IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2012-409-000182 [2013] NZHC 297

BETWEEN	FINANCE AND LEASING LIMITED (IN RECEIVERSHIP)
Plaintiff

AND	ASHGROVE HOLDINGS CHRISTCHURCH LIMITED First Defendant

AND	HAREWOOD FARMING TRUSTEE COMPANY LIMITED
Second Defendant

Hearing:	18, 19 and 20 February 2013

Appearances: J E Bayley for Plaintiff
G M Brodie for First Defendant
No Appearance for Second Defendant

Judgment:	21 February 2013

ORAL JUDGMENT OF CHISHOLM J

[1]       This  proceeding  revolves  around  a  first  mortgage  in  favour  of  the  first defendant (Ashgrove) over a block of land at Conservators Road on the outskirts of Christchurch (the Conservators Road  land).   This land is owned  by the second defendant (Harewood) who is, of course, the mortgagor.  The plaintiff (Finance and Leasing)  is  the  second  mortgagee  of  the  same  block  of  land.    Harewood  has defaulted under both mortgages.

[2]       Through its receivers Finance and Leasing seeks a declaration that advances by Ashgrove amounting to approximately $340,000 are not secured by the first mortgage over the Conservators Road land.  Ancillary orders are also sought.   By way of counterclaim Ashgrove seeks judgment  against Finance and  Leasing for
approximately $340,000 plus interest and costs.  Harewood has not taken any steps.

FINANCE AND LEASING LIMITED (IN RECEIVERSHIP) V ASHGROVE HOLDINGS CHRISTCHURCH LIMITED HC CHCH CIV-2012-409-000182 [21 February 2013]

[3]       Before the proceeding was issued an impasse had developed between the receivers of Finance and Leasing and Ashgrove about whether the first mortgage secured the advances that had been made by Ashgrove.  An offer by a third party to purchaser the Conservators Road land was on the table and the receivers wanted to accept it.   Ashgrove declined to release its mortgage so the receivers sought an mandatory interlocutory injunction requiring the mortgage to be released.

[4]       This interlocutory application came before French J on 9 March 2012.  Part way through the hearing consent orders were made.   These enabled the sale to proceed on the basis that $650,000 was paid into a stakeholders’ trust account.  This amount is more than enough to cover the amount that will be payable to Ashgrove if its counterclaim succeeds.

Background

[5]       For around 27 years Finance and Leasing successfully operated as a finance company.  It was profitable and there were no defaults.  Kipp Alexander, a chartered accountant in public practice, is the principal shareholder and director of Finance and Leasing.  He gave evidence.

[6]       Like  most  finance  companies,  Finance  and  Leasing  began  to  experience liquidity problems in early 2009.  This reflected the global financial crisis rather than any inadequacy in the management of the company.  Kipp Alexander approached his brother, Pita Alexander, for assistance.

[7]       Pita Alexander is also a chartered accountant in public practice.  His son, Paul Alexander, another chartered accountant, is part of the same practice.   Paul gave evidence on behalf of his father and himself.  Their practice is entirely independent of  Kipp’s  practice,  and  vice  versa.    They  had  no  involvement  in  Finance  and Leasing.

[8]       It  was  agreed  that  Pita Alexander’s  family  would  inject  $2  million  into Finance and Leasing.  Although this was a relatively complex transaction involving the acquisition of both assets and the issue of redeemable preference shares, the

details are of no immediate relevance to this proceeding.   Suffice to say that the transaction  was  fully  documented  and  later  implemented  by  the  injection  of
$2 million  from  Pita  Alexander  and  his  family.    This  injection  was  made  via Ashgrove which had been formed for this purpose.  Pita’s family are the beneficial owners of the shares.

[9]       By   the   beginning   of   2010   the   situation   had   been   reached   where Kipp Alexander required further assistance from his brother.  It is this assistance that lies at the heart of this proceeding.   Pita was not prepared to make any further advances unless they were secured.

