Through a process known as “marshalling”, the High Court has ordered that
suppliers to failed company Starplus Homes Ltd (In Liquidation)
(Starplus) who have unregistered equitable mortgages can share
in a surplus of proceeds of sale with a registered second mortgagee.
The judgment sends a strong encouragement to suppliers to include an
equitable mortgage in their terms of trade. Click here for a copy of the judgement.
The case, Adams & Buchanan (as liquidators of Starplus Homes Ltd (In
liquidation)) v Sun & Ors  NZHC 912*, concerned the failed
property development company, Starplus. ASAP Finance Ltd (ASAP)
was the primary funder of Starplus, and had taken mortgages over 20 properties.
When Starplus defaulted on its loans, ASAP enforced its mortgages over the 20
properties. ASAP’s enforcement of the mortgages resulted in a surplus of $1.7
There were four parties competing for the $1.7 million surplus, namely:
Mr Sun, who was a registered second ranking mortgagee of the last two
properties sold (the Manukau properties); and
Magsons Hardware Ltd, Hamilton Hardware Retail Ltd, United Timber Merchants
Ltd, and RD 1 Ltd, all of which had supplied goods to Starplus for the
construction (the Suppliers).
The first issue was whether the terms of trade between Starplus and each of
the Suppliers were sufficient to charge properties acquired by Starplus after
the terms were entered into with equitable mortgages in favour of each Supplier.
Equitable mortgages can be useful to building suppliers. This is because the
supplied goods invariably become part of a building. At that point, legally, the
supplied goods are “affixed” to the land and any personal property security
interest that the supplier has in the supplied goods falls away. An equitable
mortgage gives the supplier security over the land itself.
In Starplus, the Court held that Magsons and Hamilton Hardware, who
had each signed Starplus’ general terms, were granted equitable mortgages
despite that later agreements had been entered into which varied the terms of
trade with Starplus. Additionally, the Court held that United Timber’s and RD
1’s standard terms, which Starplus had signed, also gave equitable mortgages to
United Timber and RD 1.
In terms of priority, Mr Sun’s registered mortgage security prevailed over
the equitable mortgages of the Suppliers. Under s185 of the Property Law Act
2007, Mr Sun was therefore entitled to the surplus ahead of the Suppliers.
However, the Suppliers raised the argument of marshalling by contending that
the order in which ASAP sold the mortgaged properties results in a windfall for
Mr Sun. If ASAP sold the Manukau properties first, the whole of the proceeds of
those sales would have gone to ASAP, and Mr Sun would be left with nothing. In
those circumstances, the Suppliers would have received some of the surplus
instead of Mr Sun.
Under marshalling, the Court can allocate the surplus left over by ASAP as a
“senior creditor” to Mr Sun and the Suppliers as “junior creditors” in a way
that is equitable to the junior creditors. Importantly, this allocation is made
despite that a junior creditor’s security (i.e. Mr Sun’s registered second
mortgage) ordinarily prevails over other junior creditors’ security (i.e. the
Suppliers’ equitable mortgages) under the Property Law Act.
The Court found that ASAP’s arbitrary order of selling the properties had
resulted in an inequitable result and ordered that the Suppliers could share in
the surplus. In reaching its decision, the Court noted rather ironically that
had the Manukau properties been sold first, Mr Sun would likely be raising the
marshalling argument to obtain a share of the surplus. This undoubtedly was
taken into account in the Court’s decision.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.