Sovereign Yachts (NZ) Ltd v Hanover Group Holdings Ltd

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV-2007-404-00491

BETWEEN SOVEREIGN YACHTS (NZ) LIMITED
Plaintiff

AND HANOVER GROUP HOLDINGS LIMITED
First Defendant

AND UNITED FINANCE LIMITED
Second Defendant

AND A J MCCULLAGH AND S M LAWRENCE
Third Defendants

Hearing: 2 April 2007
Appearances: Mr R B Stewart QC for plaintiff
Mr P David and Mr B F Peachey for first and second defendants
Mr B Gustafson and Mr J Nolen for third defendants
Ms A E Murray for interested party (Mr Taylor)
Judgment: 3 April 2007

JUDGMENT OF LANG J
[in relation to ancillary orders]

This judgment was delivered by me on 3 April 2007 at 2 pm, pursuant to Rule 540(4) of the High Court Rules.

Solicitors:
Kensington Swan, Private Bag 92101, Auckland
Mayne Weatherell, P O Box 3797, Auckland
Hesketh Henry, Private Bag 92093, Auckland Mail Centre
Counsel:
Mr R B Stewart QC, P O Box 2302, Auckland
Mr P W David, P O Box 4472, Auckland

[1] On 21 March 2007 I granted Sovereign’s application for an interim injunction preventing the receivers appointed by Hanover from selling Sovereign’s one-third share in the vessel Bacchus. I then adjourned for further consideration at a hearing on 28 March 2007 the issue of ancillary orders to be made as a consequence of that injunction.

[2] Prior to the hearing on 28 March Sovereign filed an application seeking an order for the sale of the vessel. It relied on both s 143 of the Property Law Act 1952 and s 4 of the Admiralty Act 1973. Mr Taylor supports Sovereign’s application, but all three defendants oppose it.

[3] In addition, Mr Taylor seeks to be added as a fourth defendant in this proceeding. Sovereign does not oppose that application, but the defendants do. They say that Mr Taylor does not need to be added as a party because the issues that arise for determination in this proceeding concern only the present parties to it.

[4] I propose to deal firstly with the Sovereign’s application for an order that the vessel be sold. In doing so I take the reader to be familiar with my earlier judgment, and I do not propose to repeat or summarise the matters referred to in it.

Application for sale

[5] Sovereign seeks orders that:

1. the 120 foot motor yacht known as “The Bacchus” (the Yacht) be sold.

2. the sale of the Yacht be carried out and effected by recognised brokers on behalf of the plaintiff or on behalf of the owners.

3. the proceeds of sale of the Yacht be applied as follows:

(a) firstly, in reduction of any costs incurred in selling the Yacht (the Sale Costs);

(b) secondly, one-third of the balance of the proceeds of sale following payment of the Sale Costs is to be paid to Mr Taylor as the owner of a one-third share of the Yacht;

(c) thirdly, the remaining two-thirds of the balance of the proceeds of sale following payment of the Sale Costs (the Balance) is to be paid into Court and not disbursed unless:

(i) the plaintiff and the first defendant resolve the dispute between them in relation to the Yacht Construction Agreement dated August 2005, and agree to the release of the Balance; or

(ii) the Court orders the release of the Balance on such terms as it thinks fit.

Preliminary issues relating to jurisdiction

[6] Before dealing with the issues that the application raises it is necessary to mention the preliminary arguments that United, Hanover and the receivers have advanced in relation to the jurisdiction of the Court to consider Sovereign’s application.

[7] As their primary argument Hanover and United contend that the Court should not grant the present application because it seeks orders that go well beyond those that are properly ancillary to the injunction that has already been granted. They also say that an order for the sale of the vessel would also be outside the scope of the substantive relief that Sovereign seeks in this proceeding. They therefore contend that, if Sovereign wishes to seek such an order, it must issue a new proceeding in which the sale of the vessel is the substantive relief sought. They also say that such an order would ignore, and cut completely across, the detailed contractual arrangements that the parties settled upon when they initially agreed to become involved in the ownership of the vessel.

[8] Hanover and United also argue that, even if a new proceeding had been issued, the Court has no jurisdiction to make the orders that Sovereign seeks. They say that Sovereign cannot invoke s 143 of the Property Law Act 1952 because the dispute, involving as it does the ownership of a ship, comes exclusively within the Court’s admiralty jurisdiction and falls to be determined solely under the provisions of the Admiralty Act 1973. They also submit that Sovereign cannot invoke s 4 of the Admiralty Act 1973 because it relates solely to disputes between the legal coowners of a ship and Hanover is not yet a co-owner.

[9] For their part, the receivers contend that the Court has no jurisdiction to consider the present application because Sovereign granted a security in favour of United that has the legal effect of transferring to United virtually all of Sovereign’s rights and interest in the vessel. As a result, they say that it is no longer open to Sovereign to apply for orders under either the Property Law Act 1952 or the Admiralty Act 1973.

