COUMAT LIMITED v WHITFORD PROPERTIES LIMITED [2018] NZCA 15

COUMAT LIMITED v WHITFORD PROPERTIES LIMITED [2018] NZCA 15 [16 February 2018]IN THE COURT OF APPEAL OF NEW ZEALANDCA228/2017[2018] NZCA 15BETWEEN COUMAT LIMITEDFirst AppellantGREGORY BRUCE HAYHOWSecond AppellantAND WHITFORD PROPERTIES LIMITEDRespondentHearing: 14 November 2017Court: Asher, Lang and Ellis JJCounsel: P F Dalkie and R Rao for AppellantsM C Black for RespondentJudgment: 16 February 2018 at 10 amJUDGMENT OF THE COURTA The application for leave to adduce further evidence is declined.B The appeal is dismissed.C The appellants must pay the respondent costs for a standard appeal on aband A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Asher J)Table of ContentsPara NoIntroductionFactsThe High Court judgment and the issues arisingMr Bruce's duties in relation to the mortgageWas there a breach of trust?The Initial Tender depositSteps taken by Mr HayhowThe $1,310,054Unjust enrichmentConclusion on Mr Bruce's dutiesLiability of Mr Hayhow and Coumat for knowing receipt ordishonest assistanceConclusionResult[1][2][18][25][36][37][46][53][54][57][59][65][67]Introduction[1] This appeal concerns a vendor mortgagee's equitable and statutory duties on amortgagee sale. In particular, it concerns the duty of a mortgagee to account for aforfeit deposit to the mortgagor, and to account to the mortgagor for any surplusremaining after the amount owing under the mortgage has been repaid.Facts[2] The relevant history of the sale begins with the incorporation of the respondent,Whitford Properties Ltd (in liq) (Whitford) on 26 March 2002. Whitford wasincorporated by Robert Bruce and Wayne Allen. They were shareholders together withMr Allen's wife. Shortly afterwards, Whitford acquired a block of land inSouth Auckland in two titles totalling approximately eight and a half hectares (theWhitford Land). It was then zoned rural but if certain consents could be obtained itcould be subdivided for residential purposes. Being close to Auckland it hadconsiderable potential value. The history of the steps taken to get the subdivisionunderway is complex and does not need to be recited. Of relevance is that on6 July 2005 a mortgage was registered over the Whitford Land to secure borrowingsby Whitford from ANZ Bank New Zealand Ltd (ANZ).1 The mortgage wasguaranteed by Mr Bruce and Mr Allen.[3] By April 2014 Whitford was in default on the ANZ mortgage. At that time itowed approximately $8.5 million. Discussions between ANZ and Whitford brokedown, and ANZ proceeded to sell the Whitford Land as mortgagee. It adopted a tenderprocess for the sale, and on 16 April 2014 ANZ issued an invitation to tender. Theterms of the invitation to tender required the successful tenderer to pay a deposit of10 per cent of the tendered sum.[4] By this time the second appellant, Gregory Hayhow, had become involved withMessrs Bruce and Allen. On or about 16 October 2013 he had lent $330,000 toMr Bruce on the basis of a term loan agreement. The agreement was for a three-monthperiod and featured an interest rate of 400 per cent. As security Mr Hayhow was givena first ranking general security over Mr Bruce's 50 per cent shareholding in Whitford.That security proved to be valueless, because Mr Bruce had already given securityover the shares to another party. Therefore, by early 2014 Mr Hayhow had seriousconcerns about his ability to recover his loan from Mr Bruce.[5] It seems by early 2014 Messrs Bruce and Allen were no longer workingtogether. Mr Allen wanted to tender in his own name for the Whitford Land in thesum of $9 million. However, unsurprisingly given Whitford's defaults, he lackedsufficient funds to complete a purchase at that price. He approached Mr Hayhow andasked for his financial assistance in making the offer. Mr Hayhow entered intodiscussions with Mr Allen, and deposed that he did so in order to recoup some of theloan made to Mr Bruce. After some negotiation Mr Hayhow and Mr Allen reached anagreement, documented by a joint venture memorandum dated 10 April 2014. Theywould establish a limited liability company as a vehicle and there would be a tenderoffer made on behalf of that entity at a price of $9 million with a deposit of $1 million.[6] Mr Allen made an initial tender offer of $9 million on 10 April 2014. Heincreased the offer on 15 April 2014 to $12.5 million (the Initial Tender). On1 Ultimately Whitford's borrowing from ANZ was secured by two mortgages (6485175.2 and6485203.2).16 April 2014 ANZ accepted the tender and an agreement was signed (the InitialTender Agreement). A deposit of $1.25 million was paid. The funds for the depositwere provided by Mr Hayhow. That is a matter to which we will return later in thisjudgment, as it is central to the appeal.[7] On or about 8 May 2014 Mr Hayhow incorporated a new company, WhitfordProperty Developments Ltd (WPDL). He intended this to be the joint venturecompany, and that he would hold 50 per cent of the shares in that company.On 19 May 2014 his solicitors confirmed to Buddle Findlay, solicitors for ANZ, thatWPDL would be nominated as purchaser under the tender for the purchase of theWhitford Land.[8] Settlement of the Initial Tender Agreement was to take place onMonday 16 June 2014. WPDL was never formally nominated to be the purchaser.Mr Hayhow deposed that by mid-June it became clear that Mr Allen would not be ableto provide his share of the funds for the purchase. WPDL was not able to settle on thescheduled day. On 17 June 2014 ANZ served a settlement notice on Mr Allen as thesuccessful tenderer and WPDL as "potential nominee purchaser". The deadline forsettlement was Tuesday 24 June 2014. However, Mr Allen was unable to settle by thatdate. Mr Hayhow now faced the prospect of losing the deposit of $1.25 million thathe had paid on behalf of Mr Allen, as well as the $330,000 he had earlier loaned toMr Bruce.