IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY COMMERCIAL LIST CIV 2013-404-4168 [2014] NZHC 912 UNDER THE COMPANIES ACT 1993 IN THE MATTER OF STARPLUS HOMES LTD (IN LIQUIDATION) BETWEEN SHAUN NEIL ADAMS AND JOHN ROBERT BUCHANAN (AS LIQUIDATORS OF STARPLUS HOMES LTD (IN LIQUIDATION)) Applicants AND DAVID WEI SUN First Respondent MAGSONS HARDWARE LTD Second Respondent HAMILTON HARDWARE RETAIL LTD Third Respondent UNITED TIMBER MERCHANTS LTD Fourth Respondent DALE KING BUILDING SUPPLIES LTD Fifth Respondent RD 1 LTD Sixth Respondent Hearing: 24 and 25 February 2014 Counsel: No appearance by or on behalf of Applicants N W Ingram QC and C J R Baird for First Respondent M D Arthur for Second Respondent M D Branch for Third Respondent P R Cogswell for Fourth Respondent K A Lomas for Sixth Respondent No appearance by or on behalf of Fifth Respondent Judgment: 6 May 2014 JUDGMENT OF HEATH J This judgment was delivered by me on 6 May 2014 at 4.00pm pursuant to Rule 11.5 of the High Court Rules Registrar/Deputy Registrar ADAMS AND BUCHANAN (AS LIQUIDATORS OF STARPLUS HOMES LTD (IN LIQUIDATION)) v SUN [2014] NZHC [6 May 2014] CONTENTS The problem The application Background The competing claims The “validity” questions Magsons’ claim (a) The contractual provisions (b) The security interest Hamilton Hardware’s claim (a) The contractual provisions (b) The security interest United Timber’s and RD 1’s claims (a) The contractual provisions (b) The security interest Priority issues (a) Legal principles (b) Priorities as among charge holders Marshalling Result [1] [3] [7] [13] [20] [21] [24] [36] [40] [54] [57] [59] [64] [75] [95] The problem [1] Starplus Homes Ltd (Starplus) was engaged in property development. It was put into liquidation on 22 April 2013.1 Starplus owned a large number of properties, over which its primary lender, ASAP Finance Ltd (ASAP), held first mortgages. All fell into default. ASAP conducted mortgagee sales to recover the amount owing to it. Not only were the proceeds of sale sufficient to repay ASAP in full, but there was also a surplus to be applied towards other debts. [2] How should the surplus be distributed? A number of creditors claim legal or equitable security interests in some or all of the properties. It is necessary to consider the validity of each security interest claimed, the respective priorities, and whether there should be any apportionment of the fund among the secured claimants, through the equitable principles of marshalling.2 1 2 Subsequently, on 24 April 2013, Messrs McKay and Cregton were appointed as receivers of Starplus by Westpac Banking Corporation, the holder of a general security agreement. Westpac having been paid in full, the receivers resigned on 23 August 2013. For that reason, there is no need for me to discuss the involvement of the receivers. Discussed at paras [59]–[63] below. The application [3] Starplus was incorporated on 5 December 2007. Initially, it carried on its business in the Waikato, later expanding into South Auckland. When it was put into liquidation on 22 April 2013, Mr Buchanan was appointed as its liquidator. Subsequently, on 3 May 2013, Mr Buchanan resigned to facilitate the joint appointment of Mr Adams and himself. The liquidators have applied to this Court for directions about the way in which the surplus should be distributed.3 [4] There are five competing claimants.4 Mr Sun holds a registered second mortgage over two properties, situated at 731 and 741 Redoubt Road, Manukau.5 They were the last of 20 properties to be sold by ASAP.6 The proceeds of sale of those two properties represents about 70% of the available surplus.7 The other four claimants are building supply companies, each of which asserts that it has an equitable interest in properties owned by Starplus. Each claims that it contracted with Starplus on terms that included an agreement to mortgage real property. [5] In respect of each of the claims, there are three issues that require determination: [6] (a) The validity of security interests claimed. (b) The priority to be afforded to each creditor who has a valid claim. (c) Whether the equitable doctrine of marshalling should be applied. The liquidators elected not to present an adversary argument on behalf of preferential and unsecured creditors. They abide the decision of the Court. As a result, a discrete question has arisen about whether the liquidators are entitled to indemnity costs, payable out of the fund, for the steps they have taken in this 3 4 5 6 7 Under s 284(1) of the Companies Act 1993. A sixth, Dale King Building Supplies Ltd, withdrew its claim before the hearing. See para [14] below. See para [11] below. See para [16] below. proceeding. That question was argued separately, and is the subject of a separate judgment that I am delivering contemporaneously.8 Background [7] Starplus purchased land from other property developers on builders’ terms. Its aim was to pay a deposit of 5%, on the basis that settlement would occur at some future time. While developing the property, Starplus would enter into a contract to sell to an end purchaser. Settlement of its purchase from the property developer and its sale to the purchaser were to be undertaken contemporaneously. At the time of Starplus’ expansion into South Auckland, its business appeared to be operating successfully. [8] However, things did not go to plan. The company was unable to generate sufficient cash to meet its obligations to creditors. One of the liquidators, Mr Adams, opines that this was due to rapid growth, coupled with the absence of financial controls that might have enabled the directors of the company to make more informed operational decisions. [9] Mr Adams’ estimate of Starplus’ preferential and unsecured indebtedness is something in the order of $18.75 million. The existing secured claims are about $16.4 million. That leaves the total indebtedness at approximately $35.15 million. [10] When ASAP began the mortgagee sales process, all that it wanted to achieve was repayment of its debt. As its goal was to recover the monies owing to it, the order in which the properties were sold was of no particular moment. [11] The order in which ASAP might have sold the properties was influenced by a number of external factors.9 As it transpired, the properties at 731 and 741 Redoubt Road, Manukau were the last to sell. Their sale left surplus funds available for distribution to lower ranking secured creditors. As ASAP was aware that sale of the Redoubt Road properties was likely to generate a surplus, it applied to this Court (under s 200 of the Property Law Act 2007) for an order authorising the sales and 8 9 Re Starplus Homes Ltd (in liquidation) (No 2) [2014] NZHC 913. See para [90] below. requiring their proceeds (together with other surplus money) to be paid into Court, to await a judicial decision about distribution among the competing claimants. Brown J made orders to that effect on 31 July 2013. 10 At that stage, ASAP had no further interest in its proceeding. [12] The liquidators filed their application for directions on 9 September 2013. In effect, it superseded ASAP’s s 200 application. On 10 December 2013, by consent, Lang J granted leave for the ASAP proceeding to be discontinued. He directed that the money paid into Court be held pending determination of the present application. A total of $1,747,229.28 (exclusive of interest) is held by the Registrar. The competing claims [13] Mr Sun claims on the basis of second mortgages in his favour that are registered against each of the two Redoubt Road properties. Mr Sun and Mr Lee (a director of Starplus) were known to each other. At sometime in early February 2013, Mr Lee approached Mr Sun and asked whether he would advance $920,000 to Starplus on a short term basis. Mr Sun agreed. He did so on the basis that the loan would carry interest at 25% per annum, and be repayable in two months. It is common ground that Mr Sun advanced $920,000 to Starplus on 21 February 2013. Mr Sun is owed that sum, together with interest and claimable costs. [14] Although public documents reveal a priority to ASAP of $4.8 million,11 Mr Sun’s evidence is that he believed the priority for each mortgage would be $1 million. Mr Sun says that Mr Lee informed him that each of the two properties would be worth something in the vicinity of $1.4 million to $1.5 million when completed, and that one of the properties was “almost complete”. However, there is nothing in the evidence to suggest that Mr Sun was naïve in business matters. I infer that he was not. On any view, this was high risk lending. 