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Kc Securities Limited v/s Belgrave Finance Limited (In Receivership)

    CA No. 115 of 2010

    Decided On, 08 September 2010

    At, Court of Appeal of New Zealand


    For the Appellant: N S Gedye, K Knight, Advocates. For the Respondent: M D Arthur, J Tunna, Advocates.

Judgment Text

Asher, J.


[1] This is an appeal by KC Securities Limited, a financier, against the decision of Associate Judge Bell in which he gave priority to another financier, the respondent Belgrave Finance Limited, and entered judgment for Belgrave Finance Limited against KC Securities Limited for $204,271.33.[1]

[2] KC Securities Limited ('KC Securities') specialises in project finance and property investment. It lent substantial sums to Aspiring Custodians Limited ('Aspiring') for a development in Wanaka. It became the first mortgagee of a property owned by Aspiring at Mt Aspiring Road ('the property'). Belgrave Finance Limited ('Belgrave Finance') was also a financier and advanced moneys to Aspiring on the security of a second mortgage over the property. Belgrave is now in receivership. There was also a third mortgagee, which is not a party to the proceeding.

[3] The advance by KC Securities was made on 18 December 2006, and was originally to be repaid less than two months later on 15 February 2007. The advance by Belgrave Finance was made on 19 December 2006, and was to be repaid on 31 March 2007. There were variations to the loan terms which, amongst other things, extended both repayment dates to 30 April 2007.

[4] On 18 December 2006 Aspiring, KC Securities and the third mortgagee entered into a deed of subordination and priority. Belgrave Finance was shown as a party but did not sign this document. On 3 April 2007, Aspiring, KC Securities, Belgrave Finance and the third mortgagee entered into a second deed of subordination and priority ('the priority deed'). It is the terms of the second deed which were the focus of the summary judgment hearing and this appeal.

[5] The mortgage advance from KC Securities was ultimately due to be repaid on 30 April 2007. Aspiring defaulted. The loan from Belgrave Finance was due to be repaid on 30 June 2007 after a further extension. Aspiring also defaulted on that loan. On 29 October 2007, after a delay of six months from default, KC Securities served a notice under s 92 of the Property Law Act 1952 requiring payment of the sum then owing to it of $2,047,525.70. That sum was made up of principal, interest, facility fees and legal fees. The notice required the default to be remedied before 7 December 2007. Aspiring did not comply with the notice.

[6] KC Securities appointed receivers to Aspiring. The receivers sold the property and KC Securities adopted the agreement under s 179 of the Property Law Act 2007 so as to become the vendor. The sale settled on 4 July 2008. The funds received from the sale amounted to $2,726,624.36. After paying GST and various costs KC Securities retained the rest of the sale proceeds as they amounted to less than the full amount owed to it. There appear to be no other assets of Aspiring available for the secured creditors.

[7] KC Securities says that at the date of settlement of the sale the principal advance plus accrued capitalised interest that was owing to it by Aspiring amounted to $2,326,474.41. In addition it claims to have incurred GST plus costs totalling $425,657.13. KC Securities’ calculation of the sums due to it took into account interest that had fallen due both before and after the expiry of the Property Law Act notice on 7 December 2007.

[8] The balance owing to Belgrave Finance under its loan as at 4 July 2008 was $204,271.33. If KC Securities was entitled to all the amounts owed to it from the proceeds of sale, there would be nothing left for Belgrave Finance.

[9] Belgrave Finance challenged KC Securities’ claim to all the proceeds of sale and issued summary judgment proceedings against KC Securities seeking recovery of the $204,271.33 owed to it. It asserted that KC Securities had retained more than it was entitled to under the priority deed. The issue before the Associate Judge was whether the priority deed limited the amount recoverable by KC Securities under its first mortgage so that the second mortgagee, Belgrave Finance, could recover its advance of $204,271.33 from the proceeds of sale.

The relevant provisions of the priority deed

[10] Paragraph 7 of the schedule to the priority deed provides:

The First Secured Party Securities, and all moneys from time to time secured under them, will have first priority over the Second Secured Party Securities and the Third Secured Party Securities for an amount not exceeding the First Secured Party Priority Amount.

