FATUPAITO v HARRIS [2018] NZCA 497

FATUPAITO v HARRIS [2018] NZCA 497 [14 November 2018]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA612/2017[2018] NZCA 497BETWEEN VIVIAN JUDITH FATUPAITO ANDANDREW JOHN HAWKESAppellantsAND KEITH VINCENT HARRIS AND IAINANDREW NELLIESFirst RespondentsTHE BANKHOUSE TRUST LIMITEDSecond RespondentHearing: 20–21 June 2018Court: Winkelmann, Simon France and Wylie JJCounsel: M J Tingey for AppellantsD M Hughes and H L Quinlan for First RespondentsJudgment: 14 November 2018 at 10 amJUDGMENT OF THE COURTA The application to adduce further evidence is declined.B The appeal is allowed.C The appellants are entitled to declarations as follows:(a) The appointment of the first respondents as receivers was invalid.(b) The first respondents are not entitled to recover from the assets of CITHoldings Ltd their costs and expenses incurred in purportedlyconducting the receivership pursuant to the terms of theGeneral Security Deed or under the provisions of the Receiverships Act1993.D The first respondents must pay the appellants one set of costs for a standardappeal on a band A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Winkelmann J)[1] On this appeal we address whether a creditor's appointment of receivers, madein bad faith, is invalid, and what constitutes bad faith for these purposes.[2] The appellants, Ms Vivian Fatupaito and Mr Andrew Hawkes, are theliquidators of CIT Holdings Ltd (CIT). CIT and the second respondent,The Bankhouse Trust Ltd (Bankhouse) are party to a General Security Deed (GSD)securing repayment to Bankhouse of debt owed by CIT. Amongst other things, theGSD charged various properties owned by CIT. Mr Gregory Olliver is the soledirector of both Bankhouse and CIT. Bankhouse exercised a right under that GSD toappoint the first respondents, Mr Keith Harris and Mr Iain Nellies, as receivers of CIT.It is the liquidators' case that Bankhouse did this for a purpose unrelated to obtainingrepayment of the debt; that Bankhouse appointed the first respondents to ensure thatthe charged properties were sold, on very particular terms, to an entity owned byMr Olliver. By controlling the sale in this way, Mr Olliver could retain control of theproperties to his advantage, whilst also obtaining claims CIT had against his formerwife, with whom he was in an acrimonious relationship property dispute.[3] The liquidators say that the appointment of the first respondents was invalidbecause the power conferred by the GSD to appoint receivers is to be exercised for thepurpose of securing repayment of the debt. The predominant purpose for theappointment in this case was collateral to that and so was in bad faith and was invalid.This follows, the liquidators say, from the application of well-established equitableprinciple. It follows also from s 25(1) of the Personal Property Securities Act 1999(PPSA), which requires the good faith exercise of all rights under security agreementsgoverned by that Act. The liquidators say the invalid appointment added cost anddelay to the liquidation.[4] These arguments failed in the High Court before Jagose J and the liquidatorsnow appeal against that judgment.1Factual background[5] CIT's principal assets were properties in Waimarie Street in St Heliers,Auckland (the properties). These properties were mostly bare land, but one had ahouse on it. Mr Olliver lived in that house at the time of the appointment of thereceivers. CIT held these properties as bare trustee for joint venture partiesWaimarie Trust and the Glover Trust. Issues in connection with that joint venture ledto CIT issuing proceedings against Waimarie Trust and Ms Sparks, Mr Olliver'sestranged wife, in 2014. Waimarie Trust was associated with Ms Sparks.[6] CIT's creditors claimed approximately $21.2 million in the liquidation. As at2017, the Bank of New Zealand (the Bank) was the first-ranking secured creditor,owed approximately $13.5 million. Bankhouse was the second-ranking securedcreditor, owed approximately $2.24 million under the GSD. There were preferentialcreditors with claims totalling around $400,000. A further $5.1 million was owed tounsecured creditors.[7] The appellants were appointed liquidators of CIT on 4 March 2016, followingCIT's failure to pay outstanding tax debts. The Bank initially indicated that, asfirst-ranking secured creditor, it would move to sell CIT's properties to realise itssecurity interest. However, before the Bank took any steps toward sale, Mr Olliver,Bankhouse and another creditor, The Kohimarama Trust Ltd (Kohimarama),approached the liquidators with an indicative offer from Kohimarama to purchase theproperties. Kohimarama is an entity associated with Mr Olliver. Mr Olliver said hebelieved it to be in the best interests of the creditors to avoid a mortgagee sale.[8] The liquidators discussed with the Bank the possibility that the liquidatorscould manage the sale of the properties. They believed they were best placed to do so.Ms Fatupaito gave the Bank a copy of the indicative offer the liquidators had receivedfrom Kohimarama but told the Bank she could not accept the offer without testing the1 Harris v Bank of New Zealand [2017] NZHC 2374.market. For that she needed funding to obtain a valuation, and to support themarketing of the properties.[9] Whilst awaiting the Bank's response, the liquidators sought indicative marketvaluations of the properties from various real estate agents. The average of theindicative market values provided through that process was $20,393,767 includingGST. In late May, the Bank advised it would not consent to the liquidators selling theproperties and that arrangements for a mortgagee sale process would be finalised oncenotices under the Property Law Act 2007 had expired.