[9] Mr Hayhow had intense negotiations with ANZ and with Mr Allen's lawyersto try and salvage the position, but nothing came of it. Mr Hayhow deposed that helost all faith in Mr Allen. Through those days of late June, however, ANZ did not takeany steps to cancel the Initial Tender Agreement. Mr Hayhow contacted Mr Bruce tosee whether a solution could be reached with him. Mr Bruce was liable as a guarantorof the ANZ mortgage. A proposal was put forward by Mr Bruce's solicitors wherebyMr Bruce would use his guarantee to redeem the Whitford Land for the ANZ mortgagedebt, using his rights under the guarantee and ss 97 or 102 of the Property LawAct 2007 (the Act).[10] On 7 July 2014 Mr Hayhow agreed with Mr Bruce that if Mr Bruce exercisedhis right as guarantor to redeem the Whitford Land he would provide the necessarymoney to him on the basis that Mr Hayhow's company, Coumat Ltd (Coumat), thefirst appellant, would then become the registered proprietor of the Whitford Land.Mr Hayhow is the sole director and shareholder of Coumat. Mr Bruce was preparedto talk to Mr Hayhow, given that he owed an ever-increasing amount of money for hispersonal loan (increasing at 400 per cent per annum). He also wished to mitigate hisliability to ANZ for the $8.5 million still owing, which was accruing interest.[11] As a result of their discussions Mr Bruce and Mr Hayhow entered into a deeddated 21 July 2014. Mr Bruce was to give notice to ANZ, at Mr Hayhow's request, ofhis intention to redeem the Whitford Land under ss 97 or 102 of the Act. The mortgagewould thereby be transferred to him, enabling him to sell the Whitford Land asmortgagee. Mr Hayhow would provide Mr Bruce with the funds to effect theredemption of the mortgage in consideration for Mr Bruce transferring the WhitfordLand to Coumat. Mr Bruce irrevocably appointed Mr Hayhow and his representativesas his attorney. Mr Bruce was to get $100,000 for personal services as project assistantin respect of the subdivision of the Whitford Land. The agreement provided: "Subjectto Bruce performing his obligations under this Deed and the Services ContractHayhow will write off Bruce's debt to him."[12] A further settlement notice on the Initial Tender Agreement had been issued byANZ, which was due to expire at 4 pm on 23 July 2014. That afternoon Mr Hayhowmet with ANZ and Mr Bruce. They followed an agreed agenda at that meeting,beginning with ANZ formally cancelling the Initial Tender Agreement. A cancellationnotice signed on behalf of ANZ was provided whereby ANZ notified Mr Allen as thesuccessful tenderer and WPDL as the potential nominee purchaser that, as aconsequence of the failure to settle, the Initial Tender Agreement was cancelled "andthe deposit of $1,250,000 is forfeited". The forfeiture of the deposit and its applicationto Whitford's mortgage was subsequently recorded by ANZ in a settlement statementdated 4 August 2014.[13] In accordance with the agenda, Mr Bruce then issued a notice to ANZ whereby,pursuant to s 102 of the Act using his rights as guarantor, he redeemed the mortgage.He gave a notice to ANZ dated 23 July 2014 requesting the transfer of the mortgageto him. The mortgage was so transferred. Mr Bruce and Coumat then entered into a"Private Treaty Agreement" under which Mr Bruce would sell the Whitford Land toCoumat for $7,454,903. That price was calculated on the basis that, at the time,$8,704,902 was owed to ANZ, from which the $1.25 million deposit would bededucted. The Private Treaty Agreement showed the consideration as $7,454,903 witha $1 deposit. The settlement date was 23 July 2014. In addition, Mr Bruce requiredMr Hayhow to formally forgive his personal debt.[14] On 26 July 2014 a "Substitute Private Treaty Agreement" was prepared. Thiswas on the same terms as the earlier Private Treaty Agreement save that the price wasstated to be $10,014,956. The deposit was recorded as $2,560,054. This comprised:(a) $1,310,054, being the extinguishment of Mr Bruce's $330,000 personaldebt to Mr Hayhow which had ballooned at the 400 per cent interestrate; and(b) $1.25 million, being the forfeited deposit paid under the cancelledInitial Tender Agreement. This deposit payment had reduced the ANZdebt from $8,704,902 to $7,454,902.Interest on the balance of the purchase price was payable at 17 per cent. On28 July 2014 the Substitute Private Treaty Agreement was signed.[15] The purchase of the Whitford Land by Coumat from Mr Bruce was settled on4 August 2014. Coumat was registered as proprietor of the Whitford Land. As perthe arrangement between Mr Bruce, Mr Hayhow and Coumat, no funds were paid toWhitford for the Whitford Land. Mr Hayhow's provision of the deposit of$1.25 million under the Initial Tender Agreement, his forgiveness of Mr Bruce'spersonal debt and his provision of the funds that enabled Mr Bruce to redeem themortgage as guarantor were treated as payment of the purchase price.[16] In due course Whitford went into liquidation. The liquidator, John Whittfield,after investigating the transactions, decided that Whitfield should pursue the claim thatgives rise to the present appeal. That is, that Mr Bruce breached his duty as mortgageeto strictly account to Whitford for the proceeds of the sale of the Whitford Land unders 185 of the Act, and that Mr Hayhow and Coumat dishonestly assisted, and knowinglyreceived the benefit of, that breach.[17] Mr Bruce represented himself in the High Court but took no steps in this Court.Nevertheless, as we have indicated, his position, and in particular his duties, are centralto the appeal, which contests Duffy J's decision that Mr Bruce breached his fiduciaryduties as mortgagee.The High Court judgment and the issues arising[18] Duffy J's core findings were as follows:2(a) Mr Bruce breached the mortgagee's duty to account for thesurplus proceeds of the mortgagee sale of the Whitford Land,insofar as he accepted payments that were less than the contractprice.