Fern Ltd ((in Liquidation)) v Financial Trust Ltd and Anor

JurisdictionNew Zealand
CourtHigh Court
JudgeVenning J
Judgment Date30 November 2010
Neutral Citation[2010] NZHC 2119
Docket NumberCIV-2009-404-004055
Date30 November 2010

[2010] NZHC 2119

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

Venning J

CIV-2009-404-004055

Between
Fern Limited (In Liquidation)
Plaintiff
and
Financial Trust Limited
First Defendant

And

Matrix Custodians Limited
Second Defendant
Appearances:

M Sandelin and N A Chamberlain for Defendant/Applicants

B Clode in person for himself, J Cooper and Wanganella Trustee Ltd L Gilbertson in person and for LJK Investments Ltd

Catchline: Application by the defendant for costs against non-parties who were either associated with or had dealings with the plaintiff — defendant held a mortgage over the only asset held by the plaintiff and issued mortgagee sale proceedings — plaintiff gained an interim injunction preventing the mortgagee sale and sold the property to an associated company which was sold back to the defendant and then to a family trust — whether the conduct was designed to prevent the defendant from exercising its right of a mortgagee sale and recovering its costs — whether the injunction was used for an improper purpose — whether causation was required for costs against non-parties.

The issues were: whether the conduct was designed to prevent Financial Trust from exercising its right of a mortgagee sale and recovering its costs; whether the injunction was used for an improper purpose; and whether causation was required for costs against non-parties.

Held: The Court had a general jurisdiction to award costs under s51J Judicature Act 1908 (jurisdiction of Court to award costs in all cases). In appropriate cases and for proper reasons, the Court could require non-parties to make payments towards costs incurred by a party where the non-party, who had the ability to control the proceedings, took steps to frustrate a party's claim to relief or its ability to recover costs.

Prior to the purchase of the first mortgage by LJK and the contemporaneous transfer of the property to Wanganella, Financial Trust had been protected for its costs against Fern as it had provided an undertaking to obtain the injunction which had been supported by the property owned by Fern. There had also been ample equity to have met any costs award. The actions of the non-parties however, removed the property from Fern and Fern was in liquidation so there was no prospect of recovering costs. The non-parties had pursued a course of action which had the effect of defeating Financial Trust's interest in the property. At the time of the sale by LJK there had been no apparent pressure to sell the property; the first mortgage had been paid out and Fern had an interim injunction preventing Financial Trust from taking further steps to enforce its security. There was no apparent reason to sell a property valued at $2,600,000 for $1,562,000. Gilbertson also could not explain when, after LJK had bought the property, it agreed to sell the property with $462,500 owed by way of unsecured advance when LJK was already owed a substantial sum by Clode and Cooper. There had also been no commercial reason for Cooper to have taken a second mortgage over the property in priority to the balance owed to LJK. There had been no commercial benefit to LJK in the transaction.

However, Gilbertson was neither a shareholder nor director of Wanganella, nor was he involved with Fern. He had no role or personal interest in the Court proceedings and had not controlled them; in those circumstances it was not just or necessary to order costs against Gilbertson or LJK.

Clode and Cooper were closely connected with and controlled the proceedings. Wanganella was also connected with the proceedings as the transferee of the property, the only asset owned by Fern. The transfer had been made to defeat Financial Trust's position as the second mortgagee and to transfer property from Fern's control to defeat any subsequent claim by Financial Trust for damages or costs. Their actions had directly led to Financial Trust being unable to enforce the costs order against Fern. That fact there were separate proceedings with possibly alternative remedies did not preclude an order for costs. It was just to make orders for costs against Clode, Cooper and Wanganella.

The majority of costs incurred in the proceedings were incurred prior to Cooper taking control of Wanganella. To that extent, Wanganella's subsequent actions had not had a causative effect on the costs that were incurred in relation to the injunction. It could not be said that the costs in opposing the injunction would not have been incurred but for the actions of Wanganella. There were a number of authorities which supported the proposition that a party claiming costs had to establish that the non-party caused the proceeding to be brought or continued and that a non-party generally could not be held liable for costs that would have been incurred without that non-party's involvement.