10 11 ASAP Finance Ltd v Starplus Homes Ltd (in rec and in liq) HC Auckland CIV 2013-404-3432, 31 July 2013 (Minute of Brown J) at para [3]. This sum appeared on each of the mortgages held by ASAP. [15] Magsons Hardware Ltd (Magsons), Hamilton Hardware Retail Ltd (Hamilton Hardware), United Timber Merchants Ltd12 (United Timber) and RD 1 Ltd (RD 1) (the building supply companies) each entered into agreements to supply building materials to Starplus. They did so, initially, on the basis of standard terms and conditions used by each. Magsons and Hamilton Hardware entered into subsequent agreements with Starplus. [16] The surplus held in Court has been derived from seven separate mortgagee sales and is made up as follows:13 (a) 731 Redoubt Road $591,335.91 741 Redoubt Road $772,014.60 $1,363,350.51 (b) 3 Ihimaera Terrace, 1 Clewer Lane, 3 Raupo Place, 60 Magellan Rise, 62 Magellan Rise (c) 18 Alexia Place TOTAL [17] $383,353.77 $525.00 $1,747,229.28 Magsons, Hamilton Hardware and United Timber had each lodged caveats against those properties, to protect their equitable interests under their asserted 12 13 At the time the transaction was initially entered into the company was known as Akarana Timber Ltd. Its name was changed on 17 May 2013. The amount shown in respect of the Alexia Place property reflects a refund following an apportionment of expenses on settlement. agreements to mortgage. All of the caveats were registered in the period between 4 April 2013 and 12 April 2013. Those companies had also registered caveats against the 13 properties that had been sold earlier by ASAP. RD 1 did not take any steps to protect its agreement to mortgage by way of caveat. [18] The amounts said to be owing to the building supply companies (all exclusive of interest and costs) are: (a) Magsons $4,236,964.90 (b) Hamilton Hardware $1,387,508.74 (c) United Timber $88,947.44 (d) RD 1 $17,127.59 TOTAL [19] $5,730,548.67 Mr Sun, as the holder of a second registered mortgage in respect of both Redoubt Road properties, would ordinarily expect to receive payment of his debt from the proceeds of their sale, in priority to any creditor with only an equitable interest in the land. However, the building supply companies contend that they have been inappropriately disadvantaged through ASAP’s arbitrary choice of the order in which it, as the senior creditor, conducted the mortgagee sales. Each contends that, once the validity and priority of any equitable claims are fixed, they are entitled to ask the Court to apportion the proceeds, so that a just division is achieved among all secured creditors, irrespective of whether their interests are legal or equitable in nature. The “validity” questions [20] So far as validity is concerned: (a) It is common ground that Mr Sun has a valid and enforceable second mortgage over each of the Redoubt Road properties. (b) The following questions arise in respect of Magsons’, Hamilton Hardware’s, United Timbers’ and RD 1’s alleged security interests: (i) Are the terms sufficient to charge properties acquired by Starplus after the date on which the agreements were signed? (ii) In the case of Magsons and Hamilton Hardware, did their alleged security survive various amendments to their terms of trade with Starplus? Magsons’ claim (a) The contractual provisions [21] By an agreement dated 18 June 2011, Magsons agreed to supply building materials to Starplus, on its standard terms and conditions of sale (the standard terms). Clause 7.3 states: If the Customer is in default the remedies provided above shall apply as well as all other remedies at common law or otherwise available to the Company. The Customer shall be liable for any losses, costs, expenses and liabilities incurred by the Company in exercising its remedies and the Customer hereby agrees to fully indemnity the Company in respect of any such losses, costs expenses and liabilities. It is also hereby agreed by the Customer and/or Guarantor that the Company shall have the right and liberty to complete and have registered a MORTGAGE over any property owned by the Customer and/or Guarantor to secure monies owed by the Customer and the Company shall also have the right at its discretion to place a caveat on any such property for the purpose of this provision and the Customer and/or Guarantor hereby irrevocably appoints the Company as the Attorney of the Customer and/or Guarantor for the purpose of executing such mortgage. [22] On 7 January 2013, a Memorandum of Understanding (the Memorandum) was executed by Magsons and Starplus. The document refers to “draft principles” that had been “jointly negotiated between the parties”.14 The stated purpose of the Memorandum was “to record the parties’ agreement in relation to the supply of goods by Magsons ... to [Starplus] ..., the agreement payment terms, and the ratio of 14 Clause 1 of the Memorandum of Understanding. security supplied by [Starplus] in relation to the outstanding indebtedness to Magsons”.15 The Memorandum was to continue in force until 14 January 2014.16 [23] Clauses 3, 4 and 11 of the Memorandum dealt separately with “price and payment terms” and “security” respectively. They state:17 3. Price and Payment Terms The general basis upon which the parties are proceeding is as follows: Magsons Hardware Limited will supply building materials and services to [Starplus] Homes Ltd at agreed commercial rates. Magsons Hardware Limited will extend payment terms on the [Starplus] Homes Ltd Trading Account to “90” days, with payment being due on the 20th of the month in the 3rd month after delivery and invoicing. Credits and returns: The provisions of the Magsons Hardware terms and conditions apply. Orders: Without exception authorised purchase orders are to be used for each individual transaction. 4. Security [Starplus] Homes Limited will supply security by way of registered caveats in favour of Magsons Hardware Ltd to a value of 1.5 times the value of the Current credit limits of the [Starplus] Homes Limited Trading Account with Magsons Hardware Limited. [Starplus] Homes Limited are to provide the titles and current valuations associated with the properties offered as security, to ensure that the ratio of the security is met. The proposal is that the current credit limit of the [Starplus] Homes Limited Trading Account be raised to $4 million dollars, and be reviewed on a monthly basis. Magsons Hardware Limited will release caveats, on properties completed and nearing sale, and replace the released properties with newly started building projects to keep the caveat protected value of the total of properties covered by these caveats at the agreed ratio to the value of the trading account credit limit with Magsons Hardware Limited. ... 15 16 17 Clause 2. Clause 9. The clause refers to 14 January 2013 but that is clearly an error. It was to enure for one year. There remains some debate about whether the credit limit of $4 million, set out in cl 4 of the Memorandum, was later varied downwards. On the view I take, nothing turns on the point. 