[10]     On  28  January  2010  Kipp  Alexander  emailed  his  proposal  to  Pita  and

Paul Alexander.  He said:

...

Summary Plan

Ashgrove Holdings Limited has taken a 1st  mortgage over one of the two blocks at McLean's Island, that should have been settled in April 2009 for
$1m.

My plan is to ask you if I need your assistance to put your money into this mortgage.  This mortgage is a revolving credit type mortgage that can have money in and out.  Interest will be paid at 10%.

This would mean you are ahead of Finance and Leasing Limited, who will have the second mortgage.

...

It is common ground that the reference to Ashgrove Holdings Limited at the beginning of this email is a mistake and that it was intended to be a reference to Finance  and   Leasing  Limited.     The  land  being  talked  about   included  the Conservators Road land.

[11]     Pita and Paul Alexander were prepared to go along with Kipp Alexander’s proposal.   In essence this involved Ashgrove funding Finance and Leasing on the basis that Harewood provided the first mortgage security over the Conservators Road land.  Any advances by Ashgrove through Harewood were to come off the amount

owing by Harewood to Finance and Leasing. At that time around $2m was owing to

Finance and Leasing who held a first mortgage over the land.

[12]     Obviously this proposal was only feasible if Harewood was prepared to co- operate.  The principal shareholder and director of Harewood, Martin Mason, gave evidence.   He had worked closely with Kipp Alexander over many years.   By the beginning of 2010 Harewood was in arrears under its mortgage in favour of Finance and Leasing.  Harewood was facing the prospect of a mortgagee sale of the land, and he and Kipp Alexander were endeavouring to resolve the problems they were facing.

[13]     After the proposal had been explained to him by Kipp Alexander Mr Mason was ready and willing to co-operate. All necessary documentation was then prepared and executed.  Amongst other things Ashgrove and Harewood entered into a term loan agreement providing for advances of up to $1.4 million.  The advances were to be secured by a first mortgage (plus other securities that have no immediate relevance) over the Conservators Road land.

[14]     It was recorded at clause 15.1 of the loan agreement that the purpose of the loan was to enable Harewood to reduce its indebtedness to Finance and Leasing.  In that sense Harewood was nothing more than a conduit.  There is no real dispute that Harewood’s obligation to pass the funds on to Finance and Leasing was an integral part of the overall arrangement.

[15]     Both Harewood and Finance and Leasing entered into a memorandum of priority of mortgage which relegated the existing first mortgage in favour of Finance and Leasing to a second mortgage.   This enabled the new mortgage in favour of Ashgrove to become a first mortgage.   All relevant documentation, including the memorandum of priority of mortgage and mortgage, was prepared by Harewood’s solicitors.  In due course the memorandum of priority and mortgage were registered.

[16]     This brings me to the advances in issue.  On 11 February 2010 Ashgrove paid

$350,000 to Finance and Leasing.  This was followed by a payment of $90,000 on

26 February 2010, $134,893 on 17 March 2010 and $25,000 on 30 April 2010.

These payments totalled $599,893.  Each payment was made direct by Ashgrove to

Finance and Leasing.

[17]     On  15 November 2010  Finance  and  Leasing  paid  $259,000  to  Pajama Investments Limited which is an entity belonging to Pita Alexander’s family.  Given that Ashgrove had been the mechanism through which Pita Alexander’s family had made the advances, this was effectively a payment to Ashgrove.  This payment had the effect of reducing the amount owed by Finance and Leasing to Ashgrove to
$340,893.

[18]     Brett Chambers and Paul Munro were appointed receivers of Finance and

Leasing on 18 January 2011.  Mr Chambers gave evidence on behalf of the receivers.

[19]     After they were appointed, the receivers reached the view that the Ashgrove advances to Finance and Leasing were not secured by the first mortgage over the Conservators Road land.  This was essentially because the payments had been made direct from Ashgrove to Finance and Leasing, and not through Harewood.  As the receivers saw it, Ashgrove was only an unsecured creditor.

