IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE	
CIV 2018-404-1910
[2018] NZHC 2512	

BETWEEN	CORONATION GARDENS LIMITED
Applicant	
AND	SMALL (2005) LIMITED
First respondent

THE GOLDEN BELT MINING CO LIMITED
Second respondent	

Hearing:	24 September 2018	
Appearances:	M G Colson for the applicant
MJW Lenihan for the respondents	
Judgment:	26 September 2018	

JUDGMENT OF JAGOSE J

This judgment was delivered by me on 26 September 2018 at 12:00 p.m. pursuant to r 11.5 of the High Court Rules 1985.

Registrar/Deputy Registrar

……………………………………

Solicitors / Counsel:
Mr M G Colson, Barrister, Wellington
Mr F B Collins, Gibson Sheat, Solicitors, Wellington Mr MJW Lenihan, Barrister, Wellington
Mr J Brown, Brown Partners, Solicitors, Auckland

CORONATION GARDENS LTD v SMALL (2005) LTD [2018] NZHC 2512 [26 September 2018]

[1]	In this proceeding, the applicant (“Coronation Gardens”) alleges sale of its land to the second respondent (“Golden Belt”) was in breach of duties had by the first respondent (“Small”) as mortgagee.

[2]	Those duties arise in equity, and under s 176 of the Property Law Act 2007, which requires a mortgagee exercising a power of sale to “obtain the best price reasonably obtainable”. The breaches relate to Small allegedly:

(a)	transferring the land to a related party at under value;

(b)	failing to pursue Coronation Gardens’ indication of another potential purchaser; and

(c)	preventing Coronation Gardens’ redemption of its mortgage to Small.

[3]	On the present application, Coronation Gardens seeks interlocutory orders restraining Small and Golden Belt from dealing with the land. Coronation Gardens’ counsel, Michael Colson, emphasised the injunction was only ‘until further order of the Court’. He anticipated circumstances may change in advance of trial such as justified its discharge, and articulated supplementary orders granting Small and/or Golden Belt leave to apply to set the injunction aside, or for it to lapse after a period if Coronation Gardens is liquidated (as presently seems inevitable).

Background

[4]	Coronation Gardens’ sole director and shareholder is Saren Loo; the respondents’ sole director and shareholder is Timothy Edney. Together with Ms Loos’ partner, Neville Mahon, the three have worked together on a variety of development projects, including investing in each other’s developments, and buying and selling developments between each other. The present arrangements are illustrative.

[5]	Coronation Gardens acquired the land, comprising three titles at 117 Coronation Road in Auckland’s Mangere, from Small in 2014 for $14.6 million. It financed the purchase with funding from the Bank of New Zealand, secured by a first-

ranking mortgage over the land. Coronation Gardens intended a large-scale housing development on the land. It raised funds from Small for the proposed development in two tranches – respectively, of $11.6 million and $3 million – secured by second- ranking mortgage over the land (the former tranche also personally being guaranteed by Mr Mahon).

[6]	The development progressed by obtaining resource consents, building roads and other infrastructure, and constructing and selling over 20 terraced townhouses. It appears Coronation Gardens’ arrangements for payment of GST on sale ceased at some point after it ran into financial difficulties, such sums instead going to meet its debt to the Bank of New Zealand. Coronation Gardens also defaulted on its $3 million loan to Small.

[7]	In May 2017, the Bank of New Zealand sought repayment of Coronation Gardens’ outstanding debt. In June 2017, Small acquired the Bank’s debt and securities, and sought Coronation Gardens’ repayment of the debt and its own loans. When those were not met, Small took steps in July 2017 to market the land for sale by tender as a “mortgagee sale”.1 Small relied on a proposal from the real estate agency, CBRE Ltd, which anticipated a “likely realisation” of $18 million to $20 million.

[8]	Although the tender process obtained over 120 expressions of interest, and seven offers ranging from $6.4 million to $14 million, it secured only one unconditional offer at $9 million. Mr Edney doubted the bona fides of another conditional offer at $17.3 million, but ultimately it was accepted. In the event, despite an extension of time, the required $1 million deposit was not paid, leading to Small’s cancellation of the agreement in March 2018. (For completeness, Coronation Gardens did not take up Small’s invitation to submit an informed back-up offer, and a highly conditioned expression of interest from a third party at $22 million was not formalised as an offer.)

