FEDERAL COURT OF AUSTRALIA Spalla v St George Wholesale Finance Pty Ltd [1999] FCA 208 ANTHONY PATRICK SPALLA, IRLMOND PTY LTD (RECEIVERS & MANAGERS APPOINTED) & APS (WHOLESALE) PTY LTD (RECEIVERS & MANAGERS APPOINTED) V ST GEORGE WHOLESALE FINANCE PTY LTD, ST GEORGE MOTOR FINANCE PTY LTD, ANDREW STEWART HOME & ANDREW WILLIAM BECK NO. V 74 OF 1999 JUDGE: FINKELSTEIN J PLACE: MELBOURNE DATE: 4 MARCH 1999 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 74 of 1999 BETWEEN: ANTHONY PATRICK SPALLA IRLMOND PTY LTD (RECEIVERS & MANAGERS APPOINTED) and APS (WHOLESALE) PTY LTD (RECEIVERS & MANAGERS APPOINTED) Applicants AND: ST GEORGE WHOLESALE FINANCE PTY LTD ST GEORGE MOTOR FINANCE PTY LTD ANDREW STEWART HOME and ANDREW WILLIAM BECK Respondents JUDGE: FINKELSTEIN J DATE: 4 MARCH 1999 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 Irlmond Pty Ltd (Irlmond), the second applicant, conducts the business of selling new and used motor vehicles under the name "Essendon Mitsubishi" pursuant to a franchise granted by Mitsubishi Motors Australia. APS Wholesale Pty Ltd (APS Wholesale), the third applicant, acts as the wholesaling arm for that business. The business is financed by St George Wholesale Finance Pty Ltd, the first respondent, and St George Motor Finance Ltd, the second respondent, each being a subsidiary of the St George Bank. 2 The manner in which finance is provided is as follows. Irlmond has entered into a bailment plan agreement with the financiers. The agreement is dated 21 February 1994. By that agreement, the financiers are to purchase motor vehicles when requested by Irlmond. Irlmond then takes possession of the vehicles as bailee and displays them for sale. Any offer to purchase a vehicle is received by Irlmond as agent for the financiers who may in their complete discretion sell the vehicle. It is not clear whether the sale is to the customer or to APS Wholesale who then sells the vehicle to Irlmond who in turn sells it to the customer. Upon the sale of a vehicle, Irlmond receives the purchase price for the account of the financiers. Out of those moneys, Irlmond is entitled to deduct its commission, being the difference between the price the customer pays for a vehicle and the price at which the vehicle was purchased by the financiers. 3 From time to time, motor vehicles are sold under an agreement whereby the payment of the purchase price is to be deferred for a period after the vehicle has been delivered. By a deferred payment agreement, also dated 21 February 1994, the obligation to pay the financiers the purchase price for those vehicles is deferred until the purchase price is received from the purchasers or 30 days from the date of the delivery of the vehicles, whichever first occurs. 4 The parties have agreed that there should be limits on the facility provided by the financiers. Those limits are that the financiers will at any one time purchase new vehicles to the value of $3.5 million, demonstration vehicles to the value of $350,000 and used vehicles to the value of $1.450 million. The limit on the value of new vehicles to be purchased includes an amount of $800,000 in respect of the deferred payment facility. Thus the "credit" available to Irlmond was agreed to be $5.3 million. 5 In order to secure its obligations under the bailment agreement and the deferred payment agreement, Irlmond has granted to the financiers a fixed and floating charge over its property. A like charge has been granted by APS Wholesale who has guaranteed the obligations of Irlmond. 6 By the end of 1994, Irlmond was in serious financial difficulty. Unsecured creditors were owed in excess of $2 million. The company needed to raise approximately $1 million in order to keep trading. St George Bank was requested to provide this money but only agreed to advance approximately $600,000. 7 Thereafter the business continued to struggle. Not only was it short of working capital, it was suffering trading losses. For example in the year ended 30 June 1997, the losses were of the order of $500,000. To cover the shortage of cash, Irlmond made use of the deferred delivery facility in a way not permitted by the agreements. What occurred was this. Irlmond allocated to the deferred delivery facility vehicles that had been sold and paid for. This enabled Irlmond to make use of the purchase price that had been received for these vehicles for a period of up to 30 days. According to the evidence, about one half of the facility was comprised of vehicles in respect of which the purchase price had been paid. 8 In the period from 1995 to September 1998, the level of the deferred delivery facility fluctuated between approximately $700,000 and $1.8 million of which, as I have said, approximately 50 per cent represented funds that should have been paid to the financiers. Since Irlmond was required to pay the purchase price of the deferred delivery vehicles within 30 days of those vehicles being allocated to the facility, Irlmond not only obtained up to 30 days' credit, but was able to roll over this credit from month to month. 