[20]     Finance and Leasing subsequently went into liquidation.

Issues

[21]     There are three primary issues.

[22]     First, whether the advances are secured by the first mortgage in favour of Ashgrove.   This is a relatively narrow issue revolving around whether the direct payment from Ashgrove to Finance and Leasing deprived Ashgrove of the benefit of the first mortgage.

[23]     Secondly, if the first issue is resolved in favour of Ashgrove, the Court is asked to determine the amount owing under the mortgage.   To a large extent this issue has been resolved, and I am grateful to counsel for their assistance in this regard.

[24]     Thirdly, whether the costs order made by French J against Ashgrove at the interlocutory hearing should be reversed.

[25]     I now deal with each of these issues:

Are the advances secured by the mortgage?

[26]     I begin by considering the purpose of the arrangement and its documentation.

Purpose of arrangement

[27]     It  is  clear  from  both  the  oral  evidence,  which  is  supported  by  the documentary  evidence,  that  the  underlying  purpose  of  the  arrangement  was  to provide a mechanism that would enable Ashgrove to assist Finance and Leasing on a secured basis.  The security was to be a first mortgage over the Conservators Road land.     This  is  the  effect  of  the  evidence  of  Kipp  and  Paul  Alexander  and Martin Mason, all of which I accept.

[28]     To achieve this purpose Harewood had to be part of the arrangement.  I find that it agreed to participate because it would otherwise face a mortgagee sale of the Conservators Road land at the hands of Finance and Leasing.  Apart from that there was, of course, a spirit of co-operation between Kipp Alexander and Martin Mason, both  of  whom  where  endeavouring  to  achieve  an  outcome  that  was  best  for everyone.

Structuring of the arrangement

[29]     In some respects the arrangement that was put in place was unusual, and different people might have structured it in a different way.  But it is a structure that was put in place by the parties to it (Ashgrove, Harewood and Finance and Leasing) that counts.   Under cross-examination Mr Chambers accepted that while he might have done things differently (especially in relation to the accounting aspects) there was nothing illegitimate about these transactions.

[30]     As I have already mentioned, the arrangement required any payment from Ashgrove to Harewood to be immediately passed on by Harewood to Finance and Leasing,  thereby  reducing  Harewood’s  indebtedness  to  Finance  and  Leasing. Kipp Alexander explained that he made direct payment because he did not want anything to happen to the funds as they were passing through Harewood, which I accept was a perfectly legitimate commercial consideration.

[31]     Mr Brodie might be right when he submitted that if payment been made to Harewood, that company would have been holding the money on some sort of trust until such time as it was passed on to Finance and Leasing.   But I do not need to determine that issue.   Suffice to say that I am satisfied that the arrangement was structured in a way that obliged Harewood to immediately pass on the advances to Finance and Leasing and under those circumstances it was perfectly understandable that direct payment was made.

[32]     Now I turn to the mortgage security which is obviously a critical component of the arrangement.

[33]     The mortgage defines the monies that are secured under it:

(a)	In this mortgage, “the secured moneys” means:

(i)         all moneys which are now or at any time in the future owing by  the  party  giving  this  mortgage  or  an  accommodated person to the mortgagee.

...

(ii)	[each and every payment or performance of an obligation:

...

(A)	by  any  accommodated  person,  in  respect  of  any secured agreement.]

...

Provided Finance and Leasing is “an accommodated person”, any money that it owes Ashgrove as mortgagee must be secured under the mortgage in terms of this definition.

[34]    The expression “accommodated person” is also defined in the mortgage documentation:

“accommodated person” means any person:

(i)	with   whom   the   mortgagee   contracts   or   makes   any arrangement; or

(ii)	to whom the mortgagee provides any financial services or facility

for the accommodation of the party giving this mortgage;

“for the accommodation of the party giving this mortgage” means for the accommodation of, at the request of, at the direction of or on account of the party giving this mortgage...

