Ipsofactoj.com: International Cases  Part 6 Case 13 [PC]
THE PRIVY COUNCIL
Apple Fields Ltd
- vs -
Damesh Holdings Ltd
LORD SLYNN OF HADLEY
LORD HOBHOUSE OF WOODBOROUGH
LORD SCOTT OF FOSCOTE
LORD RODGER OF EARLFERRY
7 JULY 2003
Lord Scott of Foscote
(Delivered the judgment of the Board)
Their Lordships find themselves in complete agreement with John Hansen J in the High Court of New Zealand and the Court of Appeal of New Zealand and will humbly advise Her Majesty that this appeal should be dismissed.
The case is one in which the detailed facts are complex. Fortunately, however, they have been set out with admirable clarity, first in the judgment of Hansen J reported as Apple Fields Ltd v Damesh Holdings Ltd  1NZLR 194; and, again, in the judgment of the Court of Appeal delivered by McGrath J:  2 NZLR 586[a]. It is unnecessary for that exercise to be carried out for a third time and it will suffice for present purposes to describe the facts in summary terms sufficient to identify the issues debated in this appeal.
The appellants’ claim, dismissed by Hansen J and by the Court of Appeal, is based on the allegation that Damesh Holdings Ltd (“Damesh”), the 1st respondent, was in breach of its duty under section 103A of the Property Act 1952. Section 103A says that:
a mortgagee who exercised a power of sale of land or other mortgaged property .... owes a duty to the mortgagor to take reasonable care to obtain the best price reasonably obtainable as at the time of sale.
The appellants were the owners, and mortgagors, of some 200 acres of apple orchards on the outskirts of Christchurch. They were not joint owners. Each was the owner of a separate parcel of the orchards. Each was the wholly owned subsidiary of Apple Fields Ltd (“AFL”) which had arranged the acquisition of the orchards. The orchards are referred to in the litigation documents as the “Styx” land.
Each of the appellants had mortgaged its part of the Styx land in order to secure group borrowings arranged by AFL. The first mortgagee was Damesh. Damesh had made a loan of $7.5 million to AFL (or one of its group companies). By 28 January 1999 AFL’s indebtedness to Damesh, secured on the Styx land, was $8.15 million odd. The second mortgagee was the ANZ bank (“ANZ”). By 11 January 1999, AFL’s indebtedness to ANZ, secured on the Styx land, was $13.4 million odd.
By 1998 the apple market was, apparently, in decline and AFL was in financial difficulties. AFL was attempting to have the Styx land re-zoned as residential land. If thus re-zoned the market value of the Styx land would increase; but the measure of the increase would depend on a number of variable factors such as the permitted density of the residential development, the length of time likely to be taken in carrying out the development and the likely cost of the development. A number of valuations of the Styx land at the end of 1998 and beginning of 1999 were in evidence. The range of divergence is remarkable. A valuation in December 1998 put the value at $25.15 million but another valuation at or about the same time given by a different valuer put the value at only $12 million. In February 1999 a third valuer put the market value at $12.75 million. But a fourth valuer, also in February 1999, gave a figure of $24 million. All of these valuations seem to have been given on the footing that the desired re-zoning of the land was imminent, so uncertainty as to whether or not the land would be re-zoned cannot explain the scale of the divergences between them. Hansen J, having heard the evidence of some of the valuers, came to the conclusion that the market value of the Styx land at both 26 January and 9 March 1999 was $13.5 million (see para 46 of his judgment). The finding was recited without criticism in the judgment of the Court of Appeal (see para 22). There was no direct challenge to this finding before their Lordships.
AFL, being under financial pressure from, in particular, ANZ wanted to sell the Styx land in order to be relieved of the secured debts. AFL obviously wanted to obtain the best price reasonably obtainable. But the secured debts were a problem. They totalled over $20 million. No purchaser would be willing to buy the Styx land subject to the mortgages. The purchase price obtainable on a sale would not be likely to suffice to redeem the mortgages. So a realization of the Styx land and the discharge of the secured debts would require the co-operation of the two mortgagees, Damesh and ANZ. Damesh were co-operative and Mr. Smith, a director of and major shareholder in Damesh, introduced a Mr. Hughes as a potential purchaser.