9 Anthony Spalla, the first applicant, is the sole director and a shareholder of the corporate applicants. His evidence is that the financiers were well aware of the fact that Irlmond was making use of the deferred delivery facility in the manner described. According to Mr Spalla, he had discussed the use of the facility with officers of the financiers, in particular Wayne Phillips, Peter Beed and Danny Cahill. Mr Spalla said that each of these officers knew that the deferred delivery facility was being used in order to finance the day-to-day operations of the company's business. He says that not only did the officers of the financiers not object to what was happening, but that he was led to believe by them that the financiers would not require Irlmond to abide by the strict terms of the bailment agreement and the deferred payment agreement without reasonable notice. As at September 1998, the deferred delivery facility stood at around $1.9 million, over half of which represented funds that had been received by Irlmond that were being utilised for operating capital. 10 In September or October 1998, Mr Spalla met Mr Beed. Mr Spalla says that Mr Beed told him that: "We [presumably the corporate applicants and the financiers] have to come clean and tell Sydney the truth, but you'll have to go somewhere else." The reference to "Sydney" I take to be a reference to the St George Bank. The following day Mr Beed informed Mr Spalla that he should borrow funds to refinance the facilities that were being provided by the financiers. 11 As a consequence of these conversations, Irlmond discontinued its practice of treating vehicles that had been sold and paid for as part of the deferred delivery facility. The result was that, as disclosed by the November 1998 accounting, Irlmond was required to pay the financiers approximately $500,000 more than would otherwise have been the case. Irlmond did not have the funds to pay the total amount that was then due to the financiers. The shortfall between the amount that was paid and the amount that was payable according to the written agreements was around $1 million. 12 At a meeting that took place on either 25 or 26 November 1998, Mr Phillips served on Mr Spalla notices of demand under the debentures requiring the unpaid amounts to be paid. Mr Spalla says that when those demands were served, he was told that their service was "only a formality" and that the financiers did not intend to act upon the demands. In December 1998, Irlmond paid out the amount that was due to the financiers for the month of November 1998. 13 As a further consequence of the discussions of September or October 1998, Mr Spalla commenced negotiations with Capital Finance with a view to having that company take over the financing of Irlmond's business. Those negotiations continued until about mid-January 1999 when Capital Finance informed Mr Spalla that it was not willing to provide financial accommodation to Irlmond. 14 To appreciate the significance of what occurred in early 1999, it is necessary to mention one further aspect of the arrangements between Irlmond and the financiers. It was a feature of their dealings which does not appear to be in dispute. Although the bailment plan agreement required Irlmond to pay the purchase price received from the sale of motor vehicles within 48 hours of the receipt of those moneys, this timetable was not adhered to. What had been occurring for a number of years was that the financiers would conduct a monthly audit of motor vehicle sales and receipts, and Irlmond would pay the amount determined to be due as a consequence of that audit a short time thereafter. 15 In accordance with this practice, audits were conducted in December 1998 and January 1999. However, the evidence does not disclose the results of those audits. A further audit was conducted on 4 February 1999. According to the evidence of Mr Spalla and his accountant, Dean Still, this audit took place much earlier in the month than was usual. I infer from their evidence that a period of approximately four weeks would usually elapse between each audit and that period had not elapsed by the time of the audit of 4 February 1999. 16 Mr Still said that the audit disclosed that a number of vehicles that had not been accounted for. Apparently there were some 13 vehicles that had been sold and in respect of which payment had been received. Mr Still said that Mr Cahill requested that he be given a cheque for the sum of $310,458.41 in respect of those 13 vehicles. Mr Spalla said that he told Mr Cahill not to present the cheque because the account was not in funds. However, the cheque was presented for payment on 8 February 1999 and was dishonoured. It is arguable that this did not place Irlmond in default of its obligations under its various agreements with the financiers for the reason that the amount was not payable until after the usual monthly audit. 