[11] This clause therefore gave KC Securities priority for the 'first secured party priority amount'. That 'first secured party priority amount' is defined further on in the schedule as follows:

The aggregate of:

(a) The First Secured Party Amount;

(b) Interest, for the Interest Period commencing on the Enforcement Date, calculated on a daily basis at the highest rate payable by the Debtor to the First Secured Party immediately before the Enforcement Date, on the lesser from time to time of:

(i) the First Secured Party Amount; and

(ii) the balance secured by, and outstanding under, the First Secured Party Securities;


(Emphasis added.)

[12] The definition went on to include the amount of various fees, taxes and charges, preferential payments, and interest on those amounts as part of the first secured party priority amount ('the first priority amount'). There is no dispute about these items. There is no doubt about the first secured party amount, which is defined in the priority deed as $1,895,000. The second part of the definition at subclause (b) is critical, and is henceforth referred to as 'subclause (b)'.

[13] The 'Interest Period' referred to in subclause (b) is 24 months. The Enforcement Date referred to in subclause (b) is defined in the schedule as:

The earlier of:

(a) the date on which a Secured Party enforces (including, but not limited to, appointing a receiver) that Secured Party’s rights under a Security of that Secured Party; and

(b) the expiry date of a notice issued in respect of a Secured Party’s Security under section 90 or 92 of the Property Law Act 1952, pursuant to which a Secured Party enters into possession, or exercises that Secured Party’s power of sale, of any land.

(Emphasis added.)

The positions of the parties

[14] The 'earlier' date was the expiry of the Property Law Act notice on 7 December 2007. The specific question is what interest, if any, can KC Securities claim for the period prior to the expiry of the notice under s 92 of the Property Law Act 1952.

[15] Belgrave Finance’s contention is that KC Securities cannot include in the first priority amount any interest prior to the expiry of the Property Law Act notice, as that is the Enforcement Date and interest can only run from then. It submits that interest that is owing for the months prior to that date is not part of the first priority amount and cannot be claimed in priority.

[16] KC Securities submits that its entitlement to interest as part of the first priority amount is not so limited. It submits that it is entitled to priority for all interest owed to it, the only limitation being a limitation in clause 5 of the priority deed and in the definition in the schedule of 'Interest Period', which limits the interest period to 24 months.

The High Court judgment

[17] Associate Judge Bell considered that there were pointers for both interpretations in the language of the priority deed. He looked at wider considerations including the background circumstances. He considered that 'banking practice' suggested that lenders used a secured party amount, which is fixed at a certain figure, to give themselves sufficient room or 'freeboard' to allow for increasing loads of debt. They could get all their interest by negotiating a priority amount that was more than the amount of anticipated advances. He found that the provision for interest at subclause (b) could not be used as a 'variable and unreliable second chance buffer'. Therefore, priority could not be claimed for interest falling due before the Enforcement Date. He saw the interest period of 24 months as a longstop provision. It limited the period for which interest could be claimed, but it could run for a shorter period.

[18] Associate Judge Bell dismissed an argument raised by Belgrave Finance for an even later date for the commencement of the Enforcement Date, being the date when receivers were appointed to Aspiring. That aspect of his decision has not been challenged.

[19] He granted Belgrave Finance priority for its $204,271.33, from the sale proceeds. This was on the basis that interest for the period prior to the expiry of the Property Law Act notice was subtracted from the amount retained by KC Securities. He also awarded Belgrave Finance interest (reduced for a delay in issuing proceedings) and costs.

The plain meaning

[20] The starting point is the plain meaning of the words used.[2] Under the priority deed priority interest runs for the period 'commencing on the Enforcement Date'. The meaning is plain and unambiguous. Only interest accruing after the Enforcement Date has priority. Until the Enforcement Date no interest has priority, but it does after that date. The Enforcement Date is also defined unambiguously. It is (in these circumstances) the expiry date of the Property Law Act notice.

[21] Mr Gedye for KC Securities put forward an alternative interpretation. He suggested that the phrase 'for the Interest Period commencing on the Enforcement Date' meant that it was interest payable at the rate being paid on the Enforcement Date. There are two difficulties with this suggested interpretation. First, it runs quite contrary to the plain meaning of the words. The 'Interest Period' is entirely different from the 'interest rate'. The second difficulty is that the sentence goes on to specifically set out how the rate is to be calculated. It states that the interest is to be calculated on a daily basis at 'the highest rate payable ... immediately before the Enforcement Date'. It would be most surprising for the drafter to have said the same thing twice in the same sentence, and to have used the word 'period' when 'rate' was meant. We do not accept this alternative interpretation.