Negotiations took place between AFL, Damesh (acting by Mr. Smith), Mr. Hughes and ANZ. The negotiations resulted in agreement in principle being reached by the end of January 1999 for the sale of the Styx land on terms that would involve the writing-off of the whole of AFL’s indebtedness to Damesh and to ANZ, the payment by the purchaser to Damesh of $8.1 million in discharge of its secured debt and the acceptance by ANZ of $5.25 million in satisfaction of its secured debt. Mr. Hughes’ original intention was that the purchaser should be Parshelf 81 Ltd (“Parshelf”), the second respondent. Parshelf was a company owned by Mr. Hughes’ family. It was later agreed between Mr. Smith and Mr. Hughes that the purchaser would be a joint enterprise partnership, the Kaputone Partnership, formed by Styx Developments Ltd (owned by the Smith family) and Belfast Developments Ltd (owned by the Hughes family).
The desired transaction was structured in two alternative ways. The favoured way, the “A” alternative, involved Parshelf purchasing from Damesh the first mortgage debt and securities and from ANZ the second mortgage debt and securities and thereby becoming the sole mortgagee and secured creditor. AFL would then transfer the Styx land to Parshelf in consideration of the release of the mortgage debts, in effect a consensual foreclosure. The cost to Parshelf of this transfer would be the cost of purchasing Damesh’s first mortgage debt and ANZ’s second mortgage debt, a total cost of $13.35 million. The benefit of the transaction to AFL, and its subsidiaries, would be the writing-off of its debts to Damesh and to ANZ, a total of $21 million plus.
The problem about the “A” alternative was that it might be caught by section 129 of the Companies Act 1993. Section 129 bars a company from entering into a “major transaction”, as defined, unless the transaction is approved by special resolution (subsection (1)). A “major transaction” is defined as including a disposition of “assets of the company the value of which is more than half the value of the company’s assets before the disposition” (subsection (2)(b)). And “assets” includes property of any kind, tangible or intangible. It was feared that the disposition of the Styx land by the appellants might be a “major transaction” and require approval by special resolution. If that were so, considerable delay in bringing the transaction to completion was feared. And ANZ was restive and disinclined to accept any delay. It was, apparently, hoped that the New Zealand Stock Exchange would waive the special resolution requirement (see para 18 of the Court of Appeal judgment). But in case the waiver were not forthcoming and the special resolution requirement had to be complied with, an alternative way of implementing the desired transaction, a way that would not involve any disposition of the Styx land by AFL or the appellants, and that would therefore not be caught by section 129, was devised. This was the “B” alternative.
Under the “B” alternative, the Styx land would be transferred to the purchaser, Parshelf or, in the event, the Kaputone Partnership, under a sale by Damesh as first mortgagee. Damesh’s power of sale, as mortgagee, had already become exercisable. The price at which the sale would take place would be the sum necessary to enable Damesh to satisfy its own secured debt and to meet the sum required by ANZ.
The commercial results of the “A” alternative and the “B” alternative would be identical. Under both, the purchaser of the Styx land, whether Parshelf or the Kaputone Partnership is immaterial, would have to pay to Damesh the debt owing to Damesh and secured on first mortgage and to ANZ the $5.25 million that ANZ required for its debt secured by second mortgage. It is of interest, and significance, to notice that ANZ’s agreement to accept $5.25 million for a debt in the region of $13 million shows that ANZ must have placed a value on the Styx land in the region of $13.5 million, the figure that Hansen J held to be the market value, as well as treating AFL’s personal covenant as worthless.
Under both the “A” alternative and the “B” alternative the commercial result from AFL’s point of view would be that the whole of its indebtedness to Damesh and to ANZ would be written-off. Its balance sheet would be improved by $21 million plus. Under neither alternative would AFL, or the appellants, actually receive any funds.
Alternative “A” had the problem of section 129 of the Companies Act 1993. But since the disposition of the land would be a disposition by the mortgagors, section 103A would not be engaged. Alternative “B” on the other hand would circumvent section 129 but, since the disposition would be by a mortgagee, would engage section 103A.
In the devising of the alternative ways of implementing the desired transaction, and in the drawing-up of the documents for the implementation, a leading role was played by a Mr. Cone, a director of AFL and its solicitor (see para 31 of Hansen J’s judgment). Alternative “B” did not in any sense constitute the normal mortgagee sale transaction under which the co-operation and assent of the mortgagor are irrelevant. Alternative “B”, like alternative “A”, was devised in order to implement the transaction desired by AFL, namely, the realisation of the Styx land at the best price reasonably obtainable. There was never any likelihood that any part of the consideration to be paid by the purchaser would find its way to AFL or the appellants. In view of the size of the mortgage debts it must always have been understood that the whole of the price paid by the purchaser would go to the mortgagees. The requirement of AFL was that its secured debts should be written-off. The variable element that had had to be negotiated was the sum that ANZ required to be paid for its secured debt of $13 million odd. The amount, obviously, depended upon ANZ’s and the purchaser’s respective estimates of the value of the Styx land.