[10] In July 2016, the liquidators received a formal offer from another entityassociated with Mr Olliver, GMO Trust Ltd (GMO), to acquire the properties at a pricestructured to pay out the Bank and Bankhouse in full. This represented an offer ofapproximately $18 million against the total creditor pool of $21.2 million. The offerwas rejected by the liquidators through their solicitors because a higher price waslikely to be achievable through a public sale process.[11] The liquidators were however becoming concerned the Bank was taking littleif any action to sell the property. The liquidators wrote to the Bank on 3 August 2016advising that it was extremely important the properties be sold, given the rate at whichpenalty interest was accruing. On 10 August 2016 Ms Fatupaito issued a notice to theBank requiring it to value its security and elect which power it wanted to exercise inrelation to the property in terms of s 305 of the Companies Act 1993.[12] The Bank responded to the s 305 notice on 15 August 2016, advising that itelected to realise the security it had, that its sale of the mortgaged properties had beendelayed by litigation, and that it was awaiting the High Court's confirmation that thesale process could proceed. On 24 August 2016, its solicitors advised further stepscould not be taken until the Bank had obtained an order requiring the removal of acaveat. A court order to this effect was ultimately obtained on 27 September 2016 butwas subject to a condition that any sale of the properties over which that caveat waslodged to people or entities associated with Mr Olliver or Ms Sparks was conditionalupon the Court's approval.[13] In early November 2016 offers were received from GMO and a further entityassociated with Mr Olliver, Old Schnapper Rock Ltd, to purchase between them CIT'sbusiness and assets for a total of $20.1 million including GST. GMO's offer was topurchase four of the properties and the balance of CIT's assets. This would includethe claims CIT was pursuing against Ms Sparks and the Waimarie Trust.[14] At this point in the chronology, Inland Revenue agreed to fund an independentvaluation of CIT's properties. The valuations received indicated a range of between$15.5 million and $17.9 million on a forced sale, and $20.95 million for the totalmarket value of the properties. Ms Fatupaito took the view that the combined offerfrom GMO and Old Schnapper Rock was consistent with the market value, afteraccounting for any marketing and commission costs that would be incurred on amarket sale. She was concerned that the sale be progressed as soon as possible becausefurther delays might result in deterioration of the market value of the properties.Moreover, interest continued to accrue on the Bank debt, which had the effect ofreducing the net proceeds available to repay unsecured creditors.Following discussions with Ms Fatupaito, the Bank decided to put the marketing ofthe properties on hold while the liquidators negotiated with the prospective purchasers.[15] There were however various sticking points in the negotiations with GMO andOld Schnapper Rock. One was a clause in the agreements to the effect that thepurchase price would reduce by the amount of debts owed by CIT to interestsassociated with Mr Olliver, namely Bankhouse and another Olliver company,BBG Holdings Ltd (BBG), should those two companies agree to allow other creditorsto be paid in preference to them. The liquidators said that reduction was too great,proposing a lesser reduction. It was too great because BBG was unsecured and sowould not receive full repayment, even if it did not agree to the proposed subordinationof its claim. Nor would Bankhouse if a challenge the liquidators had signalled to theextent of Bankhouse's security, succeeded. The liquidators also sought to limit thesale to a sale of the properties, excluding from the sale any debtors or claims.Ms Fatupaito made clear throughout that she would not agree to include in the saleclaims against Ms Sparks and the Waimarie Trust. The liquidators also soughtpayment of the costs associated with obtaining the court approval of the transaction,required because the sale was to parties associated with Mr Olliver.[16] Mr Olliver pressured the liquidators to accept the offer. He warned that if itwas not agreed to, Bankhouse would appoint receivers and carry out a forced sale.Ms Fatupaito's evidence was that in a meeting with Mr Olliver on 27 March 2017, hewithdrew "his" offer on the basis that the liquidators had not consented to a sale of theclaims against Ms Sparks and Waimarie Trust. At the same time he claimed to haveacquired the Bank's debt and said he would be appointing receivers. On 31 March2017, Bankhouse appointed Mr Harris and Mr Nellies of Insolvency Management Ltdas receivers of CIT.[17] On 6 April 2017, Ms Fatupaito and her legal representative met with Mr Harristo discuss the events leading to the first respondents' appointment, and how heproposed to sell the properties. Mr Harris said he intended to conduct a marketingcampaign for the properties, was likely to proceed to utilise a registrar sale and wouldkeep the liquidators appraised of any further developments.[18] On 11 May 2017, the receivers caused CIT to enter into a sale and purchaseagreement with GMO for $17.5 million plus GST. Mr Olliver explained to theliquidators that this was the same value as GMO had offered in the previous agreementbecause of the impact of GST. As it happens, Mr Olliver was mistaken as to the value.The offers to the liquidators had been for a total price of $20.1 million inclusive ofGST. Because 22 Waimarie Street (one of the properties) was exempt from GST, noGST was required to be remitted on any proceeds from its sale. The receivers lateracknowledged the purchase price under the 11 May 2017 agreement did not accuratelyreflect the property's valuation, and amended the agreement to $20.1 million includingGST. That sum would allow the Bank and Bankhouse debts to be paid in full.