(b) Mr Bruce breached the mortgagee's duty to obtain the best pricereasonably possible insofar as he sold the Whitford Land on termswhereby Whitford did not receive good consideration for the fullsale price of the Whitford Land.(c) Mr Hayhow and Coumat dishonestly assisted Mr Bruce in hisbreach of trust to account for the surplus proceeds of the sale ofthe Whitford Land.(d) Coumat knowingly received and enjoyed the surplus proceeds ofthe sale that were held on trust for Whitford.She also held that compound interest was available and that the parties were to filememoranda on interest.2 Whitford Properties Ltd (in liq) v Bruce [2017] NZHC 625 at [151].[19] Mr Dalkie for the appellants raised two main points which he set out in asummary of argument:1. The $1.25 million was a benefit to [Whitford]. It was paid against itsdebt due to the ANZ Bank, and reduced the debt by the amount of thepayment.2. The appellants have no liability as accessories since Mr Bruce wasnever a trustee for [Whitford] as beneficiary of any amount of moneybecause there was no surplus.[20] His core argument therefore related to the $1.25 million portion of the depositunder the Substitute Private Treaty Agreement. This approach limited the issuesarising on appeal. In her decision Duffy J was faced with a much larger number ofquestions.[21] All parties agreed that the purchase price of $10,014,956 in theSubstitute Private Treaty Agreement represented the best price reasonably obtainablefor the Whitford Land at the time. Thus there is no challenge to Duffy J's finding thatthis was the reasonable market value.3[22] Mr Dalkie's criticisms of Duffy J's judgment focused on her finding that,viewed objectively, the components of the deposit that was credited to Mr Hayhowunder the Substitute Private Treaty Agreement did not constitute consideration for thepurchase. She held:4The problem here for the defendants is that the non-cash consideration wasnot good consideration vis-à-vis [Whitford]. Writing off a debt owed betweenMr Bruce and Mr Hayhow is of no value to [Whitford]. Crediting Coumatwith the benefit of Mr Hayhow's forfeit deposit for the tender agreement isalso of no value to [Whitford]. Whilst the forfeit deposit reduced [Whitford's]debt to ANZ, the reason for the forfeiture was the failure of the purchaserunder the tender agreement to settle. That transaction did not directly involve[Whitford]. Further, had there been no forfeiture, the sum payable byMr Bruce to redeem the ANZ mortgage would have been $1.25 million more.For Mr Bruce to obtain the rights to exercise a mortgagee sale he had to payANZ whatever was owed under the mortgages. There is no evidence tosuggest ANZ would have agreed to the assignment for a lesser payment.3 At [96].4 At [95].[23] Mr Dalkie argued that these conclusions were wrong. The crediting to Coumatof Mr Hayhow's forfeit deposit was of benefit to Whitford, because it reducedWhitford's mortgage debt. Mr Dalkie contended that ANZ could not have applied theforfeit deposit to Whitford's debt without the permission of Mr Hayhow, who hadfunded the deposit. Mr Hayhow only gave that permission, and the deposit was onlyapplied to the mortgage debt, in anticipation of the Substitute Private TreatyAgreement and the sale of the Whitford Land to Mr Hayhow. It was therefore an errorfor the Judge to see the Substitute Private Treaty Agreement as structured in a way thatdeprived Whitford of the benefit of any surplus proceeds.5 Whitford had got thebenefit of the deposit by the reduction of its mortgage debt, irrespective of the fact thatWhitford was not a party to the Initial Tender Agreement under which the deposit waspaid.[24] Mr Dalkie did not make detailed submissions on whether Mr Hayhow had beenguilty of dishonest assistance and knowing receipt in relation to the $1.25 million. Heaccepted that if there had been a breach of trust by Mr Bruce, such conclusions againstMr Hayhow and Coumat were available. The thrust of his argument was that therewas no breach of trust. He went further and submitted that, even if it were establishedthat there had been a breach of the duty to account for the mortgagee sale proceeds,that was not a breach of trust of the type that could sustain a claim against Mr Hayhowfor dishonest assistance or knowing receipt.Mr Bruce's duties in relation to the mortgage[25] The issue of the duty of a mortgagee to obtain the best price reasonablyobtainable under s 176 of the Act does not arise in this case. It is agreed by both partiesand indeed recorded by the Judge that the price of $10,014,956 in the SubstitutePrivate Treaty agreement represented the best price reasonably obtainable for theWhitford Land. What is at issue in this case is the duty of the mortgagee to accountfor the proceeds of that sale.5 At [96].[26] Section 185 of the Act provides:185 Application of proceeds of sale of mortgaged property(1) The proceeds arising from the sale by a mortgagee of mortgagedproperty must be applied—(d) fourthly, to the payment of amounts secured by the mortgage(to the extent that those amounts have not been paid underparagraphs (a) to (c)):(f) sixthly, to the payment of any surplus to the currentmortgagor.The first question that arises is whether this statutory duty applies to a person in theposition of Mr Bruce, where Mr Bruce has been assigned the mortgage as guarantor.Duffy J proceeded on the basis that Mr Bruce had all the duties of a mortgagee toaccount for the surplus proceeds arising from any sale.