11. Relationship Nothing in this [Memorandum of Understanding] creates a partnership or relationship of employer or employee or principal and agent between the parties. This [Memorandum of Understanding] is to read in conjunction with the terms and conditions applicable to all Magsons Hardware Limited credit accounts. The conditions in this [Memorandum of Understanding] take precedence over those in the original terms and conditions signed by [Starplus] Homes Ltd. (a copy is attached for your reference). (b) The security interest [24] In relation to Magson’s claimed security interest, the first question is whether cl 7.3 creates an equitable interest in land that was acquired after the standard terms were signed. [25] Both Mr Ingram QC, for Mr Sun, and Mr Cogswell, for United Timber, contended that cl 7.3 did not go far enough to charge land acquired after 18 June 2011, being the date on which the standard terms were signed. By cl 7.3, Starplus (and the guarantor) gave Magsons “the right and liberty to complete and have registered a Mortgage over any property owned by [either of them] to secure moneys owed” by Starplus to Magsons. The parties’ agreement that Magsons may “place a caveat on any such property” to protect that interest is consistent with the notion that an equitable interest in both present and future land was granted. [26] The nature of Starplus’ business required the regular purchase and sale of land.18 That was known to the suppliers. Starplus’ landholdings were akin to stockin-trade, or inventory. There would be no commercial reason for a building supplier to restrict its security to a property that it knew was likely to be sold in the near future. A security arrangement that permitted the supplier to protect its equitable mortgage by lodging caveats against properties purchased as part of Starplus’ ordinary business activities was more likely to have been intended. That sort of arrangement would better protect what was clearly seen as a long-term business relationship. 18 See para [7] above. [27] The nature of the relationship was confirmed in the Memorandum, in which time for payment was extended on a basis that enabled Magsons to be satisfied that the property secured would remain at a value equivalent to 1.5 of the relevant credit limit.19 The wording of cl 7.3 was clearly intended to create an equitable interest in both present and future property owned by Starplus. [28] As a matter of law, a person can mortgage land that has not yet been acquired. Delivering the judgment of the Court of Appeal in Pacific Homes Ltd (in rec) v Consolidated Joineries Ltd, Blanchard J said:20 Counsel for the receivers also argued that Consolidated Joineries can show no equitable interest arising from its conditions of sale in any of the 12 properties. His argument was directed to the portion of the conditions already quoted that says that the purchaser (Pacific Homes) "hereby grants a registrable mortgage". Counsel said that in its own terms this purported to be a present grant of a registrable mortgage over either land already owned by Pacific Homes into which products of Consolidated Joineries Ltd had then (ie at the time of adherence by Consolidated Joineries Ltd to the form of conditions) been incorporated or land not owned by Pacific Homes into which such products had already been incorporated. He submitted that each set of the conditions could apply only to the products supplied after Pacific Homes had agreed to be bound by them. As neither of the situations mentioned in the conditions could at that time have already occurred pursuant to the conditions in question, there was no security actually given, despite appearances. We have no hesitation in rejecting this submission as being without merit. It is entirely unlikely that the parties would have intended to do business on the basis of a document which referred to the grant of a mortgage but could never be effective to confer any such security. A construction which gives some commercial sense is always to be preferred. Plainly, the provision is addressing events which are to occur in the future. Supplies are contemplated to be afterwards made by Consolidated Joineries Ltd. Where "in breach of these conditions" the joinery becomes a fixture on Pacific Home's land there is to be a mortgage of that land. Where joinery becomes a fixture on land not owned by Pacific Homes then there is to be a mortgage over "any land" owned by Pacific Homes. (It is agreed by counsel that no joinery was incorporated in Pacific Home's land so it is unnecessary to explore the meaning of the reference to breach of the conditions, which seems obscure.) The futurity of the provision can be seen from its context, especially the next sentence which contains a mechanism for the creation, execution and registration of a security, obviously one in registrable form, and from the expression "where products are incorporated". 19 20 See cl 4 of the Memorandum, set out at para [23] above. Pacific Homes Ltd (in rec) v Consolidated Joineries Ltd [1996] 2 NZLR 652 (CA) at 657. ... (Emphasis added) [29] Pacific Homes is authority for the proposition that an agreement to mortgage such future land is sufficient to give rise to an equitable interest which will support a caveat. I adopt that approach. I hold that the agreement to mortgage did attach to property acquired by Starplus after the date of its agreement with Magsons. [30] The second question involves the interrelationship between the standard terms and the Memorandum. Did cl 7.3 of its standard terms survive execution of the Memorandum? While there is no equivalent of cl 7.3 in the Memorandum, cl 3 makes it clear that Magsons’ standard terms and conditions continued to apply, at least with regard to “credits and returns”. [31] Mr Arthur, for Magsons, contended that the Memorandum supplemented, rather than supplanted, Magsons’ standard terms. His argument relies on cl 4 of the Memorandum (a security provision) being interpreted as a mechanical provision, designed to put into place a process by which Starplus would supply caveats to Magsons so that it could protect its interest as an equitable mortgagee, under cl 7.3. [32] In contrast, Mr Cogswell placed weight on cl 11 of the Memorandum. In particular, he referred to the latter part of that clause which states that the conditions in the Memorandum “take precedence over those in the original terms and conditions”. [33] The Memorandum was prepared by a lay person. While that person was employed by Magsons, I do not consider that the Memorandum should be construed against Magsons’ interests on that basis alone. The Memorandum must be interpreted in its commercial context. That was one involving a continuing business relationship that had developed beyond what was contemplated by the standard terms. The parties were defining terms that would meet the needs of their continuing (and growing) relationship. That was done against the backdrop of a pre-existing arrangement, under which Starplus had agreed to mortgage its property in favour of Magsons. That approach is confirmed by the first part of cl 11 of the Memorandum which provided that the Memorandum was “to be read in conjunction with the terms and conditions applicable” to all Magsons’ credit accounts. [34] In my view, cl 4 of the Memorandum must be viewed as providing a mechanism to ensure that registerable caveats were made available to Magsons, in order to facilitate protection of that supplier’s equitable interest in the land owned by Starplus. The equitable interest sprang from cl 7.3 of the standard terms. The commercial imperatives of the agreement are met, on that interpretation. [35] I am satisfied that cl 7.3 remained in force, and provided the equitable interest that the caveats to which the Memorandum referred were designed to protect. Hamilton Hardware’s claim (a) The contractual provisions [36] Hamilton Hardware entered into a “trade credit agreement” with Starplus on 9 May 2008. That document contains the provision on which Hamilton Hardware relies to support its claim of an equitable interest in land owned by Starplus. It is in identical terms to cl 7.3 of Magsons’ standard terms.21 Both companies are Mitre 10 franchisees. [37] In November 2009, Hamilton Hardware entered an extended credit arrangement with Starplus. There is no provision akin to cl 7.3 in that agreement. The 2009 agreement recorded that, at Starplus’ request, Hamilton Hardware had agreed “to extend normal commercial credit payment terms on purchases from [Hamilton Hardware], from 30 days to 60 days”, in recognition of the value of purchases that Starplus and its “associates” intended to make. In return, Starplus agreed “to provide additional security for any amount outstanding by” it by way of second mortgages on two properties in Firth Street, Matamata owned by one of the guarantors. There is no other reference to mortgage security in that agreement. 