[19] The agreement had multiple conditions attached to it, of a very open-endednature. The purchaser, GMO or nominee, had 60 working days to fulfil conditionsincluding:(a) the receivers obtaining approval from the High Court to act as agent ofthe vendor and to enter into the agreement;(b) the vendor obtaining a valuation of the properties acceptable to it;(c) the purchaser completing the purchase of the Bank's mortgage on termsacceptable to it; and(d) the parties agreeing to the sale and purchase of "such of the other assetsof the Vendor (including debtors) as the Vendor wishes to sell and thePurchaser wishes to purchase at a price and on terms acceptable tothem".[20] The agreement could be cancelled by either party if any these conditions werenot fulfilled. But if they were fulfilled there was then a further conditional period of60 working days within which time the vendor must procure removal of caveatsaffecting the properties. The effect of this clause together with the conditions createdthe potential for the agreement to remain conditional for approximately 24 weeks.In addition, the holding pattern created by this agreement was at no cost to thepurchaser. Although the agreement provided for the payment of a deposit of10 per cent of the purchase price, it was not payable until the agreement becameunconditional.[21] GMO made a contemporaneous offer to the receivers to purchase the otherassets of CIT, including debtors, for $100,000. Mr Harris' evidence undercross-examination was that the sale of those assets was never concluded.[22] The receivers applied to the Court for the approval contemplated in theagreement for them to act as CIT's agent for the purpose of the sale to GMO.They also sought orders removing caveats registered against the properties to enablethe sale to proceed.[23] Ms Fatupaito explained that the liquidators were concerned that the agreementwas nothing more than an option to purchase, conditional in its terms and favouringGMO's position. They took the view that the receivers' appointment came with asignificant increase in cost, but without value to creditors, and that it had led to anuncommercial sale and purchase agreement. They opposed the receivers' application.They brought their own application for orders setting aside the GSD in whole or inpart, declaring the receivers invalidly appointed and not entitled to remuneration,setting aside the agreement for sale to GMO, directing the receivers cease to act,ordering that no other receiver be appointed by Bankhouse over CIT's assets, andprohibiting the receivers from acting as receivers for a period not exceeding five years.[24] Ultimately the liquidators and receivers were able to agree to consent orders toenable the agreement for sale and purchase between CIT and GMO to proceed.The terms of the consent order included a requirement that conditions in the agreementeither be unconditionally waived or completely satisfied on or before 16 August 2017and that the full purchase price under the agreement be paid in full on or before31 August 2017. Neither requirement was met, with the result that the receiversdiscontinued their application and retired from their appointment as receivers witheffect from 1 September 2017.Hearing before Jagose J[25] Jagose J made orders which are not the subject of the appeal but providenecessary background. He set aside the whole of the GSD as against the liquidatorsunder s 299 of the Companies Act.2 He was satisfied it was just and equitable for theGSD, so far as it conferred any security on Bankhouse, to be set aside as against theliquidators because it was created at a time when Mr Olliver knew of the financialdifficulties of CIT, and because it was created to enable Bankhouse to receive morethan it otherwise would have in the liquidation, at the expense of CIT's creditors as awhole. The Judge was satisfied that the GSD conferred an "inappropriate advantage"on Bankhouse.3 He therefore made an order prohibiting the appointment of any otherreceiver under the GSD.[26] The Judge declined the liquidators' application for declarations that thereceivers were invalidly appointed and not entitled to any remuneration. He observedthat the liquidators relied upon s 25(1) of the PPSA, which provides:(1) All rights, duties, or obligations that arise under a security agreementor this Act must be exercised or discharged in good faith and inaccordance with reasonable standards of commercial practice.2 Harris v Bank of New Zealand, above n 1, at [86].3 At [61].[27] The Judge accepted that the GSD was a "security agreement" for the purposesof the PPSA. Security agreement is defined in the PPSA as meaning "an agreementthat creates or provides for a security interest".4[28] The Judge recorded the liquidators' argument as being that the purpose of thereceivers' appointment was to effect the properties' sale to interests associated withMr Olliver, which was not a good faith exercise of the power to appoint and wasimproper.[29] The Judge said that Bankhouse's purpose could not invalidate the appointment,"at least not on application against the receivers alone".5 Even if the power to appointwas exercised in bad faith that was a challenge to the secured party's decision and notthe validity of the receivers' appointment.[30] As to the position of the receivers, the Judge said that it was long accepted thatreceivers are responsible to satisfy themselves as to the validity of their appointment.But it was implausible the receivers should be responsible also to satisfy themselvesthat their appointments were not tainted by ulterior motive on the part of theirappointor. The Judge continued:[74] Section 33(1) enables the Court to relieve a receiver of any liabilityincurred solely by reason of a defect in his or her appointment, if the receivernonetheless "acted honestly and reasonably and ought, in the circumstances,to be excused". The person in whose interests the receiver was appointed isthen liable to the extent the receiver is relieved.