedings where the originating application procedure can be used as of right under r 19.2 have been expanded, and can include the determination of substantive personal and property rights, this expansion does not create a carte blanche to commence any urgent matter by way of originating application. If a party wishes to obtain an urgent hearing and a truncated procedure in such a circumstance, it should file a standard proceeding in the usual way and seek priority, or allocation to the Fast Track, or some other step within the19 At [18].ambit of the standard procedure that will reduce time limits. A party should not treat the originating application procedure as a short cut for urgent cases.This applicationClaim against Balenia[27] This application is not procedural in nature, and does not involve the exercise of any particular statutory power. It concerns the rights of parties to various chattels, albeit in the context only of their removal. It relates to the substantive rights of parties to those chattels, and the possible application of the common law concepts of trespass, licence and estoppel. [28] The originating application does contain some particulars of the claim. However, they are sparse. The various chattels for which orders are sought are not specified. There is a general unspecific reference to trespass. Mr Burt converted the contents of the originating application into a draft statement of claim, and submitted that there was sufficient detail. However, this exercise demonstrated a very bare pleading, and the need for fuller particulars. The basis upon which HSBC claims title to bring the claim should be set out, and the cause of action relating to transferring items particularised, so the claims can be identified. I accept Mr Burt's point that to have to specify every single chattel would be a colossal and uneconomic undertaking. However, some particularity, at least on a geographic basis, so that an assessment could be made of what was involved, should be provided. For instance, "The engine parts in X shed". [29] Once a particularised statement of claim is filed, Balenia will have to file a statement of defence. In that statement of defence it will have to particularise the basis of its interests in the hulls, and the basis upon which it asserts the hulls are lawfully on the premises and should not be removed without Balenia's consent. It must be borne in mind that the statement of claim and statement of defence procedure is not solely for the direct benefit of the parties. It enables the court to see the issues and what is admitted and what is at issue, and to better achieve a just result. It is a valuable tool for the successful resolution of a dispute.[30] Mr Kohler advises that Balenia claims that HSBC knew of the yacht hulls when it advanced the moneys and may have known of Balenia's interest. He submits that Balenia may be able to argue that HSBC consented to a licence on the part of Balenia from SYL, to have the hulls that were its property on the land. He indicated a likely argument that SYL having consented to the licence was bound by it. He also submitted that there could be issues of estoppel. He advised that a counterclaim would be filed. [31] Mr Burt submitted that Balenia's claims were destined to fail, and that as mortgagee in possession there could be no doubt about HSBC's right to have the chattels removed. However, although there may be some force in Mr Burt's submissions on the merits, the facts and legal issues arising are not straightforward. HSBC could have pursued summary judgment, but has elected not to do so. Although the arguments have touched on the merits, they have not been fully traversed, and I am not prepared to now allow this proceeding to metamorphose into a summary judgment exercise. [32] There is a contest between SYL and Balenia and it needs to be aired. It cannot be aired fairly by this originating application procedure. HSBC needs to clearly particularise its claim and Balenia needs to have the opportunity to particularise its defence and file any counterclaim. I accept Mr Kohler's submission that Balenia should be entitled to discovery from HSBC. In particular, Balenia will be interested in any documents showing the extent of HSBC's knowledge of the hulls, and any communications with Mr Erceg's interests about them. It is not in the interests of justice that the truncated procedure of an originating application should be used. Indeed, it would be contrary to the interests of justice if Balenia was not able to utilise the procedures of ordinary actions.Formal proof claims[33] I also accept Mr Kohler's submission that no other formal proof order should be made against the other defendants in this originating application procedure. While an order has already been made in relation to the vessel 'Symphonia', that was by consent. Balenia's submissions on fact and law may impact on the view a judgetakes on the formal proof issues. Issues could arise which are relevant to chattels other than the hulls. The orders involve what are in effect mandatory injunctions against various parties requiring them to move various items. The courts are reluctant to make orders, the non-compliance of which could constitute contempt, unless they are expressed in a clear manner so that those against whom they are directed can understand the obligation placed upon them. As presently drafted, the respondents would, if the orders were granted, receive directions to remove chattels that are unspecified by type, location or number. A more particular statement of claim and more particular prayers for relief are required. [34] There is no extreme urgency about having the issues as to the other chattels determined prior to the hearing concerning the hulls. It is the tenor of HSBC's evidence that until the hulls are removed the property cannot be sold. There is nothing to be gained by adopting urgency for some chattels only. [35] Moreover, there has been the indication from Mr Dale that SYL may take steps and contest the orders that are being sought by way of formal proof. This factor alone would not persuade me to refuse permission to proceed by way of originating application, as there has been no proper appearance on behalf of SYL. However, given my decision that the usual statement of claim procedure should be adopted in relation to the hulls, it is a further factor indicating that the same procedure should be adopted in relation to the other chattels.Conclusion[36] Accordingly, I reach the conclusion that leave should not be given to bring this proceeding by way of originating application, save in relation to the consent orders already made involving the yacht 'Symphonia' and the fifth respondent, Dorchester Finance Limited. [37] I have decided not to accept Mr Kohler's submission that HSBC should be required to start afresh. While the erroneous procedure was adopted by HSBC, I have sympathy for its wish to have the issue as to the future of the hulls and other chattels determined quickly. It is an innocent third party (as is Balenia) and shouldbe able to exercise its rights, or have any dispute as to its ability to exercise those rights, determined promptly by this court. A factor which particularly persuades me to reject this submission is that some of the respondents have been difficult to serve and there has been quite a lot of time spent in obtaining substituted service orders and in effecting service. It would be unjust if HSBC could not retain the benefit of those efforts. The position might have been different if I thought that there had been some abuse of procedure on the part of HSBC, or a deliberate effort to achieve some sort of unfair advantage. I am not satisfied this has occurred. [38] Under r 1.5(3) of the High Court Rules it is provided:The court shall not wholly set aside any proceeding or the originating process by which the proceeding was begun on the ground that the proceeding was required by those rules to be begun by an originating process other than the one employed.There is no doubt that the court has the power to make such orders or directions as are appropriate, when the wrong originating process has been adopted. I have already referred to rr 19.11 and 7.9. In my view the correct way forward is not to require HSBC to start again, but rather to direct the filing of a statement of claim and statement of defence in compliance with Part IV of the rules, and to make directions as to discovery and inspection. [39] It will be necessary for there to be discussion about those orders. I also wish to discuss with counsel the setting of an early fixture date. I observe that HSBC will not be delayed in obtaining a fixture as the consequence of it having to adopt this different procedure.Result[40] I make the following orders: a) Leave is declined under r 19.5 to commence these proceedings by originating application.b) There will be a telephone conference before me within the next 14 days at 9:00 am, to determine the appropriate procedural directions for the filing of service of the statement of claim, statement of defence, counterclaim, and any other interlocutory orders. c) At that telephone conference I will also fix a trial date for this proceeding, and make appropriate directions for trial. d) At that hearing I will also fix costs on this application for leave. Costs are reserved in the meantime. e) Counsel shall file and serve memoranda dealing with these issues two working days before the telephone conference... Asher J