[27] Section 102(1) of the Act provides:102 Request to mortgagee to transfer mortgage(1) The current mortgagor or any other person who is entitled to redeemthe mortgaged property may, at any time (except a time when themortgagee is in possession of the property), request the mortgagee totransfer the mortgage to a nominated person (except the currentmortgagor).[28] "Mortgagee" is defined in the Act as including, if the mortgage has beenassigned, the assignee of the mortgage for the time being.6 The wording is broadenough to include a s 102(1) transferee. We take the view that the obligation set outin s 185 to account to the mortgagor for any surplus applied to Mr Bruce as themortgagee from the moment of the transfer of the mortgage to him. The language ofs 185 is absolute. The mortgagee "must" apply the surplus proceeds as provided.6 Property Law Act 2007, s 4.[29] Section 185 reflects the intervention of equity in relation to mortgages. Thefunction of the mortgage went from being both security for a loan and a source ofprofit in lieu of interest, to being only a security for a loan and not yielding profit tothe mortgagee over and above the interest permitted by law.7 A mortgagee might notreap any benefit from the fee simple. For instance, if a mortgagee took possession,equity held it liable to account for a full rent to the mortgagor.8 Section 185 isconsistent with the general proposition in securities law that a mortgage is no morethan security for the payment of a debt, reflected now in s 79 of the Act, which providesthat a mortgage over land takes effect as a charge.[30] The power of sale that is conferred on a mortgagee must be exercised only forthe purpose of paying the debt, and in good faith, and not for some other purpose. Thisprinciple was given authoritative expression by the Privy Council in DownsviewNominees Ltd v First City Corp Ltd:9Several 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 powers conferred on a mortgagee must beexercised in good faith for the purpose of obtaining repayment and secondlythat, subject to the first rule, powers conferred on a mortgagee may beexercised although the consequences may be disadvantageous to the borrower.These principles and rules apply also to a receiver and manager appointed bythe mortgagee.[31] It follows that a securityholder commits a breach of an equitable duty if it usessale funds other than for the particular purpose of achieving payment of its debt. Oncethe debt has been repaid, the mortgagee must account to the mortgagor for any surplus.This principle was expressed by the English Court of Appeal in Cuckmere Brick CoLtd v Mutual Finance Ltd:107 For example, in Cityland and Property (Holdings) Ltd v Dabrah [1968] Ch 166, [1967]All ER 639 a mortgagee was not permitted to insert a collateral stipulation for the payment of apremium.8 See discussion in Robert Megarry and William Wade The Law of Real Property (8th ed, Sweetand Maxwell, London, 2012) at [24-010].9 Downsview Nominees Ltd v First City Corp Ltd [1993] 1 NZLR 513 (PC) at 522.10 Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 (CA) at 966. See also Wayne Clark(ed) Fisher and Lightwood's Law of Mortgage (14th ed, LexisNexis, Wellington, 2014) at [30.46].Approaching the matter first of all on principle, it is to be observed that if thesale yields a surplus over the amount owed under the mortgage, the mortgageeholds the surplus in trust for the mortgagor.[32] We note the comment of Kay J in Charles v Jones that while a court is reluctantto treat a mortgagee as being a trustee while money is due:11 still when he has paid himself, and has money remaining in his hands whichis no longer his property, how can he be treated as other than a trustee of suchmoney?[33] It was held in Chaplin v Young (No 1) in relation to a mortgagee in possession,that:12 he stands exactly, as regards his powers, in the place of the mortgagor, and,accordingly, he is accountable to the owner of the equity of redemption foreverything which he either has received or might have received, or ought tohave received, while he continued in such possession.[34] The same principle applies equally to a mortgagee who, as a consequence of adefault, is selling the mortgaged property. The proceeds can only be used to dischargethe debt, and beyond that the mortgagee is accountable to the mortgagor. This wassummarised by Megarry and Wade in The Law of Real Property:13What [the mortgagee] may not do is to reap any personal advantage beyondwhat is due to him under the mortgage; for he is liable to account in equity forany such advantage. He is liable to account strictly, "on the footing of wilfuldefault". This means that he must account not only for all that he receives butalso for all that he ought to have received, had he managed the property withdue diligence.(Footnotes omitted.)[35] Therefore a person who is exercising the powers of a mortgagee commits abreach of the equitable duty of good faith if that power is exercised otherwise than forthe special purpose of enabling the assets comprised in the security to be preservedand realised for the benefit of that mortgagee.14 The obligation to exercise the powerof sale only for this purpose means that, when a mortgagee sale fails, and the11 Charles v Jones (1887) 35 Ch D 544 at 550.12 Chaplin v Young (No 1) (1864) 33 Beav 330 (Ch) at 337–338.13 Megarry and Wade, above n 8, at [25-026].14 Re B Johnson and Co (Builders) Ltd [1955] Ch 634 (CA) at 661–663; and Downsview NomineesLtd v First City Corp Ltd, above n 9, at 523.mortgagee obtains funds from the forfeiture of a deposit, the duty of good faithrequires those funds to be applied to reduce the mortgage debt.Was there a breach of trust?