[75] Section 33(1) points to determination of validity of appointment beinga mechanical rather than moral exercise. That is reinforced in a liquidationsetting by "the need to differentiate between the validity or otherwise of theappointment of a liquidator (on the one hand) and the liquidation process (onthe other)".6 Any ulterior motive of Bankhouse is better measured inconsideration of the receivers' conduct as against their general statutory dutiesin the process of receivership.[76] It is also unclear why, under s 33, a receiver's relief from liability ifincurred solely by reason of his or her appointment being invalidated by theappointor's lack of good faith, should turn on the receiver's honesty andreasonableness. That suggests an appointer's lack of good faith is not a defectin the receiver's appointment susceptible to determination under s 34 only asagainst the receiver (the section being about "Court supervision of receivers").4 Personal Property Securities Act 1999 [PPSA], s 16.5 At [71].6 Zhang v Kamal [2017] NZHC 1943 at [52].[31] The Judge therefore declined to make the declarations sought. In any case, hedoubted he had express power to declare the receivers should receive no remuneration;the Receiverships Act 1993 only allowed him to fix or review the remuneration, notto determine that there was no entitlement to remuneration.Was the application made against the receivers alone?[32] The Judge proceeded on the basis that the liquidators' application was againstthe receivers alone. He appears to have overlooked that the liquidators' applicationdid join Bankhouse as the appointing creditor and included an allegation thatBankhouse appointed the receivers for an improper purpose. Bankhouse was servedwith the proceedings, was heard during the interlocutory phase of the proceeding andhad the opportunity to be represented and to be heard at the hearing. We understandBankhouse was not represented because leave was declined to have Mr Olliverrepresent Bankhouse at the hearing. There is a general rule that a company must berepresented by counsel.7[33] An application by the receivers for Mr Olliver's affidavit to be adduced asevidence on their application was also declined by Jagose J. The liquidators hadopposed this application unless they were given the opportunity to cross-examineMr Olliver, which Mr Tingey for the liquidators had indicated could not be achievedin the time allowed for the fixture.[34] The first respondents now argue on appeal that in the absence of this evidenceand any cross-examination of Bankhouse's director, namely Mr Olliver, it would bean unprecedented step to find that the appointment was made in bad faith. We do notaccept that argument. Both Bankhouse and the receivers had the opportunity to fileevidence in accordance with timetable orders. A late application to adduce theevidence of Mr Olliver was declined because of the prejudice that would accrue. TheJudge was aware, when he made that ruling, that the liquidators argued that the7 Re G J Mannix Ltd [1984] 1 NZLR 309 (CA) at 310–311; aff'd New Zealand Cards Ltd v Ramsay[2012] NZCA 285 at [21]; and Commissioner of Inland Revenue v Chesterfields Preschools Ltd[2013] NZCA 53, [2013] 2 NZLR 679 at [25]–[27].appointment of receivers had been made in bad faith.8 The Judge was thereforerequired to rule on the applications on the basis of the evidence before him. We alsonote that the receivers have not identified the evidence Mr Olliver was to give that wasmaterial to the purpose of the appointment.Can the purpose for which a mortgagee exercises its power of appointmentinvalidate that appointment?[35] We start with the GSD. The GSD is expressed to be security for payment ofthe debt owed to Bankhouse by CIT. Clause 9.2(c)(vi) of the GSD provides that if anevent of default occurs Bankhouse may appoint a receiver of all or any of the securedproperties. It is not at issue that by the time of the appointment of receivers, therewere various events of default as defined by the GSD.9[36] Counsel for the receivers argues that since there are no restrictions in the GSDas to the purpose for which Bankhouse could appoint a receiver, and the power toappoint had accrued, the appointment cannot therefore be invalidated due to improperpurpose.[37] It is true that a security holder has considerable autonomy as to how it exercisesits powers under a general security agreement. There is a general principle of law,reflected in s 19 of the Receiverships Act and in s 176 of the Property Law Act, that amortgagee's powers of sale must be exercised to obtain the best price reasonablyobtainable at the time of sale. But beyond that there is little constraint as to the exerciseof a mortgagee's contractual powers.[38] In Re Potters Oils Ltd Hoffmann J rejected a liquidator's argument that asecurity holder should not have appointed a receiver because the liquidator was doing8 We note that in the amended originating application the allegation is that Mr Olliver appointedreceivers to retain control of the properties. While there is no allegation that he did so to obtainthe debts to pursue his dispute with his former wife, the central allegation is broad enough toencompass that allegation, and the factual foundation for it is contained in the affidavit ofMs Fatupaito. Bankhouse had an opportunity to respond to that allegation.9 Clause 9.1.all that could be done to protect the security holder and the appointment of a receiverwould only add cost.10 The Judge said:11The debenture-holder is under no duty to refrain from exercising his rightsmerely because to exercise them may cause loss to the company or itsunsecured creditors.