For the reasons that follow I am satisfied that Finance and Leasing is “an accommodated person” as defined.

[35]     When  determining  whether  Finance  and  Leasing  is  an  “accommodated person” it is necessary to look at the whole arrangement.   Clearly Ashgrove has contracted or made an arrangement with Finance and Leasing under (i) of the definition.     Arguably Finance and Leasing also provided financial services or facilities under (ii) of the definition, although it is sufficient that (i) is satisfied.

[36]     But that is not enough.   The second component of the definition “for the accommodation of the party giving this mortgage” requires such accommodation to be for the purpose of accommodating the party giving the mortgage (Harewood). And this needs to be by virtue of a request or direction by Harewood.  I am satisfied that the evidence also establishes this component of the definition.

[37]     It was Kipp Alexander’s evidence that a mortgagee sale of Conservators Road at the hands of Finance and Leasing would be inevitable unless the Ashgrove finance was available to Finance and Leasing.  This was confirmed by Mr Mason who gave evidence that Kipp Alexander had put the matter to him on the basis that if the financing arrangement was put in place Finance and Leasing would not conduct a mortgagee sale at that stage.  Mr Mason also said:

I accordingly instructed Oscar Alpers who was my family solicitor to prepare and register the mortgage and the deed of priority of mortgages and these were signed by [Harewood].

In  other  words,  Harewood  gave  the  necessary  request  or  direction  for  the arrangement to be put in place whereby it would be accommodated in the sense that the mortgagee sale would not proceed at that stage.

[38]     It follows that on the face of the mortgage document Finance and Leasing was an “accommodated person” and the advances to it were secured  under the mortgage.

[39]     I do not accept Mr Bayley’s argument that the actual implementation of the arrangement was outside the terms of the mortgage that I have just discussed.  In my view it would be wrong to read down the scope of the definition of “the monies secured” (and the associated definition of “accommodated person”) because that would deprive the document of its intended commercial purpose.  In my view it was intended  to  cover  the  situation  under  consideration.    Plainly  that  was  also  the intention of all the parties to the arrangement.  Otherwise the whole purpose of the arrangement would be defeated.

Significance or otherwise of the direct payment

[40]     The receivers claim that the direct payment, rather than payment through Harewood, took the transaction outside the mortgage security.  They say that if there was to be direct payment Harewood should have given written authority or, at the very least, an explicit authority for each payment when it was made.  They rely on Sims v Lowe1 and Wadsworth Norton Solicitors Nominee Co Ltd v Edmonds.2

[41]     Sims involved an application to sustain a caveat relying on a mortgage.  The advance had been made through the trust account of a solicitor acting for both parties and the mortgagor denied that the funds had ever been advanced because there had
been effectively a direct payment to a third party.  The High Court held that there

1 Sims v Lowe [1998] 1 NZLR 656 (CA).
2 Wadsworth Norton Solicitors Nominee Co Ltd v Edmonds [1992] 1 NZLR 596.

was sufficient evidence to support the caveat and the caveat was sustained.  In other words, applying the caveats threshold the Court was satisfied that the mortgage could be sustained. An appeal to the Court of Appeal failed.

[42]     In my view that case is easily distinguishable from this case.  Whereas the mortgagor in that case denied that there was authority to make the payment, the evidence of the mortgagor in this case (through Mr Mason) was:

I did not expect to receive the cash myself.  I understood that the monies to be advanced were to be paid to Finance and Leasing Limited so that that debt would be reduced by the corresponding amount.   I authorised both Ashgrove and Finance and Leasing Limited to pay the monies which were advanced against the security of the Harewood land, to Finance and Leasing Limited.  My only concern was that there was no doubling up so that any money that was advanced by Ashgrove was taken off the amount owed to Finance and Leasing.