Having obtained the injunction, Fern, Cooper and Clode had misused the process of the Court by taking steps to defeat Financial Trusts’ substantive claim. A party that obtained equitable relief from the Court owed a duty of candour to the Court and other parties, which had been breached. To have refused costs would have been contrary to the interests of justice and would have permitted Clode, Cooper and Wanganella to have achieved their purpose of using the proceedings (or at least continuing the proceedings) for an improper purpose.

Application for costs against Gilbertson and LJK dismissed. Application for costs against Clode, Cooper and Wanganella granted.

JUDGMENT OF Venning J

Venning J

This judgment was delivered by me on 30 November 2010 at 3.30 pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar Date……………

Introduction
1

The defendants seek costs against non-parties who were either associated with or who had dealings with the plaintiff company, Fern Limited. Fern is itself now in liquidation. The application is opposed by the non-parties.

Background
2

Fern owned a property at 4 Wanganella Street, Birkenhead, Auckland. Mr Clode and his partner Ms Cooper were formerly shareholders and directors of Fern. More recently, Ms Cooper has been the sole shareholder and director. Fern was the trustee of Mr Clode and Ms Cooper's family trust. Mr Clode, Ms Cooper and their family live in the Wanganella Street property.

3

Financial Trust Ltd (FTL) and Matrix Custodians Ltd (Matrix), a company closely associated with FTL, provided funding to a number of companies associated with Mr Clode and Ms Cooper (the Clode interests).

4

As part of the security for the funding Fern granted a second mortgage over the Wanganella Street property to Securities Registry Ltd (SRL), a company associated with FTL. SRL subsequently assigned the mortgage to FTL.

5

During 2006 the Clode interests sought to substitute an alternative security for the Wanganella property. An issue arose between the parties as to whether the terms upon which substitution of security was permitted were those contained in an email sent on 22 April 2005 or a later facsimile of 1 July 2005.

6

The issue was not resolved. The Clode interests fell into default under the loan agreements. Mr Clode was adjudicated bankrupt on 12 February 2009.

7

In May 2009 FTL's solicitors advised Fern it intended to proceed to mortgagee sale. It had previously issued a Property Law Act notice demanding in excess of $5,457,000, the sum owing by the Clode interests. Fern then issued proceedings seeking an interim injunction to prevent FTL's mortgagee sale.

8

On 23 July 2009 Mortgage Holding Trust Company Ltd (MHTCL), the first mortgagee, also served a Property Law Act notice on Fern. FTL was served with a copy of the notice.

9

In a judgment delivered 23 September 2009 Asher J granted an interim injunction restraining the defendants from taking steps to enforce the mortgage. The Judge accepted there was a serious question whether the 22 April email applied and that, by insisting it did not apply and seeking to enforce the terms of the 1 July facsimile, FTL may have repudiated the security agreement and mortgage. As the Wanganella Street property was Mr Clode and Ms Cooper's family home, the Judge also accepted the balance of convenience favoured the grant of an injunction. The Judge directed a hearing of the substantive issue.

10

After obtaining the injunction, Fern and Ms Cooper took no further steps to pursue the substantive proceedings. Ms Cooper and Mr Clode did, however, take a number of other steps. On 10 November 2009 Ms Cooper became a shareholder and director of another company, and changed its name to Wanganella Trustee Ltd (WTL). Also during November 2009 Mr Clode met with a friend and business associate of his, Mr Gilbertson, to discuss the options for the Wanganella Street property. Mr Clode suggested that LJK Investments Ltd (LJK), a company controlled and operated by Mr Gilbertson, might purchase the first mortgage to avoid the mortgagee sale by MHTCL. LJK was itself owed approximately $315,000 by other entities associated with Mr Clode.

11

LJK subsequently agreed to purchase, by way of assignment, the MHTCL first mortgage from MHTCL. The assignment was apparently settled on 20 January 2010 for $1,096,627. With legal costs LJK paid out $1,100,000 in total.

12

Having purchased the first mortgage security LJK then immediately, the same day, exercised the power of sale to sell the Wanganella Street property to WTL for $1,562,500. The purchase price was to be settled by $1,100,000 cash with the balance of $462,500 left in as vendor finance.

13

At the time, there were a number of valuations in existence for the Wanganella Street property: a QV valuation of $2,800,000, a registered valuation of$2,600,000, and a fire sale valuation of $1,250,000.

14

Ms Cooper had previously arranged to borrow $1,250,000 from a solicitor's nominee company to fund WTL's purchase of the property. The nominee company...

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