[39] In that same judgment however, Hoffmann J commented that the mortgagee'spower to fix the receiver's remuneration "like other powers of the mortgagee, has nodoubt to be exercised in good faith".12[40] Shamji v Johnson Matthey Bankers Ltd is another decision of Hoffmann Jwhich makes clear the extent of contractual autonomy a security holder has in theexercise of the power of sale or appointment of receivers.13 In Shamji it was arguedthat the security holder owed a duty of care to the company to consider all relevantmatters before appointing receivers when negotiations to obtain financing were beingconducted with a third party. Rejecting that argument, Hoffmann J said:14The appointment of a receiver seems to me to involve an inherent conflict ofinterest. The purpose of the power is to enable the mortgagee to take themanagement of the company's property out of the hands of directors andentrust it to a person of the mortgagee's choice. That power is granted to themortgagee by the security documents in completely unqualified terms.It seems to me that a decision by the mortgagee to exercise the power cannotbe challenged except perhaps on grounds of bad faith. There is no room forthe implication of the term that the mortgagee shall be under a duty to themortgagor to "consider all relevant matters" before exercising the power.[41] There is now ample authority to confirm the further limitation, identified byHoffmann J in both Potters and Shamji, that the power to appoint a receiver may notbe exercised in bad faith. Downsview Nominees Ltd v First City Corp Ltd is a decisionof the Privy Council on appeal from this Court, and is the leading authority as to thenature of the equitable duties owed by the charge holder under a general securityagreement when exercising its powers under that agreement.15 The issues in10 Re Potters Oils Ltd [1986] 1 WLR 201 (Ch) at 205.11 At 206.12 At 206.13 Shamji v Johnson Matthey Bankers Ltd [1986] BCLC 278 (Ch).14 At 284.15 Downsview Nominees Ltd v First City Corp Ltd [1993] 1 NZLR 513 (PC).Downsview arose out of the appointment of a receiver under a debenture.16The hearing before the Privy Council proceeded on factual findings made by the firstinstance Judge that in appointing a receiver, the first-ranking debenture holder had notacted for the proper purpose of realising its security but for the improper purpose ofallowing the mortgagor to continue in trade. It achieved this by the receiverobstructing the efforts of a subsequent mortgagee to enforce its own security.There was no plan to sell the property.[42] Their Lordships explained that equity has overlaid on contracts of securitycertain duties as follows:17Several centuries ago equity evolved principles for the enforcement ofmortgages and the protection of borrowers. The most basic principles were,first, that a mortgage is security for the repayment of a debt and, secondly, thata security for repayment of a debt is only a mortgage. From these principlesflowed two rules, first, that power conferred on a mortgagee must be exercisedin good faith for the purpose of obtaining repayment and secondly that, subjectto the first rule, powers conferred on a mortgagee may be exercised althoughthe consequences may be disadvantageous to the borrower.[43] To similar effect, later in the judgment the Court said:18A mortgagee owes a general duty to subsequent encumbrancers and to themortgagor to use his powers for the sole purpose of securing repayment of themoneys owing under his mortgage and a duty to act in good faith.[44] Mr Hughes, on behalf of the first respondents, argues that Downsview is notauthority for the proposition that an appointor's improper purpose or bad faith caninvalidate the receiver's appointment because the Court was not asked to address thevalidity of that appointment.[45] It is true the Court did not address the validity of the appointment.The receiver, Mr Russell, had ceased to act before the issues between the parties cameto trial, and so the parties pursued recovery of the losses the receiver's actions causedby way of damages claims. Nevertheless, we are satisfied the principles identified in16 In many of the cases discussed in this judgment, charges granted over the assets of a company arereferred to as debentures. After the enactment of the PPSA, securities issued by companies are nolonger called debentures.17 Downsview Nominees Ltd v First City Corp Ltd, above n 15, at 522.18 At 526.Downsview as to the nature of the mortgagee's duties are relevant to the extent andnature of the contractual power to appoint. This is because Downsview is authorityfor the proposition that a mortgagee must exercise its contractual power to appointreceivers under the general security agreement for obtaining repayment, and that toexercise it for another purpose is a bad faith exercise of the power.19 If a securityholder may not exercise a power to appoint in bad faith, that is a limitation upon thatpower. To put it another way, if a power to appoint receivers is exercised for a purposeunrelated to recovery of the debt, then that is a bad faith exercise of the power and isinvalid.[46] This equitable principle is expressed in statutory form in s 25 of the PPSAwhich provides that all rights, duties or obligations under security agreements subjectto that Act must be exercised in good faith. Section 25 applies in this case since theGSD created an interest in personal property.20 The PPSA provides that a breachresults in a right to recover damages for any loss or damage that was reasonablyforeseeable as likely to result from the breach.21 For our purposes, this adds nothingto the equitable principle we have identified above.[47] A more difficult issue is that raised by the first respondents' challenge as towhat constitutes bad faith for these purposes. The first respondents argue that even ifit is accepted that the appointment of a receiver for an improper purpose can render anappointment invalid, it is necessary to show that the improper purpose is the onlypurpose.