[9]	Also in March 2018, the Commissioner of Inland Revenue served a statutory demand on Coronation Gardens for over $730,000. It has since issued liquidation

1	Coronation Gardens unsuccessfully challenged that process: Coronation Gardens Ltd v Small (2005) Ltd [2017] NZHC 1662.

proceedings against Coronation Gardens, to be heard in mid-August 2018 (but now later this week). Coronation Gardens’ only asset was the land.

[10]	CBRE conducted a second tender campaign in May 2018, resulting in only one conditional offer at $7 million, and expressions of interest (which were never formalised as offers) for prices at $8 million, $10 million to $12 million, or an unspecified amount. Disappointed by the tenders’ results, Mr Edney contemplated setting up a separate company to acquire the land. He obtained a fresh valuation of the properties, at a combined $16.85 million (or $14.32 million on their forced sale); or ‘in one line’ at $13.67 million (or $11.62 million on its forced sale).

[11]	On 26 July 2018, Coronation Gardens advised Small it had “obtained a refinancing proposal … [which] may operate by way of purchase of the property”. Coronation Gardens sought a settlement statement from Small. Mr Edney thought the indeterminate and unevidenced proposal “may be a stalling tactic”. The proposal was raised again with Mr Edney in his 1 August 2018 meeting with Mr Mahon, who advised the funding would come from Gleneagles Securities (with whom Mr Edney knew Mr Mahon was familiar). Mr Mahon stressed the proposal was required urgently to address the Commissioner’s liquidation application.

[12]	As mortgagee, Small sold the properties to Golden Belt (incorporated on 30 July 2018) for $11.75 million. The sale was formalised on 1 August  and settled on  3 August 2018, but Mr Edney says the decision to sell to his separate company was made “around the middle of July 2018”. The proceeds were applied to reduce Coronation Garden’s indebtedness to Small.

[13]	On 8 August 2018, Small’s (and now Golden Belt’s) solicitors advised Coronation Gardens’ solicitors of the sale, and offered the properties back to Coronation Gardens for $17.25 million. Mr Edney describes the price as an approximate $500,000 “discount to [Coronation Gardens’] actual indebtedness”, although the correspondence did not expressly propose settling that liability.

[14]	Golden Belt now intends to sell the properties “as soon as it can for the best price that it can”. It acknowledges the sale price may be less than the properties were

sold to Golden Belt (to Coronation Gardens’ and Mr Mahon’s benefit). It invites Coronation Gardens’ best offer.

[15]	Coronation Gardens’ present application is to prevent such sale or other dealing, except under this Court’s scrutiny on Golden Belt’s application to be relieved of the orders sought. That is said to be because the “primary” remedy for breaches of mortgagees’ duties on sale is “as a general rule … to set aside the sale and restore to the borrower the equity of redemption”.2

Applicable legal principle

[16]	Interim injunction applications are determined on the basis of whether the plaintiff has a serious question for trial, and whether the balance of convenience and overall interests of justice favour granting the injunction.3 On the latter consideration(s), the question is whether refusing the injunction would be harder on a plaintiff who was successful at trial, than would granting it be on the successful defendant.4 This assessment is undertaken by reference to the adequacy of damages, preservation of the status quo, the uncompensatable disadvantages to either party, and the relative strengths of their cases.5

A serious question for trial?

[17]	Mr Colson emphasises well-trodden precedent to the effect a mortgagee purporting to exercise a power of sale to sell to a related party bears the burden of proving the transaction was conducted in good faith (and this includes obtaining the best price reasonably obtainable).6 He points to the circumstances and timing of the sale, in conjunction with Coronation Gardens’ request for a settlement statement, and the price, as raising questions for serious argument at trial (on which Small carries the onus).

2	Apple Fields Ltd v Damesh Holdings Ltd [2001] 2 NZLR 586 at [52].
3	American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL); and Klissers Farmhouse Bakeries Ltd
[1985] 2 NZLR 129 (CA).
4	Wellington International Airport Ltd v Air New Zealand Ltd HC Wellington CIV-2007-485-1756, 30 July 2008 at [4] citing Kane v Global Natural Resources Plc [1984] 1 All ER 225 (CA) at 237.
5	Wellington International Airport Ltd v Air New Zealand, above n 4, at [6]-[14].
6	Apple Fields Ltd v Damesh Holdings Ltd, above n 2, at [51]; and Coltart v Lepionka & Co Investments Ltd [2016] NZCA 102, [2016] 3 NZLR 36 (CA) at [57].

