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Capital + Merchant Finance Limited (In Receivership & In Liquidation) & Others v/s Vision Securities Limited (In Receivership)

    CA No. 147 of 2010

    Decided On, 04 August 2011

    At, Court of Appeal of New Zealand

    By, THE HONOURABLE MR. JUSTICE ELLEN FRANCE
    By, THE HONOURABLE MR. JUSTICE GENDALL & THE HONOURABLE MR. JUSTICE ALLAN

    For the Appellant: S A Barker, B R Balderstone, Advocates. For the Respondent: M R Bos, Advocate.



Judgment Text

Allan. J.

Introduction

[1] In this appeal the Court is asked to determine the proper construction of a Security Trust Deed (the Deed) made between the first appellant (CMF) and the respondent (Vision). Each party had advanced substantial sums of money to Education Holdings Ltd (Education). CMF sold its indebtedness to a third party. Vision contended that the terms of the deed required CMF to apply the proceeds of sale in reduction of the amount owed by Education to Vision. CMF disagreed. Vision issued proceedings and sought summary judgment. CMF made a cross application for defendant’s summary judgment.

[2] In a judgment given on 19 February 2010, Associate Judge Doogue refused both applications for summary judgment.[1] Vision’s appeal against that judgment was subsequently withdrawn. That leaves for determination CMF’s appeal against the Judge’s determination that it was not entitled to summary judgment as a defendant against the claim by Vision that CMF was required to pay the sale price of $250,000 to Vision in reduction of the indebtedness of Education to that party.

[3] A second ground of appeal concerns Associate Judge Doogue’s ruling that, for summary judgment purposes, CMF had failed to establish that Vision had consented to the assignment by CMF to a third party.

Background

[4] CMF and Vision both traded as finance companies. On 23 November 2007, the second appellants were appointed to be the receivers of CMF. Vision was also placed in receivership from 1 April 2010.

[5] CMF and Vision were both secured lenders to Education, a property developer engaged in a project involving part of the Selwyn College site at Kohimarama, Auckland. In August 2006, CMF and Vision agreed that Vision would provide further finance to enable the project to be carried forward. Education and its guarantor (Honk Foods Ltd), were to provide securities to CMF, that CMF would hold on trust for the benefit of both CMF and Vision.

[6] On 19 September 2006, CMF, Vision and Education entered into the Deed. Among its detailed provisions was an agreement that the secured amounts owed by Education to CMF were to be subordinated in favour of the secured amounts owed by Education to Vision.

[7] Vision advanced $3 million to Education on 20 September 2006. Initially the loan was for a period of six months, but Vision agreed to extend the maturity date to 19 September 2007. Education failed to repay the loan, and on 29 November 2007 the security holders of CMF put Education into receivership.

[8] On 3 December 2007 (immediately following the appointment of the receivers of CMF on 23 November), Vision’s solicitors wrote to CMF’s receivers advising them of Vision’s interest under the Deed.

[9] On 31 January 2008, following correspondence between Vision and the receivers, a variation agreement was executed. The parties to that agreement were Vision, CMF, and Education. A further advance of $995,000 to Education was made by Vision.

[10] By mid-2008, Education had fallen into default with various secured lenders. In July 2008, the principal of Education (Mr Tauber), advised the receivers that Education’s first mortgagee, Hong Kong and Shanghai Banking Corporation Ltd (HSBC) was threatening to undertake a mortgagee sale of the property. Mr Tauber was concerned to avoid a mortgagee sale because of the risk of sale at an under-value, and also because he had given a personal guarantee of Education’s borrowing from HSBC.

[11] A mortgagor’s sale by Education followed. The purchaser was a new company, Education Holdings (2008) Ltd (the 2008 Company). The shareholders in the new company were the principals and shareholders of Vision (as to 75 per cent) and of Education (as to 25 per cent). Education sold the property to the 2008 Company for $10.8 million. Of that figure, HSBC’s priority amount was $6,800,000. Vision was owed $3,970,000. In theory that left a surplus of just $30,000 for CMF. In practice, however, CMF got nothing because interest and costs over a period of time had increased the amount owed to Vision to a sum in excess of $4.4 million.

[12] On 2 December 2008, the receivers of CMF provided a discharge of mortgage to enable the transaction to settle. A day earlier, on 1 December 2008, CMF had assigned to another Honk entity (Honk) its debt from Education, and the residual security interests held by it in respect of that company. CMF claims that Vision consented to the assignment. Vision says that it learned of the assignment no earlier than about 2 February 2009, and that it made demand on CMF and the receivers for the assignment consideration of $250,000 on 9 February 2009.