Context within the agreement

[22] The second step is to consider the relevant clause in the context of the agreement as a whole, in particular in relation to any other clause that may relate to the relevant subject matter. The priority deed contains a number of provisions before the execution clauses, and then in the schedule sets out further terms and an interpretation section. This contains the definition of 'first secured party priority amount', including at subclause (b) the amount that can be claimed for interest. It also stated that the interest period is 24 months.

[23] Earlier, at paragraph 5 of the provisions of the deed there is a clause headed 'Reduction in First Secured Party’s Nominated Amount'. The clause reads as follows:

The First Secured Party agrees that any proceeds of sale of any part of the Land received by it or any amounts received by it from the Debtor which derive from such proceeds will, subject always to the provisions of this deed, be applied first in payment of any outstanding interest on the First Secured Debt but limited to an amount equal to the interest that would accrue in a period of 24 months at the rate charged by the First Secured Party under the Loan Agreement and secondly in repayment of the First Secured Debt. With effect from the payment of such amount the First Secured Party Amount will be reduced by an amount equal to the amount of the proceeds applied in repayment of the First Secured Debt (but subject always to any amount being avoided under any law of insolvency). It is acknowledged that the Debtor shall be obliged to apply all proceeds of sale of any part of the Land (less market related agent’s fees, legal fees and any GST) in repayment of the First Secured Debt as provided in this deed.

(Emphasis added.)

[24] Mr Gedye submitted that clause 5 should be given priority over the definition of 'first secured party priority amount'. He emphasised the reference to 24 months interest being recoverable, and submitted that this is the only limitation on KC Securities’ ability to recover the interest. The Associate Judge did not address such an interpretation of clause 5 in his judgment. This was understandable, as we understand that no submission was made to him on the point. On appeal it was given considerable emphasis, and Mr Gedye submitted that the failure to address the point led to the wrong result. In particular he submitted that the Judge’s references to the parties’ intention and the reference to 'freeboard' were inconsistent with clause 5. He described clause 5 as being the 'paramount operative mandatory provision'.

[25] However clause 5 in our view has a much more limited meaning. It does not in its heading or in its place in the agreement relate directly to priorities between the secured creditors. It applies to the proceeds of sale of any 'part of the land' or amounts received which 'derive from such proceeds'. It provides that those moneys will be applied first in payment of any outstanding interest on the first secured debt, but limits this to an amount equal to the interest that would accrue in a 24 month period. Only after payment of the 24 months of interest are the proceeds of sale to be used to reduce the secured debt.

[26] The clause, therefore, regulates the way in which the proceeds of a sale of part of the land will be applied, first to interest and then to principal. By directing that up to 24 months interest is to be paid first it clarifies the extent to which the first secured party amount will reduce. It also creates a long stop for the calculation of interest. It ensures that the first secured party and indeed the second and third secured parties who have the benefit of identically worded clauses in the next paragraphs, cannot allocate unlimited proceeds against accrued interest.

[27] Clause 5 provides that it is 'subject always to the provisions of this deed'. This indicates that it is not intended to be a paramount clause, prevailing over a different inconsistent clause elsewhere in the deed. It cannot be construed as amending the provisions in the schedule to the deed that are specifically devoted to the priorities between the three secured creditors. Mr Gedye suggested that if subclause (b) was given priority over clause 5 that would be the tail wagging the dog. We consider the position to be the other way round. Subclause (b) is the clause specifically dealing with the priority of interest, and is the primary clause on priority issues.

[28] Mr Gedye relied on the recent Supreme Court decision of Totara Investments Ltd v Crismac Ltd[3] to support his argument that clause 5 was the operative and paramount clause. In that case boilerplate provisions were not permitted to take priority over what was seen to be the primary clauses, even though this meant that the boilerplate clauses were left with 'little or no work to do'.[4] That case does not assist KC Securities. The clauses in the interpretation section of the schedule, in particular subclause (b), are not boilerplate provisions. They are the clauses that expressly deal with the priorities and are central to the purpose of the deed.