[18]	In reliance on other appellate judgments,7 counsel for Small and Golden Belt, Michael Lenihan, responds the obligation is not to obtain the best price reasonably obtainable, but to take reasonable care to do so, and on that basis the sale process – conducted under expert advice – is unassailable. He points to the irrelevance of valuations, and the results of the tender process, as establishing sale to an unrelated third party on the second tender’s $7 million would have been uncontestable, as Small had no duty to obtain a better price.8 He notes Coronation Gardens’ failure throughout to establish any reasonable financial foundation for its contended redemption.

[19]	I accept (but only just) there is a serious question for trial, being at least whether Small exercised its sale powers in good faith. It may be there is more to be seen than presently is obvious, but the substantial margin in sale price over market offers may suggest something either was not known to the market, or is comprehended by Small and/or Golden Belt, and possibly at Coronation Gardens’ expense. I cannot take the point any further on interlocutory fact-finding. It is a matter for trial.

Balance of convenience and overall justice?

[20]	In its present circumstances of insolvency, Coronation Gardens’ right of redemption can only be to enable sale of the land to meet its liabilities. Although there is argument about the size of those liabilities (and in particular whether Small, not a registered financial services provider, is entitled to charge interest), there is no evidence any residual equity in the land is sufficient to avoid its sale. While the right to redeem a mortgage may have independent value in unencumbering one’s own land, such that the ‘general rule’ is to set aside the impugned transaction, Coronation Gardens has no alternative to sale.

[21]	Damages are thus an adequate remedy, if Coronation Gardens succeeds at trial. In that respect, the balance favours refusing the application. Conversely, maintenance of the status quo – the last settled position between the parties, before the impugned transaction took effect – favours granting the application. Any delay in issuing the

7	Gardiner v Westpac New Zealand Ltd [2014] NZCA 537, [2015] 3 NZLR 1 at [85] citing Long v ANZ National Bank Ltd [2012] NZCA 132 at [21(a)].
8	Public Trust v Ottow (2009) 10 NZCPR 879 at [17(c)].

proceeding does not seem to have benefitted Coronation Gardens, or prejudiced Small and/or Golden Belt.

[22]	But then there is insolvent Coronation Gardens’ mandatory undertaking as to damages, which to be meaningful should at least have been extended on the basis of the funding contended to be available to Coronation Gardens. I do not accept this may be disregarded, as Mr Colson contended, by analogy with a plaintiff’s security for costs when their impecuniosity is caused by the defendant. Here, Coronation Gardens defaulted on its liabilities to the Bank of New Zealand and to Inland Revenue, as well as to Small, well before Small took any action to enforce its securities.

[23]	Last, the relative strength of the parties’ cases on the affidavit evidence favours refusing the application. That is because, although Coronation Gardens has established there is a serious question for trial, it has not been able to show there is any particular likelihood of its success.

[24]	Standing back, on balance, the overall interests of justice favour refusing the application: if successful at trial, Coronation Gardens has not established it requires resort to the land for other than its realisation for funds, for which damages are an adequate remedy; if not successful at trial, Coronation Gardens’ undertaking is inadequate to compensate the respondents for any loss incurred by reason of the injunction. And such loss is at least likely.

Result

[25]	Coronation Gardens’ application is dismissed.

Costs

[26]	In my preliminary  view,  Small  and  Golden  Belt  are  entitled  to  costs.  Mr Lenihan claims costs on a solicitor/client basis in terms of the assigned Bank of New Zealand agreement, as applied by Gordon J in the earlier proceeding.9 On the basis Golden Belt’s involvement incurred no additional expense, I would allow similarly here.

9	Coronation Gardens Ltd v Small (2005) Ltd, above n 1, at [12].

[27]	If that is not accepted by any party, and costs cannot otherwise be agreed between them, costs are reserved for determination on short memoranda of no more than five pages to be filed and served by:

(a)	Coronation Gardens within ten working days of the date of this judgment;

(b)	the respondents within five working days of service of Coronation Garden’s memorandum; and

(c)	Coronation Gardens strictly in reply within five working days of service of the respondents’ memorandum.

Jagose J