A finance company is seeking freezing orders on properties belonging to the guarantors of a $300,000 loan it made to a now bankrupt former lawyer.
A lawyer acting for FAI Money, which lists businessmen Eric Watson and Mark Hotchin as directors, told the High Court at Auckland that FAI had made the loan to Edward Errol Johnston in 2009.
Johnston was struck off as a lawyer last year after admitting charges of misconduct. He is now bankrupt.
The court heard that the loan was guaranteed by Edward Johnston’s brother, Richard Johnston, and Gavin Crawley, who were the effective trustees of a property in Swanson, West Auckland.
FAI claims that Edward Johnston told the finance company that the Swanson house was worth $1.5 million and was unencumbered when he applied for the loan.
While no mortgage was taken by FAI on this property, FAI’s lawyer Bret Gustafson said the loan agreement included covenants prohibiting the property from being mortgaged or sold "other than in the ordinary business of the trust".
However the Swanson house had already been mortgaged to Westpac, which had a $1.1m priority on the property.
FAI claims that the failure to disclose the Westpac mortgage and another to Dorchester Finance was a breach of the loan agreement that was either fraudulent or negligent.
FAI also claims that the property was subsequently sold to related parties for $960,000, well below the $1.5m valuation that Edward Johnston had supplied.
Gustafson said the sale had been made by private treaty without marketing and without a real estate agent.
"The sale wasn’t in the normal course of business of the trust, therefore it was against the loan agreement," Gustafson said.
But a lawyer representing the guarantors, Simativa Perese, said FAI had become aware of the Westpac mortgage when Richard Johnston had supplied the certificate of title to the finance company.
"From the very outset FAI had knowledge that Westpac had a mortgage and that the priority was $1.1m," Perese said.
Perese said that Westpac had been entitled to and had been given all of the proceeds of the sale of the Swanson property, and the guarantors had not supplied any valuation.
"There is no evidence of dishonesty or of negligence," Perese said. ‘‘Now realising that they have dropped the ball, FAI is seeking to spray as widely as possible to recover their money.’’
Justice Mark Cooper reserved his decision, but he ordered that interim freezing orders obtained in an earlier hearing would remain in force.