17 A further audit was conducted on 10 February 1999. This audit disclosed that Irlmond was indebted to the financiers in the sum of approximately $2,238,000. It is far from clear how the account had reached this level. I assume that one reason was that Irlmond was no longer using the deferred payment facility in accordance with past practices. Mr Still offered a further explanation. He said that between 4 February 1999 and 10 February 1999, Irlmond had received a large number of payments for vehicles that had been delivered during that period. He also said that the amounts were not required to be paid to the financiers until after the monthly audit in accordance with the practice that had been established. 18 It seems that all parties accepted that the debt that was in fact due to the financiers was greater than the amount disclosed by the audit of 10 February 1999. Mr Spalla thought that the debt was around $2.4 million to $2.5 million. Others were of the view that the debt might have been as high as $2.7 million or $2.8 million. On 12 February 1999, Mr Phillips telephoned Mr Spalla, and said, according to Mr Spalla, that unless the debt due to the financiers was immediately reduced to $2,238,000, the financiers would "close him up". In a discussion that occurred later on the same day, Mr Spalla informed Mr Phillips that he could not put further funds into the business and thus could not make the payment sought. However, by this time the financiers had appointed receivers over the property of the corporate applicants. The receivers are the third and fourth respondents to this proceeding. 19 The appointment of the receivers led to the commencement of this proceeding. The principal relief sought is a declaration that the receivers were not lawfully appointed and that they are trespassing on the corporate applicants' property. Damages for trespass are sought. The basis for the contention that the appointment of the receivers was unlawful is that by reason of the dealings between the parties that I have described, the bailment plan agreement was varied to the effect that Irlmond could use the deferred delivery facility to fund its operations. Alternatively it is alleged that Irlmond was induced to believe that its conduct would not constitute a breach of its obligations under the bailment plan agreement or the deferred delivery facility, and that the financiers would not depart from that position without giving the corporate applicants reasonable notice of their intention to do so. 20 The applicants now seek an interlocutory injunction pending trial restraining the receivers from selling the business. They do not seek to restrain the receivers from remaining in possession of the business in the meantime. In other words, the corporate applicants seek to have the business and its assets preserved in the event that they are successful at the trial and obtain an order that the receivers are trespassing upon their property. 21 The principles to be applied in determining whether interlocutory relief should be granted are well known and were the subject of only passing comment by counsel. In this type of application, it is necessary for a court to consider a variety of factors: the strength of the plaintiff's case, whether irreparable harm will be suffered by the plaintiff if relief is withheld, whether irreparable harm will be done to the defendant if the relief is granted, what is the "balance of convenience", a shorthand expression for an indefinable array of elements, and any other special factors that ought to be brought into consideration. The relevant weight to be given to each factor will depend upon the particular circumstances of the case. 22 What is the strength of the applicants' case? For the purpose of considering this question, I will act on the basis of Mr Spalla's evidence that officers of the financiers were aware of and had acquiesced in the use by Irlmond of the deferred delivery facility in the manner described for the purpose of enabling Irlmond to fund the day-to-day operations of its business. It is true that Mr Spalla's evidence in this regard is denied by the respondents' witnesses, but on an interlocutory application such as this, where the evidence is incomplete and that which has been given has not been tested, I will act on the applicants' evidence unless it is inherently improbable. 23 On that assumption, the applicants have made out a case, which is neither trivial nor insubstantial, that the use of the deferred delivery facility as a means of funding Irlmond's business would not be treated by the financiers as a breach of the bailment plan agreement and the deferred payment agreement. 