21 Clause 7.3 is set out at para [21] above. In September 2011, an “exclusive supply agreement” was entered into [38] between Hamilton Hardware and Starplus. This document confirmed a credit facility for 60 days, with a limit of $750,000. As to security, cl 1(f) provided: 1. [Hamilton Hardware] have extended an account for the purchasing of goods for trade purposes to Starplus upon the following terms (‘credit facility’): ... (f) Starplus will provide security for the credit facility in consideration of advances made by [Hamilton Hardware] to Starplus as follows: (i) Starplus acknowledges that [Hamilton Hardware] have registered a Personal Money Security Interest (PMSI) over the company on the Personal Property Security Register (PPSR). (ii) To give weight to this security, Starplus guarantee that all goods supplied by [Hamilton Hardware] to Starplus will be used exclusively in development of properties either owned and controlled entirely by Starplus, or in ‘Design and Build’ projects where Starplus is the primary contractor. .... [39] The 2011 agreement was to enure for one year, ending on 30 September 2012. The parties recorded their agreement that, on 1 October 2012, they would renegotiate its terms. No further contractual documents were entered into. (b) The security interest [40] Clause 7.3 of Hamilton Hardware’s standard terms is in the same form as that used by Magsons. Therefore, the same answer must be given. Subject to any specific counter-vailing factors pertaining to Hamilton Hardware’s distinct position, the equitable interest in the land arose on execution of the standard terms, on 9 May 2008.22 [41] After execution of the standard terms, two additional contractual documents were executed by the parties. They are the extended credit agreement and the 22 See paras [26]–[28] above. exclusive supply agreement.23 Was there anything in either of the subsequent agreements to displace the presumptive security interest that arose on execution of the standard terms? [42] The first question is whether the extended credit agreement of November 2009 was intended to govern the business relationship between Starplus and Hamilton Hardware in whole, or just in part. [43] Mr Branch, for Hamilton Hardware, submitted that the standard terms expressly contemplated the possibility of later documents being brought into existence to govern part of the parties’ trading relationship. Clause 11 of the standard terms states: [44] 11. OTHER AGREEMENTS 11.1 Subject to clause 11.2, if there is any inconsistency between these standard terms and conditions of sale and any order submitted by the Customer (whether in writing, verbally, or by Electronic Data Interchange (EDI)) or any other arrangement between the parties, these standard terms and conditions of sale prevail unless otherwise agreed in writing by the parties. 11.2 Where the parties have entered into a credit arrangement on terms other than those detailed in clause 2.1 (“alternative credit arrangement”), then, to the extent the alternative credit arrangement is inconsistent with these standard terms and conditions of sale, the alternative credit arrangement prevails. Clause 11 contemplates two different situations. Clause 11.1 deals with a situation in which a later agreement appears inconsistent with the standard terms. In that situation, the standard terms prevail. Clause 11.2 contemplates the existence of an “alternative credit arrangement”, on terms that are inconsistent with those set out in cl 2.1 of the standard conditions.24 In that case, the new terms are treated as having been substituted for the equivalent standard term because the parties have “otherwise agreed in writing”, for the purposes of cl 11.1. governing principle is that the specific overrides the general. 23 24 See paras [36]–[39] above. See para [45] below. In both cases, the [45] The issue is one of consistency or inconsistency. Clause 11.2 of the standard terms proceeds on the assumption that both the standard terms and any further credit agreement will coalesce to govern the business relationship between the parties. Clause 2.1 of Hamilton Hardware’s standard terms provided for payment of any amount due to be made “by the 20th of the month following the date of delivery”. That term governed all supplies unless Hamilton Hardware had agreed otherwise in writing. Clause 1 of the extended credit agreement enlarged that term “from 30 days to 60 days, in recognition of the value of purchases intended to be made” by Starplus, and associate entities. It follows that, by virtue of cl 11.2 of the standard terms, the 2009 agreement took precedence only “to the extent [that it was] inconsistent with” the standard terms. There was no inconsistency between the 2009 agreement and the standard terms, in relation to cl 7.3. [46] The second question is whether the security interest created by cl 7.3 was removed by the terms of the extended credit agreement, either expressly or by necessary implication. It was not the former. Was it the latter? [47] Clauses 2 and 3 of the extended credit agreement addressed the question of security, but only in the context of the guarantors, Richard Lee and Dahang Yang.25 Those clauses stated: [48] 2. In return the Debtor has agreed to provide additional security for any amount outstanding by the Debtor or the #1 Guarantor by way of second mortgages on two properties situated at 197 & 199 Firth Street in Matamata and owned by the #2 Guarantor. 3. Enforcement of the security provided by the #2 Guarantor is entirely at the Company’s discretion, and both Guarantors undertake to complete any documentation required by such enforcement promptly and accurately. The term “additional security” makes it clear that the security to which cl 2 refers is distinct from that already given by cl 7.3 of the standard terms. The second mortgages on the two properties of Dahang Yang were provided by the guarantors to give greater assurance to Hamilton Hardware that any debt owing by Starplus would be repaid. On a natural reading, it is clear that the parties were agreeing to the 25 Richard Lee was defined as “#1 Guarantor” and Dahang Yang, as “#2 Guarantor”. provision of additional security in consideration of the longer period of credit that was being extended to Starplus. [49] The provision of two additional properties for security purposes by a guarantor/s is not inconsistent with the cl 7.3 obligation, whereby Starplus agreed to mortgage its present and future properties as security for any debt owed to Hamilton Hardware. The distinction between properties owned (or to be owned) by Starplus, and those of the guarantors is determinative. In my view, cl 7.3 survived the extended credit agreement. [50] In September 2011, Hamilton Hardware and Starplus entered into an exclusive supply agreement. That meant that Starplus was required to use goods and materials supplied by Hamilton Hardware’s “Mitre 10 Mega Hamilton” store “in property developments owned or controlled” by it. Preamble G of the Deed stated that it was entered into in order “to record the terms of exclusivity, credit and use of goods”. [51] Although Starplus was required to purchase certain trade items exclusively from Hamilton Hardware, not all of those listed in the Schedule to the 2011 agreement were contained in the standard terms. In other words, some goods continued to be supplied under the standard terms. [52] The critical aspect of the exclusive supply agreement is its provision as to security.26 By cl 1(f), Starplus acknowledged that Hamilton Hardware had registered a purchase money security interest, under the Personal Property Securities Act 1999 in respect of goods supplied by it. And, Starplus agreed that such goods would be used exclusively in developing properties owned or controlled by Starplus.27 When read in context, cl 1(f) did no more than to link Starplus’ promise to acquire certain goods exclusively from Hamilton Hardware to those goods that were subject to the purchase money security interest. Nothing in cl 1(f) is inconsistent with the continued existence of the security arrangements set out in cl 7.3 of the standard conditions. 