On 26 January 1999 two conditional contracts were signed.
Under one contract Parshelf agreed to purchase from Damesh for $8.1 million the first mortgage debt and securities and AFL agreed to transfer to Parshelf the Styx land in satisfaction of the debts owing under the first and second mortgagee. The contract was conditional on Parshelf acquiring from ANZ the second mortgage debt and securities. It was also conditional on AFL either obtaining a Stock Exchange waiver of the section 129 requirements or satisfying those requirements. This was the “A” alternative.
As a “back up” in case the contract referred to above was not able to proceed, Damesh agreed to exercise its power of sale and sell the Styx land to Parshelf for $13.7 million. This contract was conditional on ANZ agreeing to release its second mortgage debt and securities on terms satisfactory to Parshelf and AFL.
A few days later, on 29 January 1999 Parshelf and ANZ agreed that ANZ would accept $5.25 million, together with accruing interest at $700 per day until payment, for its second mortgage debt and securities. ANZ also agreed to write-off and discharge AFL and the appellants from any further liability for their indebtedness. Payment was to take place on 5 March 1999. These agreements were not expressed to be conditional. They did not need to be. They would have been needed whether the transaction proceeded by means of the “A” alternative or the “B” alternative.
The Stock Exchange was not, in the event, prepared to waive the section 129 requirements that had to be satisfied if the transaction were to proceed under the “A” alternative. Mr. Cone, in applying to the Stock Exchange for the waiver, described the transaction as worth $21.1 million to AFL. That was the amount of debt that would be removed from AFL’s balance sheet. The Stock Exchange notified its refusal to waive the requirement of shareholder approval on 2 March 1999. So, since a lengthy delay was unacceptable to ANZ, the transaction had to proceed, under the “B” alternative, as a mortgagee sale.
Completion took place on 9 March 1999 with Damesh transferring the Styx land to Parshelf to hold on behalf of the Kaputone Partnership. The price was expressed to be $13.7 million of which $8.122 million odd was applied by Damesh in discharging its first mortgage debt and the balance was applied in funding a payment to ANZ of $5.28 million odd. The payment to ANZ was made on 9 March in consideration of which ANZ released AFL and the appellants from the balance of their indebtedness. The actual indebtedness of AFL to ANZ on that date exceeded $13.4 million. A small surplus of $250,470 was apparently paid to AFL (see para 20 of the Court of Appeal judgment).
Those being the facts, it is difficult to imagine what reasonable complaint AFL could make about the transaction. The complaint is, indeed, highly contrived. It is constructed like this —
The sale was a sale by Damesh as mortgage.
Damesh was under the section 103A duty to take reasonable care to obtain the best price reasonably obtainable as at the time of sale.
Since Mr. Smith was associated with Damesh, the mortgagee/vendor, and, via Styx Developments Ltd, had an interest as purchaser, the section 103A duty required Damesh to satisfy the court that it had taken reasonable care to obtain a proper price. Tse Kwong Lam v Wong Chit Sen  1 WLR 1349 was relied on.
Damesh had taken no steps, or no sufficient steps, to ensure that $13.7 million was the best price reasonably obtainable. There was no evidence of any advice sought from experts as to how the Styx land ought to be marketed.
It followed that there was a breach by Damesh of the section 103A duty and AFL was entitled to an inquiry as to damages.
There are several reasons why this complaint lacks any substance.
First, it ignores the fact that the section 103A duty is a duty owed to the mortgagor, and that the mortgagor is entitled to agree with the mortgagee the terms on which the mortgagee sells. In the present case, the mortgagee sale by Damesh implemented a transaction which had been initiated by AFL, the form of which had been devised by Mr. Cone on behalf of AFL and all the terms of which had been agreed by AFL. The proposition that against that indisputable background AFL can complain that Damesh failed to satisfy its section 103A duty is a staggering one which offends both equity and common sense. Their Lordships have no hesitation in rejecting it.
Secondly, on the findings of the trial judge, Hansen J, the $13.7 million price was the market value of the property at the time of sale. So an inquiry as to damages would produce a nil result. Their Lordships think that the appellant’s submissions proceed upon a mistaken premise as to the nature of the section 103A duty. Section 103A codifies the duty which, under the general law, a mortgagee exercising a power of sale would be taken to owe to the mortgagor (see Cuckmere Brick Co Ltd v Mutual Finance Ltd  Ch 949). It does not produce a duty breach of which is actionable without proof of damage. If a mortgagor wants an inquiry as to damages for breach of the section 103A duty, the mortgagor must, in their Lordships’ opinion, satisfy the court that it has suffered at least some damage. Here, on the findings of Hansen J, AFL and the appellants have failed to show either that a sale at a price of $13.7 million was a sale below market value or that any other type of sale would have produced any better price. The action fails on this ground, too.