[13] Vision says that, following settlement of the sale of the property, a sum of $493,565.10 remained owing by Education to Vision. Vision demanded payment of the $250,000 assignment consideration from CMF on the basis that:

(a) CMF’s security interest was subordinate to that of Vision, so that CMF could not deal in any way with its subordinated indebtedness without Vision’s approval; and

(b) CMF was obligated under the Deed to hold all money received in respect of the subordinated indebtedness on trust for Vision.

[14] CMF denied any liability to Vision. The High Court proceedings followed.

[15] Against that background we turn to a consideration of the terms of the Deed, which lies at the heart of the appeal.

The terms of the Deed

[16] The appeal turns on the proper construction of cl 8.5 of the Deed, which provides:

8.5 Subordinated Payments to be held on Trust

If, prior to the Termination Date, Capital shall (except as expressly provided in this Deed) receive any payment in respect of any of the Subordinated Indebtedness, whether upon the dissolution of the Borrower or for any other reason, then Capital shall hold each such amount on trust and pay the relevant amount (plus interest (if any)) to Vision in or towards discharge of the Senior Indebtedness. Any such amount shall be treated, for the purposes of the obligations of the Borrower in respect of the Subordinated Indebtedness, as if it had been paid or turned over by the Borrower. The Subordinated Indebtedness shall accordingly be deemed not to be discharged to that extent. The trust constituted by this clause shall be for a term of 21 years from the date of this Deed.

[17] The issue for determination is whether the payment received by CMF for the assignment to Honk of its debt from Education is a payment '... in respect of any of the Subordinated Indebtedness ...' for the purposes of cl 8.5.

[18] It is common ground that cl 8.5 must be construed in the context of the Deed as a whole, and indeed, of all of the surrounding circumstances.[2] Certain terms appearing in cl 8.5 are defined elsewhere in the Deed.[3] The expressions 'Senior Indebtedness' and 'Subordinated Indebtedness' are defined as follows:

Senior Indebtedness means, at any date, at any time all Secured Amounts of Vision;

Subordinated Indebtedness means, at any date, at any time all Secured Amounts of Capital.

[19] These definitions incorporate by reference the expression 'Secured Amounts' of Vision and CMF respectively. The expression 'Secured Amounts' is defined as meaning:

Secured Amounts means all moneys and liabilities whatsoever which may be due, owing or payable by the Borrower to the Trustee or any of the Lenders in any currency, actually or contingently, as principal or as surety on any account whatsoever pursuant to the Facility Agreements or the Security Documents or as a consequence of any breach, non-performance, disclaimer or repudiation by the Borrower of any of its obligations under the Facility Agreements or the Security Documents and 'Secured Amounts' shall have a like meaning with respect to a particular Security Document or Lender.

[20] The provisions that immediately precede cl 8.5 are also of relevance. They read:

8.1 Order of Payments

All amounts received, realised or recovered by the Trustee under the Security Documents are to be applied as follows:

(a) First, in or towards payment to Vision of all Secured Amounts owed to it;

(b) Second, in or towards payment to Capital of all Secured Amounts owed to it.

8.2 Complete subordination of Subordinated Indebtedness

Notwithstanding the provisions of any agreement or other document constituting or evidencing any of the Subordinated Indebtedness, each of the Borrower and Capital covenant with Vision that the Subordinated Indebtedness shall be subordinated and subject in point of priority and right of repayment to the prior payment in full of the Senior Indebtedness on the terms set out in this Deed.

8.3 No payment of Subordinated Indebtedness

The Borrower and Capital each covenants for the benefit of Vision that, notwithstanding anything to the contrary contained in any agreement or other document constituting or evidencing any of the Subordinated Indebtedness, it will not, prior to the Termination Date:

(a) make or receive any payment or distribution to, or to the order of, Capital in respect of any of the Subordinated Indebtedness; or

(b) sell, purchase or acquire any of the Subordinated Indebtedness in cash or in kind; or

(c) create or suffer or permit to exist any security interest or give any guarantee over or affecting any of the Subordinated Indebtedness (other than the Security Documents); or

(d) discharge any of the Subordinated Indebtedness by set off; or

(e) take or omit to take any action whereby the subordination created or expressed to be created by this Deed may be impaired.

