FEDERAL COURT OF AUSTRALIA Wicht v Pathor Pty Ltd [2000] FCA 281 LEON MICHAEL WICHT AND JENNY CHIT CHAN WICHT v PATHOR PTY LIMITED AND BRUCE McDONALD N 1125 of 1999 HILL J 8 MARCH 2000 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 1125 OF 1999 BETWEEN: LEON MICHAEL WICHT and JENNY CHIT CHAN WICHT APPLICANTS AND: PATHOR PTY LIMITED FIRST RESPONDENT BRUCE McDONALD SECOND RESPONDENT JUDGE: HILL J DATE: 8 MARCH 2000 PLACE: SYDNEY EX TEMPORE REASONS FOR JUDGMENT 1 Before the Court is a motion brought by Pathor Pty Limited ("Pathor") and/or Mr McDonald, the respondents to proceedings in this Court commenced by Mr and Mrs Wicht, to vary an interlocutory order made by me restraining Pathor from, inter alia, selling two properties, one at Coffs Harbour and the other at Leichhardt, so as to permit Pathor to sell the Leichhardt property to an arms-length purchaser and pay the net proceeds of sale after discharge of a mortgage on the Leichhardt property into the trust account of the solicitors for Pathor. 2 It appears that a Mr Gallante, a businessman in the Leichhardt area, has made an offer to Mr McDonald to purchase the Leichhardt property at a purchase price of $374,000. There is a dispute which has arisen between the mortgagee of the property and Mr McDonald as to whether there has been a default under the mortgage over the property. Mr McDonald's position is that there has been no default and the matter is presently the subject of a dispute which could lead to the mortgagee seeking to obtain possession of the Leichhardt property and sell it. 3 It is the case of Mr and Mrs Wicht that Mr McDonald acted for them as financial advisers. In between February and April 1997 it is suggested that Mr McDonald introduced to the Wichts the possibility of their acquiring a beneficial interest in a property known as 24 Azalea Avenue, Coffs Harbour ("the Coffs Harbour property") on the basis that, so the Wichts say, they would advance the sum of $180,000 towards the acquisition costs; Mr McDonald would inject a further $180,000; the property would be repaired and renovated and ultimately that it would be sold at a profit over and above the initial contribution. 4 It is said that the agreement between the parties was that the Coffs Harbour property would be held unencumbered and that a beneficial interest in that property would be proportionate to each party's capital contribution. I shall return later to how the purchase was actually funded. 5 Subsequently, towards the latter part of 1997, Mr McDonald raised the question of the purchase of a property at 39 Lords Road, Leichhardt (the Leichhardt property). The arrangement as pleaded was said to be that the Leichhardt property would be developed into two or three town houses and sold at a profit, the profit share being 50 per cent to each party. The arrangement included payment of the purchase price for the property by the Wichts, that amount being recoverable by them when the Leichhardt property was sold before the division of profits. 6 If that was the agreement between the parties, then it was certainly not implemented in the way that the Wichts understood. According to an affidavit filed in the proceedings by Mr McDonald the arrangement was that his interests and the Wicht interests would invest in the Coffs Harbour property on a 50/50 basis. Mr McDonald says that he advised the Wichts that the purchase price was $155,000 plus stamp duty, legal expenses and other costs and that $180,000 would cover the cost of acquiring it. Mr Wicht was to put in $180,000 up front and Mr McDonald would pay for renovations, project manage and ultimately when the project was finished the property would be worth around $460,000 at which time a decision could be made to sell it and the profit be shared. 7 It is Mr McDonald's case that he was to pay for the renovations, project manage the project, estimating the building work itself would cost about $100,000. According to Mr McDonald a conversation arose at the time when the Leichhardt property was being considered. He suggested, according to his evidence, that the Wichts put in $210,000 on a project that would involve a purchase price of around $210,000. There would be development and building costs which would come to about $330,000. Mr McDonald was to pay the fees of an architect. The place would be sold when the project was completed and the profit divided between them. Mr McDonald was to pay the other costs. 8 As I understand the matter, and there is really no basic disagreement about the figures, the purchase price of the Coffs Harbour property was $155,000 and the purchase price of the Leichhardt property was $230,000. Excluding stamp duty, legal fees, et cetera, the combined purchase price of the two properties was therefore $385,000. 9 Pathor, contrary to the agreement alleged to have been made by the Wichts, mortgaged the property, borrowing from a third party in an amount of $364,000. The property was purchased in Pathor's name and arrangements regarding directorships alleged to have been made by the Wichts were not complied with according to their case. Additional moneys have been spent on the Coffs Harbour and Leichhardt properties being $127,200 in respect of the Coffs Harbour property and $53,500 in respect of a development application of the Leichhardt property totalling $180,700. 10 The cash contributions made by the Wichts as I have indicated total $407,750, more than the purchase price of the two properties. When that purchase price is added together with the development application and other costs of Coffs Harbour, a total of $565,700 has been outlaid on the two properties together with stamp duty, legal costs, etcetera of an unknown amount. For present purposes it probably suffices to say that roughly $600,000 has been outlaid on the properties. 