[48] Mr Hughes relies upon Meretz Investments NV v ACP Ltd, a first instancedecision for that proposition.22 In that case Lewison J accepted that Downsviewsupports the proposition that a power of sale is improperly exercised if it is no part ofthe mortgagee's purpose to recover the debt secured by the mortgage. But the Judgedeclined to extend that principle to a situation where there were mixed motives.19 In some cases included within that legitimate purpose is the protection of the value of the security,but this is not an issue for us in this case.20 PPSA, above n 4, ss 16, definition of "security agreement" and 17.21 Section 176.22 Meretz Investments NV v ACP Ltd [2006] EWHC 74, [2007] Ch 197.He rejected an argument that a mortgagee who acts to exercise a power of sale musthave "purity of purpose":23A dissection of a mortgagee's motives is likely to be difficult in practice.Moreover, unlike statutory powers conferred for the public benefit, or trustees'powers conferred for the benefit of beneficiaries a mortgagee's powers areconferred upon him for his own benefit. In such circumstances "purity ofpurpose" may be difficult to achieve. The cases do support the propositionthat a power of sale is improperly exercised if it is no part of the mortgagee'spurpose to recover the debt secured by the mortgage. Where, however, amortgagee has mixed motives (or purposes) one of which is a genuine purposeof recovering, in whole or in part, the amount secured by the mortgage, thenin my judgment his exercise of the power of sale will not be invalidated onthat ground. In addition I consider that it is legitimate for a mortgagee toexercise his powers for the purpose of protecting his security.[49] It is true that in Downsview no part of the mortgagee's or receiver's purposewas to use the mortgagee's power of sale to sell the secured assets and obtainrepayment of outstanding debts. Rather the intention was to allow the mortgagor tocontinue to trade. We accept it follows that the Privy Council's statement that themortgagee owed a duty to use its powers for the "sole purpose" of obtaining repaymentwas obiter.24[50] Downsview and Meretz were considered by this Court in Coltart v Lepionka &Co Investments Ltd.25 In Lepionka, GLW Group Ltd (GLW) obtained funding fromWestpac Banking Corp for its subdivision of a large parcel of land. The funding wassecured by a mortgage. It sold five undivided lots to Lepionka & Co Investments Ltdinterests and granted an option to Mr Coltart to buy another undivided lot.GLW defaulted on the mortgage. The Lepionka interests then formed a company tobuy Westpac's mortgage. The new company did so, and then adopted GLW's contractswith the Lepionka interests whilst cancelling its option with Mr Coltart. The newcompany mortgagee declined offers for the land subject to the option at market price.The Court found that the new company mortgagee acquired the Westpac mortgage forthe predominant, possibly sole intention of preserving the security and exercising itspower of sale to protect related parties, namely the Lepionka interests. The Courtcontinued:2623 At 271–272.24 Set out above at [43].25 Coltart v Lepionka & Co Investments Ltd [2016] NZCA 102, [2016] 3 NZLR 36.26 At [66] (footnotes omitted).While that intention does not of itself prove bad faith, we agree with theAssociate Judge that the Lepionka mortgagee's subsequent actions arguablygive rise to an inference that its predominant purpose was not to sell for thebest price reasonably obtainable or to protect its security. Instead, theLepionka mortgagee's actions invite the inference that its predominantpurpose was to secure collateral advantages for the Lepionka purchasers,driven by factors extraneous to the relationship of mortgagee and mortgagor.[51] The Court addressed Lewison J's suggestion that a mortgagee need not havepurity of purpose and could act with a mixture of motivations, as long as one of themwas selling the asset to obtain repayment of the secured debt. As to that the Courtsaid:27In our judgment, a mortgagee may lawfully have other purposes coincidingwith its core interest in discharging the debt and obtaining the best pricereasonably obtainable and thereby properly anticipate the enjoyment ofbenefits collateral to exercising its power of sale. But an exogenouspurpose — that is, a purpose flowing from interests outside the function of amortgagee — cannot be allowed to prevail.[52] The Court distilled the various authorities as follows:[65] The leading authorities confirm that a mortgagee will come under thescrutiny of equity when the effect of its actions invites the inference that it wasacting in breach of its duties. The ultimate question is whether a mortgageehas acted primarily for the purpose of recovering its debt. That question is tobe answered objectively, not by examining a mortgagee's subjective motives,but by examining whether its actions are taken in good faith, bearing in mindits entitlement to prefer its own interests wherever they conflict with otherinterested parties.(Footnotes omitted).[53] A mortgagee therefore need not have purity of purpose. But it does act in badfaith if, judged objectively, it acts for a predominant purpose which is collateral to, orto use the language of this Court in Lepionka, exogenous to, its interests as mortgageein preserving its security and obtaining repayment of a secured debt. However amortgagee does not act in bad faith if the effect of the exercise of its power undertakenfor the predominant purpose of securing repayment is that it secures to itself somecollateral advantage.27 At [63].[54] Of course, it will be a rare case in which there is evidence to meet this veryhigh standard. In most cases, where a mortgagee exercises its power to appointreceivers and moves to sell the mortgaged property, the inevitable inference will bethat it is acting for the proper purpose of realising its security. The evidence of badfaith would normally consist of actions taken by the receiver appointed, in conjunctionwith the mortgagee, which are inconsistent with an intention to act to realise thesecurity and repay the mortgagee, as was the case in Downsview. It may include, as isargued in this case, statements made prior to appointment by the mortgagee or a personacting on the mortgagee's behalf. But if there is evidence to show that an appointmentis made in bad faith in this sense, there seems no good reason why that appointmentshould be treated as valid, and be allowed to continue.