26 27 See cl 1(f), set out at para [38] above. Clause 1(f) is set out at para [38] above. [53] The exclusive supply agreement was not renewed when it expired on 30 September 2011. Before expiration, both the standard terms and the 2011 agreement were in force, in parallel. After expiration, the 2011 agreement fell away and the business relationship between the parties reverted to that agreed under the standard conditions. The consequence is that cl 7.3 remained intact to charge all present and future land owned by Starplus, by way of equitable mortgage. I find that Hamilton Hardware’s claimed security interest is valid, with effect from 9 May 2008. United Timber’s and RD 1’s claims (a) The contractual provisions [54] United Timber and Starplus commenced a commercial relationship on 14 December 2012. They did so through standard terms and conditions into which the parties entered. That followed an application for credit made by Starplus on 14 December 2012. [55] Clause 20 of United Timber’s standard terms provided: 20. CAVEAT The Customer/Guarantor(s) charge(s) in favour of [United Timber] as security for the customer’s obligations to [United Timber], all rights, title and interest (including beneficial interest in any Trust) in any property held now by the Customer/Guarantor(s) either alone or jointly with anyone or acquired by the Customer/Guarantor(s) at any time hereafter, also as a trustee. If the Customer/Guarantor(s) default(s) in payment of any amount owed to [United Timber], the Customer/Guarantor(s) specifically authorise(s) [United Timber] to lodge a caveat against any such property and appoint(s) [United Timber] to be the Customer/Guarantor(s)’s Attorney for this purpose – provided that – this authority is to be taken as authority to create a mortgage charge on property if a caveat is not possible or if a mortgage charge is necessitated to protect [United Timber’s] interests, at [United Timber’s] discretion. [56] RD 1 entered into an agreement to supply building materials to Starplus on 8 June 2011. Its terms of trade contained a specific provision in relation to security: 17. Security: (a) You and the Guarantor(s) hereby grant us a security interest in all your present and after-acquired personal property and also a security interest in any present and future interest in land owned. You and the Guarantor(s) agree to the additional terms as set out in the Auckland District Law Society Memorandum of General Terms and Conditions, a copy of which is registered pursuant to section 155A Land Transfer Act 1952 under number 2007/4240. (b) If requested in writing by us you and/or the Guarantor(s) shall within 5 working days execute a mortgage over land owned (“the Mortgage”). The Mortgage shall be prepared by our solicitors and shall be on the current Auckland District Law Society all obligations mortgage form. (c) The securities granted in this clause shall secure all obligations owed to us from time to time, presently or in the future. (d) You and the Guarantor(s) hereby irrevocably appoint us to be your true and lawful attorney to sign in your name and the Guarantor(s) name on their behalf any security which we shall request you and/or the Guarantor(s) to execute pursuant to this clause. (e) Nothing in sections 114(1)(a), 117(1)(c), 120, 122, 133 or 134 of the PPSA applies. Your rights in sections 116, 119, 120(2), 121, 125 to 127, 129, 131 and 132 of the PPSA do not apply unless we are the purchaser. You waive your right under the PPSA to receive a copy of any verification statement. (f) RD1 may at its sole discretion register a security interest on behalf of a vendor when acting as agent but has no obligation to do so. (b) Security interests [57] Mr Sun’s challenge to the validity of the security agreements held by United Timber and RD 1 was based on the proposition that neither supplier had obtained a charge over the land acquired by Starplus, after the date on which their agreements were entered into, on 14 December 2012 and 8 June 2011 respectively.28 [58] As I have held, it was competent for Starplus to give a mortgage which attached to land that it owned at the time the agreement to mortgage was signed, and in respect of land acquired after that.29 It is plain from a reading of cl 20 of United Timber’s standard terms that land acquired after 14 December 2012 was to be captured within the agreement to mortgage.30 Likewise, there is an express reference to any “future interest in land owned” by Starplus, in cl 17(a) of RD 1’s agreement of 28 29 30 I have already set out the relevant condition in the standard terms of each supplier. Clause 20 of United Timber’s standard terms is set out at para [55] above. Clause 17 of RD 1’s is set out at para [56] above. See paras [28] and [29] above. See para [55] above. 8 June 2011. I find that the security interests claimed by both United Timber and RD 1 are valid. Priority issues (a) Legal principles [59] Mr Sun has a registered mortgage against the Redoubt Road properties. That is regarded as a legal interest in land. Magsons, Hamilton Hardware, United Timber and RD 1 each held agreements to mortgage, capable of being protected by the lodgement of a caveat, against land owned or subsequently acquired by Starplus. The claimed equitable interests in land are, prima facie, afforded priority in the order in which they are created. [60] The nature of the priority inquiry was discussed by the Court of Appeal in Australian Guarantee Corporation (NZ) Ltd v CFC Commercial Finance Ltd31 (AGC). It is the inter-relationship between the legal and equitable interests that assumes significance in this case. [61] Generally, a legal interest in land will take precedence over an equitable interest. As between themselves, equitable interests will be determined in the order in which they arose. Nevertheless, the authorities speak of an ability for the Court to re-order priorities, in limited circumstances. Those in which a prima facie priority might be altered were considered in a number of cases on which the Court of Appeal relied in AGC. Summarising the effect of those authorities, Tompkins J, for the Court, said:32 In Heid v Reliance Finance Corporation Pty Ltd (1983) 154 CLR 326 at p 333 Gibbs CJ expressed the general approach in these terms: If the merits are equal, priority in time of creation is considered to give the better equity. This is the true meaning of the maxim qui prior est tempore potior est jure: Rice v Rice [(1853) 2 Drew 73 at p 78 [61 ER 646, at p 648]]. But where the merits are unequal, as for 31 32 Australian Guarantee Corporation (NZ) Ltd v CFC Commercial Finance Ltd [1995] 1 NZLR 129 (CA), from 135; set out at para [60] below. See also, Butler v Fairclough (1917) 23 CLR 78 (HCA) at 91 (Griffith CJ). That dictum was approved by the Privy Council in Abigail v Lapin [1934] AC 491 (PC) at 502. Australian Guarantee Corporation (NZ) Ltd v CFC Commercial Finance Ltd, above n 31, at 135–136. instance where conduct on the part of the owner of the earlier interest has led the other to acquire his interest on the supposition that the earlier did not exist, the maxim may be displaced and priority accorded to the later interest. A particularly helpful statement of the proper approach, cited with approval in this Court in Green v Meltzer (1993) 6 NZCLC 68,393 by Casey J at p 68,396 and Thomas J at p 68,409, is in the joint judgment of Mason and Deane JJ in Heid at p 341: For our part we consider it preferable to avoid the contortions and convolutions associated with basing the postponement of the first to the second equity exclusively on the doctrine of estoppel and to accept a more general and flexible principle that preference should be given to what is the better equity in an examination of the relevant circumstances. It will always be necessary to characterise the conduct of the holder of the earlier interest in order to determine whether, in all the circumstances, that conduct is such that, in fairness and in justice, the earlier interest should be postponed to the later interest. Thus in Latec Investments (1965) 113 CLR at p 276 Kitto J said that the case where the conduct of the prior owner leads the later owner to acquire his interest on the supposition that the earlier interest does not exist — the test stated by Dixon J in Lapin v Abigail (1930) 44 CLR at p 204 — was just one "instance" of a case when the merits are unequal: see also Lapin v Abigail (1930) 44 CLR at pp 185-186 per Isaacs J; General Finance Agency, etc; Co (In liq) v Perpetual Executors and Trustees Association etc (1902) 27 VLR 739 at pp 742-744. To say that the question involves