Factual background

[29] Mr Gedye submitted that the Associate Judge was in error in deciding the case without hearing about the factual background. He submitted that the Judge made a specific mistake when he approached the interpretation exercise assuming that there was 'freeboard' or margin in the sum negotiated as the first secured party amount. It was submitted that the Associate Judge had no evidence on which to base this conclusion, which was an assessment that could have only been properly made following a full hearing.

[30] In Investors Compensation Scheme Ltd v West Bromwich Building Society,[5] Lord Hoffmann stated:[6]

Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

[31] The well-known principles set out in Investors Compensation Scheme Ltd were affirmed by the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd[7] where Lord Hoffmann emphasised that there must be a strong case to persuade the Court that something has gone wrong with the contractual language. They were considered and confirmed by the Supreme Court in Vector Gas Ltd v Bay of Plenty Energy where Tipping J observed:[8]

The ultimate objective in a contract interpretation dispute is to establish the meaning the parties intended their words to bear. In order to be admissible, extrinsic evidence must be relevant to that question. The language used by the parties, appropriately interpreted, is the only source of their intended meaning. As a matter of policy, our law has always required interpretation issues to be addressed on an objective basis. The necessary inquiry therefore concerns what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean. The court embodies that person. To be properly informed the court must be aware of the commercial or other context in which the contract was made and of all the facts and circumstances known to and likely to be operating on the parties’ minds. Evidence is not relevant if it does no more than tend to prove what individual parties subjectively intended or understood their words to mean, or what their negotiating stance was at any particular time.

[32] While the background circumstances may be considered, the test remains objective. There is no place for evidence of the subjective intentions of the parties. Lord Hoffmann’s cautionary words in Bank of Credit and Commerce International SA v Ali[9] are relevant, where he said of his formulation in Investors Compensation Scheme Ltd v West Bromwich Building Society:[10]

... But the primary source for understanding what the parties meant is their language interpreted in accordance with conventional usage: ‘we do not easily accept that people have made linguistic mistakes, particularly in formal documents.’ I was certainly not encouraging a trawl through ‘background’ which could not have made a reasonable person think that the parties must have departed from conventional usage.

[33] There was evidence of the factual background before the Associate Judge at the summary judgment hearing. The affidavit filed for the plaintiff was from a Mr L J Church who was a consultant employed by the liquidators of Belgrave Finance. He gave a factual account of the sequence of events, documents and payments. For KC Securities the deponent was Mr K R Dargaville who was a director of KC Securities through the relevant period. He deposed that the first secured party amount of $1,895,000 was the amount KC Securities was entitled to be repaid on 30 April 2007 but that it did not include an amount for further interest. He said that when there were payment defaults there was always a period when the vendor would not take enforcement action but would work with the debtor to see what arrangements could be made for repayment.

[34] Mr Dargaville said that where there were multiple secured parties, the second and subsequent secured parties would wish to discourage matters being allowed to drift in a default situation while interest and costs that may rank ahead of them rise. For that reason a limit is set as to the amount over which the first or subsequent secured party will hold priority. As a consequence there is occasionally a negotiation between the secured parties as to the amount over which priority is to be given, with the first secured party wanting the amount to be as high as possible and the subsequent secured party wanting it to be as low as possible. Indeed, the correspondence shows that Belgrave Finance sought to limit KC Securities’ priority to 'an amount not more than $1,830,000 plus up to 12 months’ interest and fees'. However, they ultimately reached a 24 month period of interest and a first secured party priority amount of $1,895,000.

[35] Mr Dargaville deposed that it was his experience that lenders had priority for the amount of the facility plus the full amount of interest and fees and costs which accrue or would accrue during the priority period. The agreed amount sets an absolute limit, and will be recovered in full. He asserted that the claim that interest in priority will only run from the Enforcement Date is a wholly novel argument and makes no sense from a commercial point of view. He observed that the words 'commencing on the Enforcement Date' in subclause (b) of the definition have now been deleted from the revised edition of the standard form deed which was published by the New Zealand Bankers’ Association on 1 June 2008.

[36] The agreement in question was a standard form agreement for the use of commercial financiers, negotiated by two experienced commercial participants at arm’s length. It must be recognised that the priority deed gave the first secured lender a commercial advantage in abrogating the rules in Clayton’s Case[11] and Hopkinson v Rolt.[12] So it could be expected that there would be trade-offs and compromises in the struggle between the lenders for the best priority position. The parties had the ability to bargain as to the amount of interest that each secured party could claim in priority to the other. They in fact negotiated changes.