[55] Finally, we note that Jagose J was concerned about the position of receiverswho could be exposed to civil liability were they to accept appointment which waslater invalidated on this ground. He thought receivers should not be required toconcern themselves with the motivation of their appointors. It is certainly the casethat receivers would not be expected to interrogate appointing creditors as to thepurposes of the appointment absent something which puts them on notice that themortgagee is acting in bad faith. Responsible receivers are adequately protected fromcivil liability by the provisions of s 33(1) of the Receiverships Act which provides:33 Relief from liability(1) The court may relieve a person who has acted as a receiver from allor any personal liability incurred in the course of the receivership if itis satisfied that—(a) the liability was incurred solely by reason of a defect in theappointment of the receiver or in the deed or agreement ororder of the court by or under which the receiver wasappointed; and(b) the receiver acted honestly and reasonably and ought, in thecircumstances, to be excused.[56] Receivers are also able to negotiate an indemnity with the appointing creditorfor their fees to cover the eventuality that their appointment is subsequently held to beinvalid.Did Bankhouse act in bad faith in appointing receivers?[57] In this case there is good evidence that the predominant purpose, perhaps thesole purpose for the appointment, was gaining control of the properties in order to gainaccess to the accounts receivable of CIT and in particular the debts owed to thatcompany by Mr Olliver's estranged wife and a trust associated with her,Waimarie Trust. It is not disputed by the first respondents that as the sole director ofBankhouse, Mr Olliver's actions and intentions can be equated with those ofBankhouse. It is also not in issue that Mr Olliver can similarly be equated with theproposed purchasers GMO and Old Schnapper Rock for all relevant purposes.[58] Evidence of Bankhouse's purpose in appointing receivers can be gleaned fromthe following. The terms of sale of the properties were agreed between the liquidatorsand Mr Olliver, except for the condition Mr Olliver sought to impose for the benefitof GMO that the liquidators also agree to sell the claims against Ms Sparks andWaimarie Trust. As we have noted, Mr Olliver was, at the time, in a prolonged and itseems from the correspondence, bitter dispute with his estranged wife, Ms Sparks.There is nothing to suggest that GMO had any genuine commercial interest in thepurchase of the debts. The inference to be drawn is that Mr Olliver was attempting toacquire the debts owed by Ms Sparks and Waimarie Trust to enable him to betterpursue those debts as part of his personal dispute with her.[59] The sale the liquidators were negotiating with GMO and Old Schnapper Rockwould have enabled Bankhouse's secured debt to be fully repaid, and would have lefta surplus for unsecured creditors. The exact size of that surplus would have dependedupon the extent to which the liquidators succeeded in their challenge to Bankhouse'ssecurity. It followed therefore that Bankhouse did not need the sale of debtors toproceed to obtain repayment of the secured debt. We note as an aside, even if therewas a shortfall, the proceeds of sale of CIT's accounts receivable were unlikely to beavailable to Bankhouse. Accounts receivable are amongst the assets listed in cl 2(1)(b)of sch 7 to the Companies Act as subject to the statutory claims of preferential creditorsranking for payment ahead of the claims of the secured creditor.28 However that is notsomething we take into account in the absence of detail as to the extent of creditors28 The preferential claims are listed in cl 1 of sch 7, and include certain tax amounts.entitled to preference to the interests of a secured creditor in respect of the cl 2(1)(b)assets.[60] In a meeting on 27 March 2017 Mr Olliver told Ms Fatupaito that he/GMOwere withdrawing the offer because the liquidators had not consented to the sale ofthose claims.[61] The evidence is that one of the receivers, Mr Harris, was aware that the attemptto negotiate an agreement for sale and purchase of the land between the liquidatorsand GMO had broken down over Mr Olliver's insistence upon the sale of other assets.He knew those assets included the debts owed by Ms Sparks and Waimarie Trust. Wethink it safe to infer that when he caused Mr Harris and Mr Nellies to be appointed,Mr Olliver did so in the belief and expectation that they would agree to sell theWaimarie Trust/Ms Sparks debts to interests he controlled. It is not necessary that wealso find that the receivers acted in bad faith. It is the mortgagee's purposes that areat issue.[62] The terms of sale then agreed with GMO by the receivers were uncommercial.The agreement could fairly be described as conferring an option upon the purchasersbecause of the extent and nature of the conditions. But one of the conditions to befulfilled was agreement being reached between the parties for the sale of "such of theother assets of the Vendor (including debtors) as the Vendor wishes to sell and thePurchaser wishes to purchase at a price and on terms acceptable to them". The debtorsincluded Ms Sparks and Waimarie Trust.[63] We therefore conclude that the evidence establishes that Mr Olliver/Bankhouseappointed receivers for the principal purpose, perhaps even the sole purpose, ofobtaining control of the properties as a means of acquiring the debts due by Ms Sparksand Waimarie Trust. Bankhouse's purpose in this regard was to enable Mr Olliver tobetter pursue his personal dispute with his former wife. Acquiring those assets wasnot for the purpose of securing repayment of the secured debt. The sale of theproperties would repay Bankhouse fully.