general considerations of fairness and justice acknowledges that, in whatever form the relevant test be stated, the overriding question is ". . . whose is the better equity, bearing in mind the conduct of both parties, the question of any negligence on the part of the prior claimant, the effect of any representation as possibly raising an estoppel and whether it can be said that the conduct of the first or prior owner has enabled such a representation to be made . . .": Sykes, Law of Securities, 3rd ed (1978), p 366; see also Dixon v Muckleston (1872) LR 8 Ch App at p 160; Latec Investments (1965) 113 CLR at p 276. Thus elements of both negligence and estoppel will often be found in the statements of general principle: see, for example, Lapin v Abigail (1930) 44 CLR at p 204 per Dixon J. (Emphasis added) [62] The Court continued:33 ... there is ample authority for the proposition that the Court's consideration should not be restricted solely to the conduct of the first equity holder. In Rice v Rice (1853) 2 Drew 73 Kindersley VC said that in examining the relative merits or equities of two parties, the Court must direct its attention to "the whole conduct of each party". In Abigail in the second passage to which we have referred, Lord Wright stated the test to be whether either has been guilty of an act or default that prejudices this claim. In Heid, in the passage 33 Ibid, at 136. from Sykes, Law of Securities (3rd ed, 1978), p 336 adopted by Mason and Deane JJ, reference is made to bearing in mind "the conduct of both parties". The passage in Heid referring to the conduct of both parties was adopted by Brooking J in Cash Resources Australia Pty Ltd v BT Securities Ltd [1990] VR 576 at p 586. [63] The final point is that, in determining where relative equities lie, the Court is entitled to have regard to conduct of the parties after creation of the second and subsequent security interests. In AGC, the Court of Appeal took the view that consideration of subsequent conduct was consistent with general principles applicable to determination of priorities. The Court said:34 ... But if the holder of the later interest subsequently acts in a way that causes the holder of the earlier interest to act contrary to its interests, we see no reason why that conduct should not be placed in the scales when determining where the equities lay. The Court is, after all, concerned with the demands of fairness and justice. The preferable approach, where there is subsequent conduct of a kind that equity will regard as significant, will be to consider the whole picture at the time of decision and to fix priorities according to which party then is perceived as having the better equity. The onus rests on the second equity holder as the party seeking to reverse the order of temporal priority. If, contrary to the normal rule, the later claimant is to be preferred, the onus lies on that claimant to demonstrate why: General Finance Agency and Guarantee Co of Australia Ltd (In Liquidation) v Perpetual Executors and Trustees Association of Australia Ltd (1902) 27 VLR 739 Holroyd J at p 743. (Emphasis added) (b) Priorities as among charge holders [64] Mr Sun is presumptively entitled to the proceeds of the sale of the Redoubt Road properties, as the holder of a registered second mortgage. That follows from the statutory regime for the application of proceeds of sale of a mortgaged property, set out in s 185(1) of the Property Law Act 2007; in particular s 185(1)(e).35 [65] The challenge to Mr Sun’s presumptive right of repayment from the proceeds of sale of the Redoubt Road properties must be determined in relation to the logically later question arising from the application of the equitable doctrine of marshalling. 34 35 Ibid, at 137. See also, in respect of the predecessor to s 185(1) (s 104(1) of the Land Transfer Act 1952) Hope v Hope [1977] 1 NZLR 582 (SC) at 583. [66] The next question concerns the priorities as among equitable charge holders. Based on the dates on which Magsons, Hamilton Hardware, United Timber and RD 1 each entered into supply agreements with Starplus, the prima facie priorities are: [67] (a) Hamilton Hardware – 9 May 2008 (b) RD 1 – 31 May 2011 (c) Magsons – 18 June 2011 (d) United Timber – 14 or 21 December 201236 Magsons, Hamilton Hardware and RD 1 have agreed what priorities should arise as among themselves. I do not need to rule on that. However, United Timber contends that it has priority over both Hamilton Hardware and Magsons. It does so on the basis that the equitable charges created by cl 7 of the respective standard terms were not triggered until Starplus defaulted on its obligations to each of those companies. [68] To determine whether United Timber’s contention is correct, it is necessary to consider the whole of cl 7 of the standard terms, in context. Clause 7 provides:37 36 37 7. DEFAULT 7.1 If an event of Default occurs: (a) Mitre 10 may suspend or terminate any contract; and (b) the Amount owing shall immediately become due and payable notwithstanding that the due date has not arisen; and (c) Mitre 10 is entitled to recover from the Customer all costs that Mitre 10 may incur in attempting to collect the Amount Owing and any other moneys owing by the Customer to Mitre 10 from time to time, whether in relation to any contract or on any other account whatsoever, The different dates are discussed at paras [70]–[72] below. For present purposes, the reference to “Mitre10” can be taken as a reference to each of Magsons, Hamilton Hardware and RD 1. 7.2 7.3 [69] If the Customer does not pay the Amount Owing by the due date: (a) Mitre 10 may charge the Customer a penalty of 1.5% per months calculated on a daily basis on the unpaid portion of the Amount Owing from due date until payment in full is received; and (b) Any discounts may be disallowed. If the Customer is in default the remedies provided above shall apply as well as all other remedies at common law or otherwise available to the Company. The Customer shall be liable for any losses, costs, expenses and liabilities incurred by the Company in exercising its remedies and the Customer hereby agrees to fully indemnity the Company in respect of any such losses, costs expenses and liabilities. It is also hereby agreed by the Customer and/or Guarantor that the Company shall have the right and liberty to complete and have registered a MORTGAGE over any property owned by the Customer and/or Guarantor to secure monies owed by the Customer and the Company shall also have the right at its discretion to place a caveat on any such property for the purpose of this provision and the Customer and/or Guarantor hereby irrevocably appoints the Company as the Attorney of the Customer and/or Guarantor for the purpose of executing such mortgage. An “Event of Default” defined by cl 18.5 of the standard terms occurs where the customer fails to comply with the standard terms and conditions. If United Timber’s argument were correct, Starplus defaulted on its obligations to Hamilton Hardware on 21 December 2012, when it failed to pay the whole of the amount owing on 20 December 2012. The position is worse for Magsons, because no act of default could be identified before March 2013, well after the date on which United Timber’s charge took effect. [70] There is also a question about United Timber’s priority date. This turns on when the agreement between United Timber and Starplus became effective, through offer and acceptance. Mr Branch submits that the credit account application form signed by Starplus on 14 December 2012 was no more than an invitation to treat, and became an offer made by Starplus on the date it was signed. Mr Branch points to cl 4 of the relevant credit application which read: 4. CREDIT FACIITY / REFUSAL OF CREDIT [United Timber] is not obligated to grant credit on receipt of this application. [Even] where [United Timber] has given a credit facility, [United Timber] can refuse to make fresh supplies under that facility whether there is sufficient room to accommodate such supplies or not, with or without assigning any reason for such refusal. [71] The director of Starplus, Mr Lee, signed the relevant part of the credit application and dated it 20 December 2012, re-submitting it to United Timber for