[10] Although counsel devoted considerable time to the latter two arguments during the hearing, I do not propose to determine them at this stage. I decline to do so because I have reached the clear view that, even if there was jurisdiction to make the orders that Sovereign seeks, it would be inappropriate to make them at this stage. It is quite possible, however, that those issues will need to be determined in the future when the factual matrix may be quite different. I consider that they should only be determined when they have direct relevance to the Court’s decision and on the basis of the facts that then exist.

[11] I therefore proceed directly to the substance of Sovereign’s application.

Decision

Ancillary orders?

[12] The injunction that I have granted prevents the receivers from selling Sovereign’s one-third interest in the vessel pending the trial of Sovereign's claim in this proceeding. It follows that any ancillary orders should go no further than is necessary to ensure that that objective is met.

[13] An order for the sale of the vessel could not on any view of the facts be seen as necessary to achieve that objective. It is, in fact, wholly unrelated to the order that I have made. For this reason I accept the defendants’ submission that the order would go well beyond what could properly be described as an ancillary order.

Outside the scope of the substantive relief sought?

[14] As the pleadings presently stand, Sovereign seeks the following relief:

(a) A declaration that United unlawfully took possession of the vessel “Bacchus” on 26 January 2007 and thereby converted the vessel.

(b) A declaration that the third defendants took possession of the vessel “Bacchus” on 26 January 2007 and thereby converted the vessel.

(c) A declaration that Hanover was a party to the unlawful taking of possession and conversion.

(d) An order that United and the third defendants deliver up possession of the vessel to Sovereign.

(e) An order that the defendants pay Sovereign the amount of its losses and costs as particularised in paragraph 55 hereof.

(f) Damages against all defendants in the sum of $250,000.

(g) Costs.

[15] It is noteworthy that Sovereign does not seek an order that the vessel be sold in its prayer for relief. Moreover, the statement of claim as a whole proceeds on the basis that Sovereign seeks the return of the vessel so that it can fulfil its contractual obligations to Hanover, United and Mr Taylor. It contends that Hanover and United have breached their contractual obligations by appointing receivers and allowing them to take possession of the vessel when they were not entitled to do so.

[16] The pleadings therefore suggest that Sovereign seeks to do no more than recover possession of the vessel, and that it seeks to do so in order to be able to satisfy its own contractual obligations. Those obligations, which are prescribed in the Yacht Construction Agreements (“YCAs”), require Sovereign to complete the construction of the vessel and to transfer shares in it vessel to Hanover and Mr Taylor.

[17] I therefore also accept the defendants’ argument that an order requiring the vessel to be sold would be outside the substantive relief that Sovereign seeks in this proceeding.

What effect would the order have on the parties’ contractual rights?

[18] It is also necessary to have regard to the effect that the proposed order would have on the parties’ contractual rights. The parties have set these out in a series of carefully worded written agreements. That is not surprising given the sums of money involved and the fact that each of the parties appears to be a sophisticated operator in its own field.

[19] Mr Taylor and Hanover each entered into a YCA under which Sovereign agreed to build the vessel and, upon completion, to transfer shares in it to the other two parties. These are detailed agreements, and clearly have as their ultimate objective the completion of the vessel to a specified standard and the transfer of the shares in accordance with a defined procedure. As a result, Sovereign has a contractual obligation to complete the vessel and hand over the shares. Mr Taylor and Hanover have a corresponding obligation (already satisfied in the case of Mr Taylor) to purchase the vessel for an agreed sum. They also, however, have a contractual right to receive a one-third share in the vessel and to insist that the shares be handed over in accordance with the procedure prescribed by the agreements.

[20] This is not a minor matter because, as Mr David reminded me during argument, the YCAs require Sovereign to produce important documentation at handover. These include Building Certificates and Tonnage Certificates, which are required to confirm that the vessel has been constructed in accordance with Sovereign’s contractual obligations.

[21] It goes without saying that an order for sale will effectively remove the respective rights of both Hanover and Mr Taylor to receive their shares in the vessel in accordance with that procedure. That is not an issue for Mr Taylor if the vessel is sold, but it is for Hanover.

[22] Moreover, the parties who are to be the owners of the vessel have also entered into a very detailed agreement setting out their respective rights and obligations once the vessel has been handed over. The agreement includes a process by which the individual owners may sell their shares in the vessel. If the Court makes an order for sale at this stage it will render ineffective the agreement that the owners themselves have reached regarding the manner in which shares in the vessel, and the vessel itself, may be sold.

[23] I also accept that Hanover’s rights as secured creditor must be given due recognition. There is no doubt that, once Sovereign is in default of its obligations under the loan agreement, Hanover has the right under its security agreement to take possession of the vessel and to appoint receivers to sell Sovereign's interest in the vessel. The issue to be determined in this proceeding is whether Sovereign was in default when Hanover appointed the present receivers. If Hanover prevails, the receivers will be entitled to sell Sovereign's interest in the vessel.

[24] However, a sale of the vessel at this stage would effectively dispose of the only property that is the subject of Hanover’s security. On the information presently available it is difficult to see how that scenario would be likely to cause loss to Hanover. I accept, however, that as a matter of principle an order for the sale of the vessel would effectively remove Hanover’s ability to have recourse to the vessel in terms of its security. The entire reason for the appointment of the receivers would also have been removed by a sidewind.