8.4 Enforcement of Subordinated Indebtedness

Subject to this Deed, Capital covenants with Vision that, notwithstanding anything to the contrary contained in any agreement or other document constituting or evidencing any of the Subordinated Indebtedness, it will not, prior to the Termination Date:

(a) give an Enforcement Notice without Vision’s prior written consent; or

(b) accelerate any indebtedness outstanding pursuant to any Facility Agreement between the Borrower and Capital;

(c) demand, declare to be due and owing, ask or sue for, take or receive payment or accept any assets in respect of, any of the Subordinated Indebtedness, directly or indirectly and whether in any composition by the Borrower with its creditors, by exercise of set-off, counterclaim, consolidation of accounts or in any other manner; or

(d) prove in competition with Vision in the dissolution of the Borrower, or

(e) demand, take or receive the benefit of or suffer or permit to exist any assignment, security interest or guarantee over or affecting any of the Subordinated Indebtedness; or

(f) create or suffer or permit to exist any security interest over or affecting any of its right, title or interest in, to, under or derived from any of the Subordinated Indebtedness; or

(g) otherwise commence any Enforcement action.

[21] The Deed further provides that:

(a) Either CMF or Vision may give an Enforcement Notice where Education had defaulted under its loan arrangements with that lender[4] but:

(b) Until such time as Vision was paid in full, only it was entitled to serve an Enforcement Notice;[5]

(c) Such an Enforcement Notice was to be served upon the Trustee (initially CMF, but later Vision), which, without further notice to any party, was required to realise the securities;[6]

(d) If Vision did not receive payment of all secured amounts owing to it within five working days of Vision serving an Enforcement Notice on the Trustee, CMF was required on demand to purchase Vision’s debt for an amount equal to all Senior Indebtedness on the settlement date;[7]

(e) Vision granted CMF an option to purchase Vision’s debt at full value;[8]

(f) Where CMF was required to make any payment to Vision, then all sums so payable were to carry interest at the rate of 5 per cent per annum above the highest applicable rate under any facility agreement.[9]

The High Court judgment

[22] Associate Judge Doogue held that cl 8.5 provided a remedy designed to secure to Vision payments received by CMF, whether or not those payments were made in repayment of Subordinated Indebtedness. He held that, on the literal wording of cl 8.5, the payment by Honk for assignment of the sum owed to CMF fell within the 'wide wording' of cl 8.5. He considered that outcome to be consistent with the prohibition on sale by CMF of its Subordinated Indebtedness, found in cl 8.3(b).[10]

[23] In reaching that conclusion, Associate Judge Doogue considered certain authorities in which the expression 'in respect of' was acknowledged to be of considerable scope.[11]

The respondent’s argument

[24] The starting point is the plain meaning of the words used in the Deed.[12] The argument for the respondent is a simple one. Mr Bos submits that the plain meaning of cl 8.5 is that any payment received by CMF 'in respect of' the Subordinated Indebtedness must be turned over to Vision at any time prior to repayment of Vision’s debt in full.

[25] He further submits that the proceeds of sale of the debt were received by CMF in respect of the Subordinated Indebtedness, and that CMF must accordingly account to Vision for those proceeds. That outcome is consistent, he argues, with the overall scheme of the Deed, which incorporates a right of recourse by Vision against CMF and requires that Vision be repaid in full before CMF has any rights in respect of its securities, and before it is entitled to retain any payments. Of particular importance, Mr Bos argues, are the prohibition on sale by CMF of its Subordinated Indebtedness,[13] and on receipt of the benefit of any assignment.[14] These provisions, along with Vision’s ongoing right of recourse against CMF, are consistent with the outcome in the High Court, Mr Bos submits.

The appellants’ argument

[26] The argument for the appellants is rather more nuanced. While accepting that the words 'in respect of' may, and often will, bear a wide meaning, context will sometimes require a different, narrower meaning.[15] Mr Barker argues that a narrower interpretation is required here. He maintains that a reading of the Deed as a whole requires the words 'in respect of' in cl 8.5 to be read down. He supports that argument by referring to the detailed provisions of cl 8.

[27] Clause 8.3(a) is a covenant by both CMF and Education acknowledging that no payment may be made by Education or received by CMF in reduction of the Subordinated Indebtedness before Vision is paid in full. Clause 8.4(c) contains a covenant by CMF that it will take no steps to recover the Subordinated Indebtedness from Education, or to enforce its security either directly or indirectly, until Vision is paid in full. Mr Barker points out that each of these sub-clauses is concerned with payments made by or on behalf of Education for the purpose of reducing its debt to CMF.

[28] Clause 8.3(b), on the other hand, imposes a prohibition upon sale or assignment of the Subordinated Indebtedness by CMF to a third party. Any such sale or assignment is prohibited until Vision is paid in full. The counterpart to this clause is cl 8.4(e), which contains a covenant by CMF that it will not take the benefit of any assignment of the Subordinated Indebtedness.