[36] There is little difference between Mr Black for Whitford and Mr Dalkie aboutthe legal principles that we have outlined. The key difference was their application tothe facts. Mr Dalkie submitted that the deposit of $1.25 million, which ultimatelyreduced Whitford's debt to ANZ, was a benefit to Whitford and was properly dealtwith in the accounting for the $10,014,956 price for the Whitford Land. He submittedthat it was not right to regard the deposit paid by Mr Hayhow under the Initial TenderAgreement as money that was already lost. It was wrong for the Judge to say thatcrediting Coumat with the benefit of the deposit was of no value to Whitford.15 It wasof value, because ANZ was not entitled to apply the forfeit deposit to the mortgagedebt without Mr Hayhow's permission. Furthermore, if Whitford got the benefit ofboth the deposit under the Initial Tender Agreement and the deposit under theSubstitute Private Treaty Agreement, it was being unjustly enriched.The Initial Tender deposit[37] It is necessary to consider the nature of the $1.25 million deposit paid underthe Initial Tender Agreement by Mr Allen, using funds provided by Mr Hayhow andhis wife. Under cl 4.2 of the Initial Tender Agreement ANZ's solicitors,Buddle Findlay, would hold the deposit as stakeholder until settlement was completedin accordance with the provisions of the Agreement. It was stated in cl 4.7: "If thiscontract is cancelled as a result of the Successful Tenderer's default, the deposit plusinterest as provided in clause 4.9 will be forfeited to the Vendor." Clause 4.9 went onto provide that the party to whom the deposit was ultimately distributed, either onsettlement or in accordance with the conditions of the tender document, would also beentitled to interest accrued thereon, if any, less withholding tax and less stakeholder'scommission which would not be more than five per cent of the gross interest received.15 Whitford Properties Ltd (in liq) v Bruce, above n 2, at [95].[38] The Buddle Findlay receipts for the deposit of 16 and 17 April 2014 showedthat the deposit was paid to that firm directly by G and N Hayhow for: credit of deposit funds re mortgage sale to Wayne Allen (WhitfordProperties) being part deposit paid to Buddle Findlay as stakeholder onaccount of Wayne Ramon Allen as successful tenderer in respect of ANZmortgagee sale tender of Whitford Properties.[39] It is important to record what is readily apparent: the $1.25 million deposit waspaid in the name of Mr Allen. Mr and Mrs Hayhow provided the funds that were usedas Mr Allen's deposit, but Mr Allen was the purchaser, and it was his deposit. Thesum fell under the provisions of cl 4.7 of the Initial Tender Agreement and on defaultwas forfeited to ANZ.[40] In fact, as we have set out, there was a default and ultimately the Initial TenderAgreement with ANZ was cancelled on 23 July 2014. The deposit was forfeit in termsof that Agreement. This was recognised by Mr Hayhow's lawyers, Barter & Co.Shortly before the cancellation in their letter to Alexander Dorrington, who acted forMr Allen, they stated on behalf of Mr Hayhow:We refer to [Mr Hayhow's loan of the deposit monies to Mr Allen] simplybecause in the event ANZ should purport to cancel the tender contract and notreturn Greg Hayhow's $1.25m legal proceedings would arise.We interpret this as meaning that if the Initial Tender Agreement was cancelledbecause of a failure to settle and the deposit was forfeit, Mr Hayhow would sueMr Allen for the sum advanced. This position is consistent with later steps taken byMr Hayhow to sue Mr Allen for the deposit.[41] Thus at the moment of cancellation on 23 July 2014 the deposit was forfeit andcould be retained by ANZ. However, ANZ could not retain it for its own benefit. Itwas part of the proceeds arising from the sale by a mortgagee of mortgaged propertyand had to be applied under s 185(1)(d) for payment of amounts owed under themortgage. It could not be retained by ANZ for its private benefit or paid to any thirdparty. That would be a breach of trust. It followed that at the moment of forfeiturethe mortgage indebtedness was reduced by the $1.25 million deposit amount.[42] Mr Dalkie argued that, once the Initial Tender Agreement was cancelled, ANZcould only have returned that money to the Hayhows. It could not apply the forfeitdeposit to Whitford's debt. Presumably he based this submission on the fact that theHayhows had provided the money for the deposit. However, they had paid the moneyin the name of Mr Allen as purchaser, as the Buddle Findlay receipts recorded. Oncecredited on that basis, ANZ held the deposit under the Initial Tender Agreement asstakeholder. It had sold the property to Mr Allen, and had not accepted the depositmonies on trust for the Hayhows. It had accepted it under the contractual provisionsof the Initial Tender Agreement with Mr Allen. ANZ, as stakeholder while the InitialTender Agreement was extant, had duties to Mr Allen as the other party. It owed noduties to the Hayhows.[43] However, once Mr Allen failed to settle and the Initial Tender Agreement wascancelled, ANZ had no further contractual obligations to Mr Allen and could retain thedeposit. At that point, pursuant to the equitable duties that we have outlined, ANZ wasobliged to apply the deposit in the same way as it would have applied any proceeds ofa sale of security; in reduction of the mortgage. This is ultimately what it did when itrecorded the deposit as having been applied to the mortgage in its settlement statementof 4 August 2014.[44] The receipt of the $1.25 million can be seen as a legitimate benefit enjoyed byWhitford and not as a gratuitous windfall. The deposit had been a pledge for theperformance of the Initial Tender Agreement, and can also be seen as an aspect of theprice of the option to obtain the sale.16 Mr Allen had expressly agreed to the forfeitureupon failure to settle when he signed the Initial Tender Agreement. Whitford had, afterall, lost the benefit of the sale, and Mr Allen had not honoured his pledge. Theforfeiture was compensation for this failure, provided for in the contract. Theforfeiture of the deposit was also of benefit to ANZ, which had the sums it was owedreduced by the deposit amount of $1.25 million. Nevertheless, if ANZ attempted againto sell to recover the still considerable outstanding balance, its duty to obtain the bestprice reasonably obtainable remained, namely to repay the reduced debt and pay anysurplus to the mortgagor.16 See the discussion concerning deposits and unjust enrichment below at [54]–[56].