[37] It was open for the parties to negotiate an allowance for pre-Enforcement Date interest as part of the first secured party amount. The figure ultimately reached would be determined by commercial considerations but the opportunity to allow an amount for extra interest nevertheless existed. If the first secured party did not include any or any sufficient sum for pre-Enforcement Date interest, then they were stuck with post-Enforcement Date interest only under subclause (b), with a 24 month long stop. We derive no assistance from Mr Dargaville’s assertions as to what makes commercial sense. These types of statements are adjectival and subjective and thus inadmissible. However, the background fact that negotiations as to the priority amount could take place between competing financiers has some relevance in that it is evidence of a practice which on an objective assessment enabled the parties to negotiate for pre-Enforcement Date interest. This confirms our view that any inequalities could be dealt with in the negotiation process.

[38] The position can be usefully distinguished from that in Vector Gas. The issue in Vector Gas was the interpretation of the crucial clause in a relatively short letter as to the amount to be paid for electricity and whether or not the figure stated was inclusive or exclusive of the costs of supply. The rejected meaning there produced a commercially absurd result which, as McGrath J observed[13] could not be explained by one party being out-negotiated or obtaining a better deal. In contrast, in this case where there was an agreement with multiple clauses, there was room for trade-offs. In particular, there was a mechanism in the negotiated first secured payment amount for any commercial disadvantage arising from the exclusion of pre-Enforcement Date interest to be compensated. Viewed objectively any disadvantage to KC Securities arising from the terms of subclause (b) can be fully explained as a result of KC Securities failing to negotiate better terms. As Lord Hoffmann observed in Chartbrook,[14] the fact that a contract may appear to be unduly favourable to one of the parties is not a sufficient reason for supposing that it does not mean what it says.

[39] We do not derive any help either way from the later deletion of the phrase 'commencing on the Enforcement Date' from the New Zealand Bankers’ Association 2008 form of deed. Subsequent conduct can be relevant if capable of providing objective guidance as to intended meaning.[15] There is no evidence of any involvement of the parties in the actions which led to the change. There is not, therefore, any r

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elevant subsequent conduct to assess. Further, the later change does not, objectively assessed, confirm the meaning contended for by the appellant. To the contrary, the later change objectively assessed would tend to indicate that the parties no longer wished interest to run only from the Enforcement Date and had changed the agreement to reflect this intention. The change, if anything, supports the plain meaning. [40] The words have a plain and unambiguous meaning in accordance with conventional usage. That meaning, which was that only interest payable after the Enforcement Date had priority, did not flout business or common sense. It did no more than limit the priority for interest of KC Securities over the other financiers. The parties had an opportunity to negotiate a sum payable for interest for the pre-Enforcement Date period and include that in the first secured party amount if they wished to do so. No case has been made out to show that something has gone wrong with the contractual language. The commercial parties chose to word and structure the contract in the way they did and it is not for the Court to rewrite the contract. KC Securities through Mr Dargaville has already set out its perspective on the commercial background, and we are satisfied that further evidence would not assist the interpretation exercise. [41] Therefore, we conclude that the Associate Judge was correct in his assessment that there was no defence to Belgrave Finance’s claim and in entering judgment for Belgrave Finance in the sum of $204,271.33 plus interest and costs. Result [42] The appeal is dismissed. [43] The respondent is awarded costs against the appellant as for a standard appeal, Band A, together with usual disbursements. [1] Belgrave Finance Ltd (In Rec) v KC Securities Ltd HC Auckland CIV-2009-404-6022, 9 February 2010. [2] Vector Gas Limited v Bay of Plenty Energy Limited [2010] NZSC 5, [2010] 2 NZLR 444 at [4]. [3] Totara Investments Ltd v Crismac Ltd [2010] NZSC 36. [4] At [30]. [5] Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL). [6] At 912. [7] Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 (HL) at [14] and [15]. [8] Vector Gas at [19]. [9] Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 (HL). [10] At [39]. [11] Clayton’s Case (1816) 1 Mer 529 (Ch). [12] Hopkinson v Rolt [1861] EngR 641; (1861) 9 HL Cas 514. [13] At [82]. [14] At [20]. [15] Wholesale Distributors Ltd v Gibbons Holdings Ltd [2007] NZSC 37, [2008] 1 NZLR 277 at [52]–[53].