[64] Bankhouse may or may not have intended that the receivers would also sell theproperty to GMO to secure repayment of the debt. But if so, the sale of the propertiesto obtain repayment was at most a subsidiary purpose for the appointment.Indeed the evidence suggests it may not have been a purpose at all, given the highlyconditional nature of the offer Mr Olliver procured GMO to present. It is alsosupported by the fact the sale did not ultimately proceed because the conditions werenot fulfilled, although this is not something we rely upon.[65] It follows that the liquidators are entitled to a declaration that the receiverswere not validly appointed under the terms of the GSD because the appointment wasmade in bad faith. The appointment was made in bad faith because the principalpurpose of Bankhouse was collateral to its legitimate interest in preserving the securityand obtaining repayment of the secured debt. Its principal purpose was to procurecontrol for a third party, Mr Olliver, of assets that would enable him to better pursuehis personal dispute with his estranged wife and in which Bankhouse had no interest.Receivers' remuneration[66] The liquidators also seek a declaration that the first respondents are not entitledto remuneration. This is sought in the context, as we understand it, that thefirst respondents have filed an unsecured creditor's claim form in the liquidationseeking payment of their fees.29[67] It follows from the fact that their appointment as receivers was invalid that thefirst respondents are not entitled to be remunerated from the assets of the company, aright which would only accrue to them through the secured creditor Bankhouse,because under the terms of the GSD the remuneration forms part of the secured debt.30Because their appointment was invalid the secured creditor has no right to charge thecosts of the receivership to the company or to recover costs, on a secured basis orotherwise. Nor do the secured creditor's receivers.29 We were not asked to address, and did not hear argument on whether the setting aside of the GSDhad any effect upon the receivers' ability to recover payment of their fees up until the date of theorder setting the security aside.30 Clause 10.3.[68] There is also no statutory basis for the Court to order costs. Section 33(1) ofthe Receiverships Act provides that a court may order that they be relieved from anypersonal liability incurred in the course of the receivership if satisfied that they actedhonestly and reasonably and ought in the circumstances to be excused. But that is nota power to award remuneration. The first respondents may of course call upon anycontractual indemnity or arrangement they have with Bankhouse for payment of feesin such an eventuality.[69] Section 34 empowers the court to fix or review a receiver's remuneration, butthat provision is concerned with receivers who are validly appointed. We agree withJagose J that it does not confer a power to fix remuneration for those whoseappointment as receiver is invalid.[70] The learned authors of Private Receivers of Companies in New Zealand statethat a "receiver" who is not properly appointed, and acts de facto, "may recover areasonable fee for services which incontrovertibly benefited the company incircumstances where it would be unconscionable for the company to keep the benefitwithout paying a reasonable sum for it".31 The case the authors rely upon for thatproposition is Monks v Poynice Pty Ltd.32 The discussion in that case reflects a simpleapplication of restitutionary principles. The Court did no more than acknowledge thepossible application of those principles, leaving it to the liquidator to allow a claim inthe liquidation, to the extent it was satisfied there was an incontrovertible benefit tothe company from the services provided by the receiver.[71] We did not hear argument in relation to any restitutionary claim the receiversmight have. Although the evidence we have seen suggests they would be hard-pressedto show any benefit flowed to CIT from their appointment, as in Monks we considerthat issue best resolved through the claims process. As mentioned, we understand aclaim has been filed in the liquidation by the receivers, but that it was after thecommencement of these proceedings. The liquidators are entitled to a declaration thatthe first respondents are not entitled to recover from the assets of CIT their fees and31 Peter Blanchard and Michael Gedye Private Receivers of Companies in New Zealand (3rd ed,LexisNexis, Wellington, 2008) at [6.02].32 Monks v Poynice Pty Ltd (1987) 8 NSWLR 662 (SC).expenses incurred in the course of their conduct in purportedly conducting thereceivership pursuant to the terms of the GSD or under the provisions of theReceiverships Act.Application to adduce evidence[72] The liquidators seek leave to adduce additional evidence on appeal in the formof an affidavit from one of the liquidators, Ms Fatupaito. She annexes the unsecuredcreditor's claim form filed by the first respondents, the deed of appointment and othermaterial the liquidators argue is relevant to the first respondents' knowledge of thecircumstances of their appointment. We do not consider that material is relevant tothe issues we have to determine on this appeal. We therefore decline the applicationto adduce the additional evidence.Result[73] The application to adduce further evidence is declined.[74] The appeal is allowed.[75] The appellants are entitled to declarations as follows:(a) The appointment of the first respondents as receivers was invalid.(b) The first respondents are not entitled to recover from the assets of CITHoldings Ltd their costs and expenses incurred in purportedlyconducting the receivership pursuant to the terms of the GeneralSecurity Deed or under the provisions of the Receiverships Act.[76] The first respondents must pay the appellants one set of costs for a standardappeal on a band A basis and usual disbursements.Solicitors:Bell Gully, Auckland for AppellantsAnthony Harper, Auckland for First Respondents