[25] These matters persuade met that it would be wrong in principle for the Court to make an order for sale at this stage. To do so would, to use Mr David’s words, be to “ride roughshod” over the carefully crafted contractual arrangements that the parties have agreed upon and taken the trouble to record in written agreements.

[26] I do not discount the possibility that it may be necessary for the Court to revisit the issue in the future if the parties cannot move forward in accordance with their contractual rights. It seems to me, however, that the Court should not contemplate exercising the power of sale vested in it by s 143 of the Property Law Act 1952 and s 4 of the Admiralty Act 1973 until such time as it is satisfied that the parties have not been able to make their own contractual arrangements work.

The way forward

[27] The relationship between the parties now appears to be such that an amicable co-ownership and shared use of the vessel is out of the question. Neither does there appear to be any interest by any of the owners in acquiring the shares of the other parties. I therefore remain of the view expressed in my judgment. As matters stand, the sale of the vessel remains the only realistic ultimate outcome. In order to get to that stage, however, the vessel must be completed (if that has not already been done) and handover must occur. If the parties cannot reach agreement as to whether the vessel has been completed they have their remedies (including arbitration) under the YCAs.

[28] During the hearing counsel for United and the receivers both confirmed that they would not stand in the way of Sovereign having such reasonable access to the vessel as it needed in order to arrange for handover to occur. That, in my view, would extend to allowing Sovereign to conduct further sea trials should that be considered necessary. In the event of disagreement, I consider that the issue of access to the vessel pending handover is a matter that the Court could properly determine as an ancillary matter to the order that it has already made.

[29] Once handover has been effected, the parties can consider their respective rights under the owners’ agreement. Hanover will also enable Sovereign to repay the undisputed portion of the loans owing to United, with United retaining security over Sovereign's share of the vessel in respect of disputed amounts. That would also enable the appointment of the receivers to be terminated.

[30] Sovereign's claim in the present proceeding can continue unaffected by these events.

Application for joinder of Mr Taylor as fourth defendant

[31] The circumstances in which a defendant may be joined to a proceeding are prescribed by Rule 74(1) of the High Court Rules. Generally speaking, a defendant will only be joined where the plaintiff alleges that it has a “right to any relief in respect of or arising out of the same transaction, matter, event, instrument, or other document, …”.

[32] As the pleadings are currently framed no issue falls to be determined in this proceeding that also needs to be determined in relation to Mr Taylor. Sovereign does not seek any relief against Mr Taylor. I therefore see no reason at present to join Mr Taylor as a fourth defendant. He has had an obvious practical interest in matters that have occurred to date, and for that reason he has been given the opportunity to be heard as an interested party. He will continue to have that status in the future.

[33] The Court also has the power under Rule 97(1) to join a party where the presence of that party is necessary to enable the Court to “properly and effectually adjudicate upon all matters in issue” in a proceeding. As the pleadings currently stand, however, I do not consider that Mr Taylor’s presence before the Court is necessary to enable the Court to fully and effectually determine the matters in issue.

[34] To date there has been no suggestion that in enforcing its security United seeks to trammel Mr Taylor’s rights in any way. That is not surprising given the fact that Mr Taylor paid for his share of the boat prior to the date upon which Sovereign executed the security in favour of United. I therefore consider that Mr Taylor’s future presence as an interested party will be sufficient to enable him to ensure that his interests are properly protected. I also record that there is nothing to prevent Mr Taylor from filing a fresh application for joinder in the event that he considers that his presence is warranted by future events.

Result

[35] Sovereign's application for an order that the vessel be sold is dismissed, as is Mr Taylor’s application for joinder as fourth defendant.

[36] The only ancillary order that I make is an order granting all parties leave to have the proceeding called before a Judge (preferably me) on 36 hours notice should any issue arise in relation to Sovereign having access to the vessel for the purpose of readying it for handover.

[37] I do not propose to make an order requiring Sovereign to pay the “gap” amount at this stage. As I indicated in my earlier judgment (at [39]), it is arguable that the parties reached a binding agreement on 15 September 2006 that the amounts owing under the two loan agreements, together with interest at the ordinary rate, would be repaid to United at handover.

Costs

[38] I make no order for costs in relation to Mr Taylor’s application, as the parties were not required to formally respond to it.

[39] The resumed hearing was, strictly speaking, a hearing in relation to ancillary orders in relation to Sovereign's successful application for an interim injunction. I acknowledge, however, that the hearing was devoted virtually entirely to Sovereign's (ultimately unsuccessful) application for an order that the vessel be sold. Given the fact that that application was effectively brought at my invitation, my initial impression is that costs should lie where they fall.

[40] If any counsel wishes to advocate a different outcome memoranda should be filed and served within 14 days, with memoranda in response to be filed and served within 14 days thereafter.

Next event

[41] It is now appropriate to give the parties time to consider the path that the present proceeding should take and the timeframe within which that should occur.

[42] There is no reason why the proceeding should not be the subject of case management in the future by an Associate Judge. A telephone conference, which is to be treated as the initial case management conference in this proceeding, will therefore be held before Associate Judge Doogue on Thursday, 17 May 2007 at 9 am.