[29] Mr Barker argues that sub-clauses 8.3(b) and 8.4(e), by excluding any right on the part of CMF to assign the Subordinated Indebtedness to a third party, affect the proper construction of cl 8.5. That is because the Deed does not contemplate the lawful assignment of the Subordinated Indebtedness. Accordingly, the expression ' ... any payment in respect of any of the Subordinated Indebtedness ...' in cl 8.5 ought to be restricted to a payment made in reduction of that indebtedness, and not simply to any payment that might have some connection (however wide) with the indebtedness.

[30] Mr Barker supports his argument by reference to the practical outcome of the construction of cl 8.5 adopted in the High Court. He submits this outcome is commercially absurd as CMF is left with neither debt, nor sale proceeds, while Education, having done nothing, receives the benefit of the application of the sale proceeds in reduction of the debt owed by Education to Vision.

Discussion

[31] Interpretation issues are to be addressed on an objective basis. The inquiry is as to what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean.[16] For present purposes the Court is the informed third party. The Deed must, of course, be read as a whole in the context of all of the relevant surrounding circumstances.

[32] We consider the concluding sentence in cl 8.5 to be of some significance. It provides that a payment received by CMF 'in respect of the Subordinated Indebtedness' is to be paid to Vision and that '... the Subordinated Indebtedness shall accordingly be deemed not to be discharged to that extent'.

[33] That provision is inapt in the context of a payment made in consideration for the assignment of the Subordinated Indebtedness, because the payment to Vision of the purchase price could not, in any event, affect the amount of the Subordinated Indebtedness. Rather, it is a capital payment made by the purchaser to CMF. The fact that the last sentence of cl 8.5 has no application to a case in which the Subordinated Indebtedness is not reduced, strongly suggests to us that cl 8.5 as a whole was not intended to apply to such a payment.

[34] In assigning the Subordinated Indebtedness to Honk, CMF was acting in breach of cls 8.3(b) and 8.4(e), but it does not automatically follow that the assignment proceeds were caught by cl 8.5. As discussed above, the latter sub-clause was concerned with ensuring that CMF was unable to retain the benefit of any payment made to it by or on behalf of Education for the purpose of reducing the Subordinated Indebtedness. The intention of the parties was, we consider, to ensure that, where a payment was made to CMF that had the effect of reducing the Subordinated Indebtedness, CMF was required to account to Vision in order to preserve Vision’s rights to prior repayment of the Senior Indebtedness. The capital payment made by Honk for the assignment did not reduce the Subordinated Indebtedness. Accordingly, Vision’s right to priority was preserved.

[35] It must be borne in mind also that the parties were unlikely to have intended that cl 8.5 would catch the sale proceeds, because the contract did not contemplate the lawful assignment of the Subordinated Indebtedness by CMF to a third party. The assignment to Honk was in breach of cl 8.3(b) and cl 8.4(e). For that breach, Vision is entitled to damages if it can prove loss. Understandably, it has not been argued for the respondent that the payment of the entire assignment proceeds to Vision represents a reasonable pre-estimate of the losses Vision would suffer by reason of the breach of contract.

[36] Moreover, we are of the view that there is considerable force in Mr Barker’s submission that a High Court judgment for Vision would produce an asymmetric commercial outcome. If Vision was eventually entitled to judgment so that CMF was denied judgment as a defendant, Vision would take the benefit of a reduction in the Senior Indebtedness by requiring CMF to pay to it the amount received upon assignment of the Subordinated Indebtedness to Honk. Education, for its part, takes the benefit of a payment made by a third party, Honk, in reduction of Education’s indebtedness to CMF, because CMF is obliged to account for the sum so received to Vision, which applies it in reduction of the Senior Indebtedness. So Education receives a windfall. Meanwhile, CMF loses both its right to payment of the Subordinated Indebtedness and the proceeds of sale. It is difficult to see how this result could have been a contemplated commercial outcome.

[37] Mr Bos argues that the answer is to be found in CMF’s subrogation rights. He says that, if CMF made a payment to Vision in partial discharge of the debt owed to Vision by Education, CMF would be entitled to be subrogated to Vision’s rights in respect of that partial repayment.