Thirdly, the benefit to AFL and the appellants of the transaction, implemented in part by the sale by Damesh to Parshelf at the $13.7 million price and in part by the agreement between Parshelf and ANZ that ANZ would release the debt owing to it by AFL and the appellants, for the sum of $5.25 million, was a benefit not of $13.7 million but of over $21 million, the face value of the Damesh and ANZ debts. It was submitted on behalf of the appellants that in order to decide whether there was or was not a breach of section 103A it was only the stated price, the £13.7 million, that was relevant. ANZ’s agreement to abandon $8 million odd of its debt owed by AFL was irrelevant because ANZ’s agreement to release the debt was not expressed to be conditional. This unrealistic contention is wrong for two reasons.
It is wrong, first, because the transaction under which the Styx land was sold by Damesh for $13.7 million was dependent upon ANZ’s agreement to accept the $5.25 million. There was one composite transaction, not two independent transactions. The constituent elements of the composite transaction were completed at the same time, 9 March. If the mortgagee sale at the $13.7 million agreed price had not been completed on 9 March, the $5.25 million would not have been paid by Parshelf to ANZ and ANZ would not have released the $13.4 million debt owing by AFL.
Second, in deciding for section 103A purposes whether reasonable steps have been taken by a mortgagee to obtain the best price, the steps taken by the mortgagee and those acting with it must be looked at in the round. The issue is a commercial one, to be viewed in practical commercial terms. If a side benefit additional to the stated price is being procured for the mortgagor, that is part of the commercial context against which the question whether reasonable steps have been taken to obtain the best price must be examined. The examination of the issue in which Lord Templeman engaged in the Tse Kwong Lam case was an essentially practical and commercial one.
The interest taken by Mr. Smith and his family company in the purchase from Damesh does not, in their Lordships’ opinion, assist the appellants. It was established by Farrar v Farrars Ltd (1888) 40 Ch D 395, and is now well accepted, that there is no general rule that a company in which a mortgagee is interested cannot purchase the mortgaged property on a mortgagee sale. As Lord Templeman said in Tse Kwong Lam, at p 1355,
The mortgagee and the company seeking to uphold the transaction must show that the sale was in good faith and that the mortgagee took reasonable precautions to obtain the best price reasonably obtainable at the time.
This second half of this citation may have been the provenance of the language used in section 103A. There is no issue in the present case of good faith. The only question is as to the reasonable precautions, or reasonable steps, taken by the mortgagee to obtain the best price. Counsel for the appellants pointed out the steps that, in Tse Kwong Lam, Lord Templeman said that the mortgagee should have taken (see pp 1357 to 1359). No comparable steps were taken by Damesh. However Lord Templeman’s remarks were directed to the facts of that case. He was not formulating invariable rules as to steps to be taken by a mortgagee when contemplating a sale to a company in which he is interested. In the circumstances of the present case there was no need for Damesh to consult marketing experts about the way in which the Styx land ought to be marketed. Damesh, before Mr. Smith’s interest in participating in the purchase had arisen, was responding to sale proposals initiated by AFL, the mortgagor, itself. Having agreed to the mortgagor’s proposals, Damesh did not, in their Lordships’ opinion, come under any additional duty when, at a fairly late stage, Mr. Smith acquired an interest in the purchase. If Damesh, at that point, had taken the further steps that AFL now, long after completion of the transaction, contends should have been taken, the transaction would have been frustrated. AFL, having achieved the benefit of the transaction that it wanted, namely, to be rid of its indebtedness to Damesh and ANZ, is now recommending that time consuming steps should have been taken that, it is safe to infer, it would strenuously have resisted being taken at the time. Its contentions have no merit and their Lordships will humbly advise Her Majesty that this appeal should be dismissed with costs.
Apple Fields Ltd v Damesh Holdings Ltd  1NZLR 194; Tse Kwong Lam v Wong Chit Sen  1 WLR 1349; Cuckmere Brick Co Ltd v Mutual Finance Ltd  Ch 949; Farrar v Farrars Ltd (1888) 40 Ch D 395
Property Act 1952: s.103A
[a] see Apple Fields Ltd v Damesh Holdings Ltd @www.ipsofactoJ.com/international/index.htm  Part 5 Case 4 [NZCA]
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