approval. The credit application was accepted by United Timber on 21 December 2012, when an authorised signatory set a credit limit of $200,000. Because no binding contract was concluded until 21 December 2012, Mr Branch submits that United Timber’s equitable mortgage was not effective until 21 December 2012. [72] Mr Branch submitted that Hamilton Hardware had priority over United Timber, even if each of the agreements to mortgage did not take effect until 21 December 2012. He contended that the default by Starplus must have occurred at the earliest possible time on 21 December 2012 (a split second after midnight), whereas the signature approving the credit application on the part of United Timber could not, in the absence of evidence to the contrary, be inferred to have occurred until after the commencement of that business day. While my inclination would have been to use the discretion to reorder priorities (as discussed in AGC) to confer an equal priority on each of the Hamilton Hardware and United Timber claims,38 I need to deal only with the “default” point. [73] In my view, Mr Cogswell’s argument on default is answered by the specific terms of cl 7.3. The promises and obligations set out in cl 7.3 are not inconsistent with each other. Although bundled up with rights conferred on the creditor in the event of default, the use of the mortgage to secure moneys owed from time to time is not qualified in the same way. I am satisfied that the equitable interests arising from cl 7.3 must be regarded as having arisen on the dates on which the standard terms were executed by Hamilton Hardware, RD 1 and Magsons. In that circumstance, whether the date on which United Timber’s equitable interest came into force was either 14 or 21 December 2012 is beside the point. [74] On that reasoning, United Timber’s claim is subordinate to those of Hamilton Hardware, RD 1 and Magsons. 38 See paras [60]–[63] above. Marshalling [75] Marshalling is a process, not an entitlement.39 The process involves the Court assuming control of surplus funds on the assumption that “satisfaction of [senior securities] made the same impact proportionally on the net proceeds of sale of each of the [junior] securities”.40 In this context, the term “senior securities” refers to the first mortgages held by ASAP which, on realisation of the properties secured by them resulted in the surplus that has been paid into Court. The term “junior securities” refers to the legal interest of Mr Sun and the equitable interests in the various parcels of land held by Magsons, Hamilton Hardware and RD 1, all of which are subordinate to those of ASAP. Consequently, in dealing with the marshalling point, I refer to ASAP as the “senior creditor”, and to Mr Sun, Magsons, Hamilton Hardware and RD 1 as the “junior creditors”. [76] Usually, priorities as among secured creditors on liquidation will be determined by reference to contractual entitlements, in respect of specific properties over which securities have been granted. The presumptive position is that a registered second mortgagee (a legal mortgage) has first call on any surplus (after payment of the first mortgagee), consequent upon sale of the secured property. The proposition that registered instruments take priority over unregistered instruments is inherent in the indefeasibility principle that underpins the Land Transfer Act 1952.41 Application of that principle would result in Mr Sun being paid in full from the proceeds of sale of the two Redoubt Road properties over which he held a second mortgage. [77] At its most basic level, the doctrine of marshalling allows a Court exercising equitable jurisdiction to adjust the distribution of surplus funds among junior creditors on the principle “that a creditor, having two funds to satisfy his debt, may not, by his application of them to his demand, defeat another creditor who may resort to only one of the funds”.42 Put another way, “[if] a party has two funds ... a person 39 40 41 42 Finance Corporation of Australia Ltd v Bentley [1991] NSWCA 94, (1991) 5 BPR 11833 at 11841 (Mahoney JA). Across Australia Finance Pty Ltd v Kalls [2008] NSWSC 783, at para [7]. For example, see Frazer v Walker [1967] NZLR 1069 (PC) at 1075–1076. Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (4th ed, Butterworths LexisNexis, Sydney, 2002) at para [11–020], citing Meyer v United States 375 US 233 (1963) at having an interest in one only has a right in equity to compel the former to resort to the other, if that is necessary for the satisfaction of both ... [The] principle in some degree is that it shall not depend upon the will of one creditor to disappoint another”.43 [78] While the adjustment of priorities may only be effected through a Court order, in practice negotiations to resolve disputes of this type will be undertaken in the shadow of the law. It is likely that the dearth of authority on marshalling principles in New Zealand is largely explained by the ability of competing claimants to resolve their differences according to the principles established in the cases in which the Court has been asked to apply the doctrine.44 [79] It is important that the Court does not too readily interfere with the contractual property rights conferred on a particular creditor by a mortgage, or other security interest. A fundamental principle is that “nothing will be done to interfere with the paramount right of the senior creditor to pursue his remedy against either of the two (or more) estates”.45 [80] In National Bank of New Zealand Ltd v Caldesia Promotions Ltd, Elias J explained the principle in these terms:46 Where a creditor is secured in respect of a single debt by the same debtor over two securities, he is free to chose the order in which he realises the securities. There is no legal or equitable principle which restricts that choice but the consequences as between junior creditors are balanced and adjusted through the equitable mechanism of marshalling. It operates by a type of subrogation to place the junior creditor in the place of the senior creditor with recourse to the two securities. The effect of marshalling is to prevent the arbitrary choice of a secured creditor from determining whether another creditor is paid or not. 43 44 45 46 236. Aldrich v Cooper (1803) 8 Ves Jun 382 at 388–389; 405, cited with approval by the High Court of Australia in Miles v Official Receiver in Bankruptcy (1963) 109 CLR 501 (HCA) at 510–512. Examples of the relatively few New Zealand cases are: Ollivier v Colonial Bank (1887) 5 NZLR 283 (SC), Re Manawatu Transport Ltd (1984) 1 BCR 588 (HC), Bissett v Australia and New Zealand Bank Ltd [1961] NZLR 687 (SC) and National Bank of New Zealand Ltd v Caldesia Promotions Ltd [1996] 3 NZLR 467 (HC). Ernst Bros Co v Canada Permanent Mortgage Corp (1920) 47 OLR 362 at 368 (Orde JA affirmed on appeal ((1920) 57 DCR 500). See also Mir Bros Projects Pty Ltd v Lyons [1977] 2 NSWLR 192 (SC) at 196–197 and Re O’Leary; ex parte Bayne (1985) 61 ALR 674 at 680–681. See also S R Derham, Set-off Against an Assignee: The Relevance of Marshalling, Contribution and Subrogation (1991) 107 LQR 126 at 130. National Bank of New Zealand Ltd v Caldesia Promotions Ltd above n 44, at 474. ... Marshalling achieves fairness as between competing creditors. The principles are discussed in Meagher Gummow and Lehane, Equity Doctrines & Remedies (3rd ed, 1992) pp 309-331. Practical applications of the doctrine are discussed in a useful article by Schumacher, “Marshalling” (1989) 5 BCB 89. The article acknowledges that it is intended as a practical guide and that the views expressed are derived from principle because of the dearth of modern authorities applying the doctrine "in a multi-mortgage era". But the doctrine has been applied in New Zealand relatively recently in Re Manawatu Transport Ltd (1984) 1 BCR 588, and Bissett v Australia and New Zealand Bank Ltd [1961] NZLR 687. ... [81] In the context of this case, ASAP is regarded as the senior creditor. It was the first mortgagee in respect of all of the properties sold. As such, it had the ability to choose the order in which the properties were to be sold to maximise the prospect of receiving payment in full. The order of realisation had an adverse impact on the three junior