24 I have considerable doubt whether this conduct could result in a variation of the terms of those agreements. For one thing, it is almost impossible to specify in what way the terms would have been amended. For example, what was to be the limit of the facility? What amounts could Irlmond add to the facility? Was it agreed that Irlmond could make use of the financiers' money for the duration of the bailment plan agreement or was it agreed that it could do so only until the financiers said that it could not? 25 Secondly, it is by no means evident to me that the persons who were aware that the facility was being conducted otherwise than in accordance with the terms of the written agreements had authority to bind the financiers to a variation of them. Thus, I do not know what position any of these officers held with the financiers. I do not know the scope of their actual or implied authority in relation to the affairs of the financiers, nor is there any evidence suggesting that the financiers held those officers out as having ostensible authority to amend the facility agreements. 26 But the facts could justify a finding that the financiers are estopped from contending that what had occurred was a contravention of the facility agreements, and a further finding that they could only restore the parties to their former position by giving reasonable notice to that effect. 27 A difficult question at the trial, assuming that the applicants can establish all of the material facts, will be what period of notice is reasonable in all the circumstances? In this regard, the applicants say that Irlmond should have been given somewhere between six and 12 months' notice; that being the time that would reasonably be required to find a substitute financier. However, it is to be remembered that the corporate applicants were advised in October 1998 to find a substitute financier, and although the notices of demand were served shortly thereafter, the receivers were not appointed until February 1999. I have no doubt that on the evidence thus far filed, the suggestion that financiers were required to give 12 months' notice is not sustainable. On the other hand I think that there is a reasonable case that could be made out that at least two to three months' notice would not be sufficient. 28 It is not for me to finally resolve this question. For present purposes, the only issue that I have to determine is whether a case has been made out that notice of around six months was required to be given. If such notice was required then the receivers were appointed prematurely. Although I do not reach this conclusion with any confidence, I accept the possibility that the applicants may be able to establish that this was the period of notice that should have been given. 29 Will the applicants suffer irreparable harm if the injunction is not granted? In cases where a plaintiff claims an interference with his property, injunctions are strongly favoured. A damages award in those circumstances amounts to an expropriation of property, and in such cases courts have commonly allowed injunctive relief even where the balance of convenience strongly favours the defendant. Here the applicants do assert a direct interference with their property and, in the absence of strong countervailing arguments, are prima facie entitled to an injunction. 30 Will irreparable harm be caused to the respondents if the injunction is granted? In ordinary circumstances a plaintiff's undertaking as to damages is designed to ensure that the defendant will not suffer as a result of the grant of the injunction. Here the applicants offer such an undertaking, but it is accepted by them that the undertaking is of no value. Their financial position is such that they can give no meaningful undertaking. 31 The applicants contend that this is of no consequence in this case because the respondents will not suffer any loss by reason of the grant of the injunction. I do not agree that this is so. In the first place the business conducted by Irlmond has been trading at a loss for some time, although the evidence does show that in the financial year ended June 1998 a small trading profit was derived. That business is now being conducted by the receivers, and it may be that they will also run it at a loss. If that is so and they are forced to continue to operate the business for a further period, because that will be the effect of the injunction that is sought, any losses that are being suffered will not be recoverable in the event that the applicants fail at trial. 32 There is another potential for financial loss. Mitsubishi Motors is presently entitled to terminate the franchise granted to Irlmond. It has indicated that it will not terminate that franchise before 15 March 1999 in order to enable the respondents to sell the goodwill of the business. If the business is not sold by then and the franchise is terminated there will be no goodwill for the receivers to sell. It appears that the goodwill is worth at least $1 million, although the applicants assert that it might have a greater value. 