[45] In our view s 185 obliged ANZ to account to Whitford for the forfeit deposit,irrespective of the fact that the deposit was funded by the Hayhows. Section 185 isdirected to the proceeds "arising from the sale by a mortgagee of mortgage property".There was for a period a sale to Mr Allen under the Initial Tender Agreement, and thedeposit was proceeds from that sale. It does not matter that this sale did not proceedto settlement. Further, as we have outlined, a concurrent duty to apply the purchaseprice in reduction of the debt arose in equity in relation to the proceeds, and the dutywas not limited only to sales that proceeded to a settlement. It applied also to salesthat did not proceed, but from which funds became available to the mortgagee.17Steps taken by Mr Hayhow[46] Following the cancellation of the Initial Tender AgreementMr and Mrs Hayhow undoubtedly had a right of action against Mr Allen for the$1.25 million they had provided to him for the deposit. Indeed, Mr Hayhow formallysought to join Mr Allen to this proceeding as an additional party. The application wascontested, and was determined by Associate Judge Doogue who refused to join MrAllen.18 The Judge recorded:[15] By his third party claim, Mr Hayhow appears to be alleging that hepaid the $1.25 million to the bank which forfeited that amount when the jointventure did not proceed as a result of the failure of Mr Allen to obtain thenecessary finance. He further apparently claims that if he is required toaccount for the proceeds of sale as a mortgagee, he will be required to pay the$1.25 million a second time, in effect. The $1.25 million is over and abovethe figure which was owing to and paid to the bank. Therefore, ANZ, as theinitial mortgagee, obtained an advantage to that extent. Mr Hayhow and theother assignees of the mortgage from the bank, similarly, must account to themortgagor for any money received under the mortgage which exceeds theamount the mortgagor owed to the bank, it is alleged. Mr Hayhow wants torecover that sum from the proposed third party.[47] It can be seen that, at that stage, Mr Hayhow was taking at least an alternativeposition that the deposit was forfeit. He sought compensation for the deposit amountfrom Mr Allen on the basis of Mr Allen's failure to settle the sale under the InitialTender Agreement. Further, on 31 July 2014 Mr Hayhow had signed an instructionconfirming that he did not dispute or challenge the forfeiture of the deposit to ANZ:17 As best as we can understand the respondent's notice to support the judgment on other grounds,this conclusion encompasses that other ground.18 Whitford Properties Ltd (in liq) v Bruce [2016] NZHC 58. pursuant to the cancellation of the sale and purchase agreement or theapplication of such funds by ANZ Bank New Zealand Ltd in reduction of theindebtedness of the mortgagor, Whitford Properties Ltd, to ANZ BankNew Zealand Limited.[48] However, after the collapse of the Initial Tender Agreement Mr Hayhow wasplainly of the mistaken view that he should be able to recover the lost deposit not fromMr Allen directly but by treating it as a credit to the fair market price of theWhitford Land. He deposed:Despite the Substitute Private Treaty Agreement stating that the gross saleprice included the 'deposit' of $2,560,054 comprised of the $1,310,054 beingowed by Mr Bruce to me and the forfeited deposit of $1,250,000, there wasnever any intention by Coumat or myself to make cash payment of theDisputed Funds under the agreement to purchase the property. Theamendments were a notional record only as Mr Bruce required that the debtbe forgiven, and the document was intended to recognise that, the $1,250,000having been paid and applied already in reduction of [Whitford's] mortgagedebt.[49] The attitude of Mr Hayhow and Mr Bruce to the arrangement is encapsulatedin this statement by Mr Hayhow:It was never my intention to pay more than the ANZ mortgage debt which wasreduced by my $1,250,000 tender deposit paid to them. The amendmentsmade to our Private Treaty Agreement and reflected in the Substitute PrivateTreaty Agreement were simply a record of Mr Bruce and my arrangement inrespect of the debt he owed me and the Deposit that I had paid. I had nodiscussion with Mr Bruce as to any expectation that I pay more for theWhitford Property than the ANZ mortgage debt. I would have refused to doso as it is an absolute nonsense for me to pay an additional $2,560,054 (beinghis debt of $1,310,054 and the deposit of $1,250,000) to Mr Bruce to then payto [Whitford] when they were in fact amounts due to me. Nor do I think for amoment that Mr Bruce has any expectation that a further cash sum would bepaid.[50] These statements show Mr Hayhow's lack of understanding that the deposithad already been lost by Mr Allen, and could only be recovered by action against him.Mr Dalkie argued in response that as matters unfolded there was in fact no sale inrespect of the Initial Tender Agreement for which the $1.25 million was paid. TheAgreement was cancelled and ANZ could not retain the money. It had to be returnedto Mr Hayhow. He sought to rely on Mr Hayhow's instruction to ANZ on 31 July 2014stating in respect of the $1.25 million deposit:1. we assert no claim to such funds (or any interest in relation to thosefunds): and2. we do not dispute and will not challenge the forfeiture of such fundsto ANZ Bank New Zealand Limited pursuant to the cancellation ofthe sale and purchase agreement or the application of such funds byANZ Bank New Zealand Limited in reduction of the indebtedness ofthe mortgagor, Whitford Properties Limited, to ANZ BankNew Zealand Limited.