There could hardly be clearer evidence of an authority for direct payment and no authority requiring this to be in writing was brought to my attention.

[43]     It might also be added that unlike Lowe, where the mortgagor denied that there  had  been  an  advance,  Harewood  does  not  take  that  stance.    Indeed,  the evidence of its director effectively supports Ashgrove’s counterclaim.

[44]     For similar reasons Wadsworth is also distinguishable.   It also involved a solicitor’s trust account and a direct payment.  Again the mortgagor challenged the direct payment.  I also note that two later decisions (Laughton v C N & N A Davies Ltd3 and Helmich and Taylor v Thorp and Strathdee4) appear to express reservations about the conclusions reached in Wadsworth.

[45]       So I do not accept that the decisions relied on by Finance and Leasing support its contention that direct payment had the effect of depriving Ashgrove of its security.

[46]     For completeness I should add that when Ashgrove made each advance to

Finance and Leasing there was a notation, in some cases on the cheque and in others

3 Laughton v C N & N A Davies Ltd HC Auckland Registry CP 576/94, 6 November 1995, Blanchard J.
4 Helmich and Taylor v Thorp and Strathdee [1997] 3 NZLR 86.

on an accompanying document, that made it clear that the particular payment related to Harewood.   Thus, there can be no question that each advance was intended to come within the scope of the arrangement between the parties.

[47]     There was a faint suggestion that the evidence the Ashgrove witnesses had been structured with the benefit of hindsight.   As far as I am concerned all the witnesses were entirely straightforward and honest in their evidence, which was corroborated in important respects by the documentary record.  Understandably, their briefs were directed to the issues that had emerged after the proceeding had been issued and to that extent drew on the benefit of hindsight.  There is nothing wrong with that.

[48]     Mr Bayley argued that it was significant that Mr Mason was not aware of the individual advances at the time that they were made.  I am afraid that I cannot see the slightest significance in this.   It was clear from Mr Mason’s evidence that he had given  Kipp  Alexander  the  necessary  authority  to  make  the  payments  direct  to Finance and Leasing.  Under those circumstances it is scarcely surprising that he was not particularly interested in the individual payments because he knew that they would come off the amount owed by Harewood to Finance and Leasing.

Conclusions

[49]     All the parties to the arrangement (including Harewood) intended that the advances  from  Ashgrove  to  Finance  and  Leasing  would  be  secured  by  a  first mortgage over the Conservators Road land.  Harewood authorised direct payment. All the advances come within the definition of “the secured monies” under the mortgage.  There is no reason at all why direct payment should deprive Ashgrove of the benefit of that security.  Indeed, if that was the outcome the whole purpose of the arrangement would have been defeated.

[50]     Finance and Leasing’s application for a declaration is refused accordingly and Ashgrove is entitled to judgment on its counterclaim.

[51]	As already mentioned, this is a relatively straightforward matter. [52]	It is not disputed that the principal sum stands at $340,893.
[53]     Although the counterclaim sought interest at 17% (which is the penalty rate under the loan agreement), that rate was reduced to 7½% at the hearing.   At one stage, following Paul Alexander’s evidence, I contemplated that there would be an interest free period.   However, on reflection I decided that there was no basis on which the Court would be justified in forcing a further concession on top of the major concession that Ashgrove has already made.

[54]     Ashgrove is, therefore, entitled to judgment for $100,105.62 being interest up to 18 February 2013.  It will also be entitled to interest at 7½% from 18 February
2013 until payment. Presumably that will be as soon as the stakeholder funds are distributed.

[55]     It is not disputed that the loan documentation entitles Ashgrove to recover costs arising from the default. In the event that Ashgrove succeeds and is not entitled to costs on the injunction hearing, it was agreed by counsel that costs will amount to
$30,977.78. Applying ANZ Banking Group Limited v Gibson5 I am satisfied that it is

appropriate to award costs in that sum.