33 It is possible that Mitsubishi Motors might extend the period within which the business is to be sold if requested to do so. Mitsubishi Motors may even agree to stay its hand until the final resolution of this proceeding. As yet Mitsubishi Motors has not been requested to delay the termination of the franchise and so it is not clear how it will treat such a request. However, if no extension is granted, then the financiers will plainly suffer irreparable harm. 34 What is the balance of convenience or, to put the matter another way, does the benefit that the applicants will be given by the grant of the injunction outweigh the convenience to the respondents of withholding relief? Save for the potential of financial loss in operating the business and the possible loss of the goodwill, the respondents will not suffer any significant inconvenience if the injunction is granted. I anticipate that the trial of this action will take place within a month or so. A delay of that short a period would not detrimentally affect the respondents in any way so far as I am aware. 35 Are there any other facts that should be taken into account? There is one matter that I regard as being of great significance. The applicants relied upon an affidavit by Leslie Murray, an accountant, who has been involved in the retail motor industry for some 38 years. Mr Murray was asked to express an opinion on the possibility of Irlmond being able to refinance the bailment plan facility it has with the financiers. Mr Murray said that in his view, Irlmond would be able to refinance the business, but that it would take approximately six months to do so. However, Mr Murray made it clear that, in his view, in order to refinance the business the following requirements needed to be met: the writing off by St George of $1.150 million of the debt due to it, the provision of external capital probably of the order of $1 million, alternative finance and funds to supplement the working capital of the business. 36 If this is the true position, then the possibility of obtaining finance is remote. The financiers are unlikely to write off any part of the debt that is due to them. It is unlikely that an investor will inject capital of $1 million. If these two requirements are not met, I take Mr Murray to be saying that the business could not be refinanced. 37 If this was the only evidence on the point, the grant of an injunction would be futile and should not be issued. However, as it turns out, it is not the only evidence that deals with the issue. There is an affidavit by Nimrod Harell, the chief executive officer of First Secure Ltd, a business which is involved in buying and selling motor vehicle dealerships. Mr Harell says that he has spoken with Capital Finance, the company that had previously been approached by Mr Spalla to refinance the business. Mr Harell says that as a consequence of his discussions, he believes that if the Spalla family offer their family home as security, Capital Finance might agree to refinance the business. 38 I accept that some criticism of Mr Harell's affidavit is justified. He does not give a sufficient explanation for his opinion that finance might be available, nor does he explain in any detail the reason why Capital Finance might change its mind and provide that finance. However, for the purposes of this application, I cannot and do not reject Mr Harell's evidence. 39 What then is to be the result of this application? In balancing the relative risks of granting or withholding the remedy sought, I favour the view that the applicants' rights will be so impaired by the time of trial and final judgment, the result of which is impossible to predict, that the relief sought should be granted. However, I intend to grant that relief on the following basis. If the respondents make a bona fide request of Mitsubishi Motors to defer terminating the franchise agreement until after the trial of this action and Mitsubishi Motors refuses to grant that deferral, then I will discharge the injunction. Further, if the continuation of the business results in the receivers incurring personal liabilities which cannot be recouped from the revenue derived by them in conducting the business - that is, if the business is operating unprofitably - I will discharge the injunction unless the applicants provide adequate security to protect the receivers' position. The appropriate order for costs is that they shall be in the cause. 40 The parties should bring in short minutes of orders to give effect to these reasons and to provide for any directions that should be given in order to enable a speedy hearing to take place. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein Associate: Dated: 4 March 1999 Counsel for the Applicant: Mr P R Hayes QC Mr I D Martindale Solicitor for the Applicant: Feingold Partners P/L Counsel for the Respondent: Mr R Garratt QC Mr D Gilbertson Solicitor for the Respondent: Corrs Chambers Westgarth Date of Hearing: 2 and 4 March 1999 Date of Judgment: 4 March 1999