[51] Mr Dalkie submitted that, by seeking Mr Hayhow's permission to apply theforfeit deposit to the mortgage debt, ANZ acknowledged that it was not entitled to doso without that permission. In fact, Mr Hayhow had no basis on which to unwind theforfeiture. It had already happened and lawfully so, in accordance with theunchallenged provisions of the Initial Tender Agreement. The monies had been forfeitfrom the moment of cancellation on 23 July 2014. Mr Hayhow could notretrospectively instruct ANZ to return the deposit and deprive Whitford of the benefitof the reduction of its indebtedness. As it turned out, the forfeiture was a benefit forWhitford, but one to which it was fully entitled by virtue of the cancellation of theInitial Tender Agreement.[52] Thus the $1.25 million could not be treated by Mr Bruce and Mr Hayhow asforming part of the consideration provided in relation to the purchase price for theWhitford Land under the Substitute Private Treaty Agreement. It could not be sotreated because it was already a credit against the mortgage, to the benefit of Whitford.As a further point, if the logic of Mr Dalkie's argument was correct, then it was notCoumat that could claim the credit, as it did under the Substitute Private TreatyAgreement. If the deposit was not forfeit, it would have been refundable to theHayhows who had paid it on behalf of Mr Allen, and not Coumat, which had noinvolvement whatsoever in the Initial Tender Agreement.The $1,310,054[53] These principles apply equally to the credit of $1,310,054 that Coumatreceived under the Substitute Private Treaty Agreement in exchange for Mr Hayhowforgiving Mr Bruce's unsecured personal debt. Indeed, Coumat did not seek to argueotherwise in respect of that sum. Mr Bruce was essentially obtaining a personal benefitfor himself in having the debt of $1,310,054 repaid, effectively at the cost of Whitford,which was deprived of that amount. Mr Hayhow was also indirectly getting a benefit,in that his company Coumat was receiving a credit for the unsecured and perhapsotherwise irrecoverable money that he and Mrs Hayhow were owed by Mr Bruce(including a huge interest component).Unjust enrichment[54] Mr Dalkie argued that there was a claim of unjust enrichment available to theHayhows. If the $1.25 million was treated the way it had been treated by Duffy J inher judgment, Whitford had benefited by receiving monies to which it had no claim atthe time they were received. He relied on the following statement from Goff & Jones:The Law of Unjust Enrichment:19Since contractual provisions governing payment for a benefit will implicitlydisplace a claim for unjust enrichment in respect of that benefit, carefulanalysis may be needed in order to ascertain whether the benefit in questionfalls within the contract.[55] Unjust enrichment was not pleaded as a set-off or counterclaim in theHigh Court, and Mr Black objected to it being raised on appeal. We deal with it briefly,as there is no merit in this argument. Plainly the time honoured contractual provisionenabling the forfeiture of a 10 per cent deposit does not give rise to a claim for unjustenrichment, as the learned authors of Goff & Jones recognise in the above quote. Thefunction of deposits was stated by Fry LJ in Howe v Smith:20[A deposit is] an earnest to bind the bargain so entered into, and creates by thefear of its forfeiture a motive in the payer to perform the rest of the contract.[56] There is nothing unjust in parties agreeing, as part of a commercial contract, toa set sum as the penalty for a failure to settle. The deposit can be seen as a pledge forthe performance of the contract.21 Its primary purpose is to guarantee that the purchasewill go ahead.22 It is also an aspect of the price of the opportunity to obtain the sale.2319 Charles Mitchell and others (eds) Goff & Jones: The Law of Unjust Enrichment (9th ed, Sweetand Maxwell, London, 2015) at [3–35].20 Howe v Smith (1881) 27 Ch D 89 at 101.21 Garratt v Ikeda [2002] 1 NZLR 577 (CA) at [34].22 Soper v Arnold (1889) 14 App Cas 429 (HL) at 435, quoted in Garratt v Ikeda, above n 21, at [35].23 See Peter Watts "Forfeiture of Deposits: Enforcing Agreements" [2002] NZ L Rev 19 at 24. It isnot necessary for us to consider the academic debate on the correctness of Garratt v Ikeda: seeD W McLauchlan "Forfeiture of Deposits: Punishing the Contract Breaker" [2002] NZ LawReview 1; D W McLauchlan "Forfeiture of Deposits: A Reply" [2002] NZ Law Review 33;When a purchaser defaults there is nothing unjust in it having to meet this contractualpledge, to which it has expressly agreed. Mr Allen must be taken as having knownand intended that if he defaulted the deposit would be forfeit. The amount of10 per cent is the standard for such contracts.24 Insofar as the vendor, or in this casethe mortgagor, obtains a benefit, it is a contractual benefit to which it is directly entitledin the case of the vendor, and indirectly entitled in the case of the mortgagor. There isno injustice.Conclusion on Mr Bruce's duties[57] It follows that we agree with the decision of Duffy J that Mr Bruce breachedthe mortgagee's duty to account for the surplus proceeds from the mortgagee sale, sofar as he accepted a credit of a total of $2,560,054 as the deposit under the SubstitutePrivate Treaty Agreement, which he did not make available to Whitford. To thecontrary, in respect of the $1.25 million, Coumat got a $1.25 million credit it had notearned or paid for. The deposit paid by Mr Allen under the Initial Tender Agreementwas contractually forfeit, and it could not be appropriated by Mr Bruce and Coumatin a later sale.