[56]     Ashgrove is therefore entitled to judgment against Finance and Leasing for each of those amounts, which are to be paid from the monies held by stakeholder. Finance and Leasing is, however, entitled to set off the costs French J ordered on the interim injunction. The balance of funds held by the stakeholder are to be released to Finance and Leasing.

[57]     After  granting  the  interim  injunction  French  J  ordered Ashgrove  to  pay Finance and Leasing costs in the sum of $11,429.30.6    This was on the basis that Ashgrove had acted unreasonably and put the receiver to the unnecessary expense of a hearing:  see [15].

[58]     Given that Ashgrove has succeeded on the substantive claim, Mr Brodie now seeks to have the costs order made by French J reversed.  He relies on r 14.8(2) of the High Court Rules:

14.8	Costs on interlocutory applications

(1)        Costs  on  an  opposed  interlocutory  application,  unless  there  are special reasons to the contrary,—

(a)	must  be  fixed  in  accordance  with  these  rules  when  the application is determined; and

(b)	become payable when they are fixed.

(2)        Despite subclause (1), the court may reverse, discharge, or vary an order for costs on an interlocutory application if satisfied subsequently that the original order should not have been made.

(3)	This rule does not apply to an application for summary judgment

The issue is, therefore, whether I can be satisfied that the original order should not have been made.

[59]     In support of the application Mr Brodie advanced various matters including: critical information, including the terms of the mortgage, were not before French J; had this information been before the Judge she would not have fixed costs at that stage; Ashgrove’s stance had now been vindicated; and it was now appropriate to reverse the order.  Mr Bayley opposed the application.

[60]     As  I  read  French  J’s  judgment,  she  made  the  order  for  costs  because
Ashgrove had originally rejected the stakeholder proposal which was later incorporated in the consent order part way through the hearing.  Obviously the Judge

6 Finance and Leasing Limited (In Receivership) v Ashgrove Holdings (Chch) Limited [2012] NZHC
407.

saw the stakeholder proposal as an appropriate solution to the impasse between the parties and the need to find a mechanism that would enable the offer to purchase the Conservators Road land that was on the table to be accepted.

[61]     Under those circumstances I cannot possibly be satisfied that the order for costs should not have been made.  The fact that Ashgrove ultimately succeeded is beside the point.  There was every justification for the order that was made and I am not prepared to reverse it.

Reservation of leave

[62]     Mr Brodie has raised the possibility, albeit probably remote, that the payment of $259,000 by Finance and Leasing to Pajama Investments Limited (effectively a payment to Ashgrove7) might be found to be a preference.   If that happened the amount owing to Ashgrove would increase by that amount, and the quantum of the judgment would need to be amended accordingly.  Understandably Mr Brodie does not want to be faced with a res judicata situation.

[63]     Following discussion with counsel it was decided that the appropriate course was to reserve leave to apply.  Leave is reserved accordingly.

Summary of the orders

[64]     The plaintiff’s application for a declaration is dismissed.

[65]	The first defendant is entitled to judgment against the plaintiff for: (a)	The principal sum of $340,893;
(b)	Interest of $100,105.62 up to 18 February 2013 and thereafter interest at 7½%  until payment; and

(c)	Costs totalling $30,977.78.

Those amounts  are to  be paid  as  soon  as  possible from  the funds held  by the stakeholder and the balance of the funds are to be released to the plaintiff.

[66]     The first defendant’s application to reverse the costs ordered by French J at the interlocutory hearing is dismissed and those costs are to be set off against the costs payable under [65] (c) above.

[67]     Leave is reserved to either party to apply further in the event that the payment of $259,000 is found to be a preference.

Solicitors:
Rhodes & Co, Christchurch,  jebayley@rhodes.co.nz
Geoffrey Brodie, Christchurch,  geoff.brodie@endeavourchambers.co.nz