[38] We agree that, in theory it is at least arguable that CMF is entitled to look to Education for repayment of any sum paid by CMF to Vision. That is because CMF would have made the payment in reduction of Education’s indebtedness to Vision pursuant to a contractual obligation to do so, and Education, as a party to the Deed, must be taken to have notice of the circumstances in which the payment was made.[17] But we see a difficulty in the application of the respondent’s subrogation argument. It arises from the interpretation of cl 8.5 for which the respondent contends. If that clause is wide enough to catch the consideration for the assignment in the first place, then in our view it is capable of catching also any subsequent payment (the subrogation payment) made by Education to CMF, pursuant to the latter’s subrogation rights. That is, the payment will have been received '... in respect of ... the Subordinated Indebtedness' in the sense that the subrogation payment to CMF is made 'in respect of' CMF’s status as owner of the Subordinated Indebtedness. If that is so, then CMF would need to account to Vision for the subrogation payment as well, so CMF’s theoretical subrogation rights, if exercised, would simply confer upon Vision a further right to call for the subrogation payment to be passed on to it by CMF, pursuant to cl 8.5 (assuming that Vision’s debt had not been entirely discharged by then).

[39] We consider therefore that CMF’s theoretical subrogation rights are likely to prove illusory at a practical level. The interpretation for which Mr Bos contends leads to a windfall for Vision and for Education, and a detriment for CMF for which it cannot be compensated. An interpretation of the contract which produces illogical commercial results is to be avoided where possible.

[40] We accept Mr Barker’s submission that there is an important conceptual distinction in this case between the subordinated lender’s obligation to account for funds received in reduction of its indebtedness on the one hand, and the proper application of the sale proceeds of such indebtedness on the other. We think that the proper construction of cl 8.5 is that for which Mr Barker contends, and accordingly the conclusion reached by Associate Judge Doogue was wrong.

[41] We accept, of course, that the assignment by CMF amounted to a breach of contract and that Vision is entitled to sue for losses arising from that breach. However that is an entirely separate matter from the issue before the Court, which concerns the proper application of the assignment proceeds and turns upon the true interpretation of cl 8.5.

Consent to assignment

[42] By reason of our conclusions in respect of the principal argument, it is unnecessary to do more than explain briefly why we agree with Associate Judge Doogue’s conclusions as to Vision’s alleged consent to the assignment.

[43] If Vision had consented to the assignment then it would have been in no position to require CMF to account to it for the assignment proceeds.

[44] Clause 7.1 of the Deed of Assignment provided that the agreement was conditional upon Honk obtaining the approval of Vision to the transaction prior to s

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ettlement and resigning as trustee. The argument for the appellants is that Vision did consent. Associate Judge Doogue held that there was insufficient evidence to justify a finding that Vision had given its consent under the Deed of Assignment. We agree. Vision was not a party to the Deed of Assignment; neither is there any direct evidence of consent. The Court is asked to infer that the giving of consent was inevitable:[18] ... because of the commonality between the parties putting in place the arrangements – Andrew Tauber is the principal of Education Holdings Ltd, the original borrower; and of Honk 2 Limited, the assignee from CMF; and a partner with Vision in the arrangements which resulted in the repurchase by Education Holdings (2008) Limited– in a way and at a certified price to show repayment of HSBC and Vision. [45] Associate Judge Doogue accepted that Mr Tauber and Vision were co-operating in the context of a broad plan to refinance the Education entities, but he held that he was not justified in assuming that that co-operation must have involved also a formal consent to the assignment. We concur. The question of whether, in all the circumstances, there was consent on behalf of Vision was a matter for trial. Result [46] For the foregoing reasons the appeal is allowed. The first appellant is entitled to summary judgment as a defendant against the respondent. The appellants are entitled to one set of costs for a standard appeal calculated in accordance with Band A, together with reasonable disbursements. 1. Vision Securities Ltd v Capital + Merchant Finance Ltd (in rec) [2010] NZHC 127; [2010] NZCCLR 21 (HC). 2. Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [19]. 3. Cl 1.1. 4. Cls 1.1 and 4.2. 5. Cl 4.3. 6. Cl 4.2. 7. Cls 8.12.1 and 8.12.2. 8. Cl 9. 9. Cl 8.13. 10. At [48]. 11. Hughes v Chase Wellington Properties Ltd (1991) 5 NZCLC 67,069 (HC); Workers’ Compensation Board of Queensland v Technical Products Pty Ltd (1988) 81 ALR 260 at 267; and H v H [1997] 2 NZLR 700 (HC) at 711. 12. Vector Gas Ltd at [4]. 13. Cl 8.3(b). 14. Cl 8.4(e). 15. State Government Insurance Office (Qld) v Rees (1979) [1979] HCA 52; 144 CLR 549 (HCA) at 554. 16. Vector Gas Ltd at [19]. 17. Banque Financiere de la Cite v Parc (Battersea) Ltd [1998] UKHL 7, [1999] 1 AC 221 at 231-235. 18. Vision Securities Ltd v Capital + Merchant Finance (in rec) [2010] NZHC 127; [2010] NZCCLR 21 (HC) at 76.
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