[58] In respect of the $1,310,054, Mr Bruce and Mr Hayhow received the benefitof the money: Mr Bruce's personal debt was forgiven and Mr Hayhow (throughCoumat) obtained repayment of the unsecured and doubtful debt owed by Mr Bruce.Together, the credit for these amounts reduced the price that should have been paid forthe Whitford Land. Mr Bruce breached his s 185 and equitable duties in treating the$2,560,054 as already paid (and therefore a credit available to Coumat), rather thanrequiring payment of the full sale price.Liability of Mr Hayhow and Coumat for knowing receipt or dishonest assistance[59] It is not necessary to consider this issue in detail, as Mr Dalkie accepted that,if Mr Bruce was in breach of trust, Mr Hayhow was liable for dishonest assistance.Brian Coote "Unpaid Deposits and the Contractual Remedies Act 1979" (2002) 8 NZBLQ 142;and Andrew Geddis "Garratt v Ikeda" (2002) 18 JCL 250.24 Garratt v Ikeda, above n 21, at [40].[60] For a stranger to be personally liable under the doctrine of knowing receipt ordishonest assistance there must have been a breach of trust or other fiduciaryobligation.25 As Smellie J outlined in Equiticorp Industries Group Ltd v The Crown,there are three necessary elements for a claim of knowing receipt and accessoryliability.26 First, the plaintiffs must show a disposal of funds by a person owing afiduciary duty to them in breach of that fiduciary duty or on some other unauthorisedbasis. Second, the defendant must receive the benefit of those funds. Third, theremust be knowledge by the defendant that the payment was in breach of the fiduciaryduty or other unauthorised act. That knowledge is assessed objectively, and is notdependent on subjective dishonesty.[61] Plainly all three elements exist here in relation to Coumat. First, Mr Bruceagreed to a payment structure for the Whitford Land whereby the $2,560,054 depositwas not paid and not available to Whitford, in breach of trust. Second, Coumatreceived the benefit of that breach of trust in the form of a reduced purchase price forthe Whitford Land. While no monies were received by Coumat, Coumat got monies'worth in that it was given a credit on a purchase where the sale price was at marketvalue. Coumat had contrived a situation where it purchased at an under-value atWhitford's expense. Third, Coumat, through its director Mr Hayhow, knew that thecredit involved appropriating the deposit for itself, and it was for monies that wouldotherwise go to paying off the mortgage, with the surplus going to Whitford.[62] In relation to Mr Hayhow, he did not directly receive the benefit, but he is liablefor knowing assistance. As was stated by Lord Nicholls in Royal Brunei Airlines vTan:27Stated in the simplest terms, a trust is a relationship which exists when oneperson holds property on behalf of another. If, for his own purposes, a thirdparty deliberately interferes in that relationship by assisting the trustee indepriving the beneficiary of the property held for him by the trustee, thebeneficiary should be able to look for recompense to the third party as well asthe trustee.25 Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555 (Ch) at 1579; WestpacBanking Corp v Savin [1985] 2 NZLR 41 (CA) at 52; and Equiticorp Industries Group Ltd v TheCrown [1998] 2 NZLR 481 (HC) at 540.26 Equiticorp Industries Group Ltd v The Crown, above n 25, at 540.27 Royal Brunei Airlines v Tan [1995] 2 AC 378 (PC) at 386.[63] As we have set out, Mr Hayhow knew of the facts constituting the breach offiduciary duty. He knew of the credit to his company, Coumat. He was its directorand sole shareholder. In negotiating the arrangement and implementing it for Coumatat the expense of Whitford, he was, objectively assessed, dishonest. It was plain thatin obtaining payment of Mr Bruce's debt to him personally (the bulk of which wasinterest at 400 per cent) he was getting a credit at the expense of Whitford, which itwould have otherwise received as funds. While he may not have understood the lawrelating to deposits, looking at the matter objectively he should have known thatWhitford already had the benefit of the forfeit deposit on the Initial Tender and hecould not escape his obligation to pay the $1.25 million by offsetting his loss.[64] It follows that we agree with Duffy J's conclusions that Mr Bruce had breachedtrust, that Coumat knowingly received and enjoyed the surplus proceeds of the sale,and that Mr Hayhow dishonestly assisted Mr Bruce in his breach of trust.28 Whitfordhas proven this aspect of its claim.29Conclusion[65] We uphold the Judge's decision.[66] We decline the application to adduce new evidence. The proposed newevidence was to the effect that the Whitford Land had been on-sold by Coumat in late2016 for a price in the vicinity of $22 million or more, a great profit. However, giventhat it is agreed that when the Whitford Land was sold the best price reasonablyobtainable was the $10,014,956 sale price, evidence of later sales is irrelevant.Result[67] The application for leave to adduce further evidence is declined.[68] The appeal is dismissed.28 Whitford Properties Ltd (in liq) v Bruce, above n 2, at [112] and [116].29 Given our conclusion there is no need for us to deal specifically with a notice of the respondent tosupport the decision appealed from on another ground. As best we can understand the notice, ourdecision does, in any event, uphold the decision on that new ground. See above n 17.[69] The parties accept that costs must follow the event. The appellants must paythe respondent costs for a standard appeal on a band A basis and usual disbursements.Solicitors:Inder Lynch, Papakura for AppellantsAlexander Dorrington Lawyers, Auckland for Respondent