creditors who held equitable interests in the various parcels of land, but left the properties over which Mr Sun had security with a sufficient surplus to enable debt to be repaid in full, in the absence of marshalling. [82] I deal first with the question whether it is appropriate for the Court to marshal securities as between a registered mortgagee (on the one hand) and unregistered mortgagees (on the other) so as to defeat the prima facie entitlement of the registered mortgagee to receive payment of his debt from the proceeds of sale of those particular properties. [83] On analysis, the availability of marshalling in this case is clear. If ASAP had chosen to realise the Redoubt Road properties first, the whole of the proceeds of sale would have been distributed to it in partial satisfaction of its debt. Had that occurred, Mr Sun would have received nothing from the properties over which he held a registered second mortgage. The fact that, by happenstance, the Redoubt Road properties were the last to sell, creates a surplus from which Mr Sun might be entitled to receive payment of his debt in full. In the absence of marshalling, Mr Sun obtains a windfall that he would not otherwise have received if the properties had been sold in reverse order. The irony is that, in those circumstances, to obtain a just outcome based on the arbitrary order in which the properties were sold, it would have been necessary for Mr Sun to apply to invoke the doctrine. [84] Accepting that the doctrine could apply, Mr Ingram submitted that application of the principle of rateable apportionment was, nevertheless, subject to a residual equitable discretion that the Court could exercise in favour of Mr Sun. He contended that there had been delay on the part of the building supply companies in exercising any security entitlements, and that delay had caused prejudice to Mr Sun who would not have advanced funds had he know the true position. Mr Ingram relied on the equitable maxim: equity assists the diligent, not the tardy.47 [85] Mr Arthur, who carried the burden of argument on this point, contended that Mr Sun should be fixed with knowledge held by a solicitor who appears to have acted for him on the transaction to know that he, if the advance were made, stood behind ASAP as to priority and that the priority limit was $4.8 million. Even so, Mr Sun was prepared to advance that amount. He submitted that the nature and amount of the advance made by Mr Sun demonstrated his appetite for risk. Thus, Mr Arthur contended, Mr Sun could legitimately be seen as the author of his own downfall. [86] In summary: (a) Mr Sun entered into a term loan agreement with Starplus on 19 February 2013, in the sum of $920,000 and for a term of two months at an interest rate of 25% per annum. (b) On 20 February 2013, Mr Sun instructed Hanlon Law to advance $920,000 to Starplus. The evidence indicates that sum was paid on 20 February 2013. (c) On 21 February 2013, a second mortgage in Mr Sun’s name was registered against each of the two Redoubt Road titles. [87] Mr Arthur’s factual point was that Mr Sun should be taken to have done due diligence when advancing the sum of $920,000 to Starplus and that, had he done so, he would have discovered that there was a priority sum in the ASAP mortgages over Redoubt Road of $4.8 million. 47 Meagher, Gummow and Lehane’s Equity Doctrines and Remedies above n 42 at para [3–140]. [88] I am not satisfied that any delay on the part of the building supply companies caused any material prejudice to Mr Sun. The most basic of inquiries would have revealed the extraordinarily high risk that Mr Sun was running in making an advance of that sum, in circumstances where the money was plainly required on a short term basis. Consent of the first mortgagee would have been required if the second mortgage were to be used for enforcement purposes. Mr Sun’s only other option would have been to pay out the first mortgagee, an unlikely event given the amount then owed to ASAP. [89] All of the mortgagee sales were conducted after 22 April 2013, when Mr Buchanan was appointed as liquidator of Starplus. While Mr Sun took security over the two properties on the basis of assurances that he had been given by the director of Starplus, Mr Lee, whom he knew, it transpires that Mr Lee’s representations must have been false.48 [90] I am satisfied that a number of factors influenced ASAP to sell the properties in the order that they did. The reasons are broadly those advanced by Mr Arthur, in his written submissions. In particular: (a) The order is likely to have been affected by the dates chosen for tenders and auctions. The fixing of such dates would ordinarily turn on unrelated factors such as the availability of agents, the set timings of auction days, and a desire not to put a large number of similar properties onto the market in one auction. (b) The possibility that potential buyers might have been more attracted to some properties over others. (c) Whether reserve prices were pitched at appropriate levels for each property. 48 See paras [13] and [14] above. (d) The personal needs of certain purchasers might have driven the order in which settlement of sales of the various parcels of land could have been settled.49 [91] Given the right for a senior creditor to realise its securities in any order it thinks might best meet its objectives, the arbitrary nature of the outcome of that choice makes it appropriate for marshalling to be directed, based on an apportionment of the proceeds of sale among the competing junior creditors, including Mr Sun. [92] I agree with the way in which counsel for the three building supply companies suggested that marshalling take place. It is, as they submitted, the method by which the most equitable result for all junior creditors can be achieved. It involves the calculation as a percentage of the amount that ASAP was entitled to recover from the sale of all properties ($5,350,352.66) and the actual net proceeds of sale ($7,097,581.94). The amount paid to ASAP represented 75.38% of the total sale proceeds. [93] It will be necessary to identify the precise amounts payable to each of the creditors having priority in respect of the surplus fund by reference to amounts that include interest and costs. It will also be necessary to take account of the outcome of the dispute about the liquidators’ costs, with which I have dealt in a contemporaneous judgment.50 [94] I will establish a timetable for the exchange of submissions on those topics, and costs. If practicable, I will hold a hearing by video-link from Timaru (where I am currently presiding over a trial that is likely to extend until the end of June 2014) to resolve outstanding issues. Result [95] 49 50 For those reasons: For example, the purchaser of five of the properties that were due to settle on 18 July was unable to complete until 2 August 2013. That default had the effect of altering the way in which the surplus was allocated. Re Starplus Homes Ltd (in liquidation) (No 2) [2014] NZHC 913. (a) I hold that Mr Sun, Magsons, Hamilton Hardware and RD 1 are entitled to participate in the surplus held in Court. Leave is reserved for those parties to make further submissions on the amounts payable to each from the fund, having regard to the terms of this judgment. (b) [96] Costs are reserved. I establish the following timetable: (a) Further submissions on the entitlement and costs issues shall be filed and served on or before 9 May 2014. (b) Submissions in opposition shall be filed and served on or before 30 May 2014. (c) [97] All submissions shall be exchanged contemporaneously. The Registrar shall fix a hearing date, of not more than one hour, for counsel to speak to their written submissions and respond to any arising out of oppositions to which they had not previously had the opportunity to reply. The Registrar shall liaise with counsel as to a suitable date, which will need to be at 9am one morning during June 2014. [98] I thank counsel for their assistance to date. _______________________________ P R Heath J Delivered at 4.00pm on 6 May 2014 Solicitors: Bell Gully, Auckland Harkness Henry, Hamilton Chapman Tripp, Auckland Cogswell Law, Auckland Quinn Law, Auckland Counsel: N W Ingram QC, Auckland C J R Baird, Auckland