11 After the contribution of the Wichts is deducted that leaves approximately $200,000, which has been put into the project from outside funds. The only outside funds used were those being the borrowings of Pathor. It will be observed that there is a large discrepancy, that discrepancy arises because Pathor paid out of the moneys borrowed a large amount of money to a company called Bulletin Capital Management Pty Ltd which is owned by the McDonald interests. 12 Mr McDonald guaranteed the borrowings made by Pathor. At some time an amount of approximately $10,000 was returned to the Wichts according to Mr McDonald. Mr McDonald takes the view that Pathor holds the two properties upon trust for the Wichts and himself in equal shares. On the case of the Wichts, or at least on one view of it, the property was held by Pathor pro rata to the contributions made by each of the McDonald and Wicht interests. No doubt it is the Wichts' case that Mr McDonald contributed nothing with the result that they are the sole beneficial owners but that the Wichts are the sole beneficial owners. 13 To some extent the resolution of who was to be the beneficial owner of the properties depends upon the proper construction to be given to conversations between the parties and, in particular, what is meant by the proportion of contributions to which I have alluded. The matter has been listed for hearing on 4 May. Both properties, being the subject of a mortgage, are no doubt costing money in terms of interest and other outgoings. It is obvious enough that there is some suspicion on the part of the Wichts directed at Mr McDonald, whether rightly or wrongly, and I can understand at least why they may not wish to permit him to sell the property or to have control of the sale of the property. 14 I should say that if Mr McDonald is correct in the view he takes of the transaction an appropriate order that would be made would no doubt be that the property be sold by auction, or perhaps that a receiver be appointed to conduct the sale. On the Wichts' case they seek at least an order that the properties be transferred to them as sole beneficial owner. That is a dispute which no doubt will have to await resolution in May. 15 There are two matters of urgency at the moment. The first is the obvious one, that the Leichhardt property is costing money, it is vacant land, and also is the subject of a mortgage and interest. There is also the danger that the mortgagee might seek to enter into possession and carry out a forced sale which would not be in the interests of either of the parties. 16 Evidence of valuation of the property was placed before me for the purposes of the present application. In an affidavit dated 8 March Mr McDonald deposes to the fact that he had taken no steps yet to list the sale of the property but had spoken to agents and been advised by Vincent Montano Real Estate that a reasonable asking price was in the vicinity of $350,000 to $370,000. Another agent, Mr Horne, had advised him that an asking price of $340,000 to $350,000 was reasonable. Mr Wicht had likewise had some conversation with a real estate agent in Leichhardt who had suggested that the site would be worth between $450,000 to $500,000. That agent had not, it would seem, inspected the property. 17 There was tendered before me a valuation prepared by Jeffrey Perkins & Associates on 1 March 2000. The valuer makes some qualifications to his value in that he had not made searches of title or other potential restrictions that might affect the property, but concluded that the current market value of it was in the order of $390,000. 18 Counsel for the McDonald interests submitted that I should make an order permitting the sale of the property by Pathor at a price not less than $390,000, accepting for that purpose the value that Mr Perkins had given. Alternatively, he submitted that I should order now that the Leichhardt property be put up to auction. Counsel for Mr and Mrs Wicht submitted that I should make no order having regard to the fact that the matter was to heard in something less than two months time or alternatively, that I should order that the property be placed with two agents, one appointed by each side to be advertised and marketed for sale. 19 It would seem that the Wicht interests are concerned at the costs that might be generated if the property were sold by auction. Given that Mr and Mrs Wicht seek an order that the property be transferred to them as beneficial owners solely and that they oppose the sale I am not disposed to permit Pathor to sell the property at this stage at a figure of $390,000 although on the evidence before me that is its market value. There is no doubt that there is an arguable issue to be tried between the Wichts and Mr McDonald. 20 It is inappropriate for me to express any view on the likely outcome of the case. It would likewise be inappropriate to order that the property be sold when the Wichts claim to be the sole beneficial owners of it and do not consent to the sale. There is no immediate urgency that the property be sold, notwithstanding the dispute between the mortgagee and Pathor. At least according to Mr McDonald there is no current default under the mortgage. Within approximately two months the question of ownership of the Leichhardt property will have been determined. 21 It would be an appropriate exercise of discretion for me to vary the terms of the injunction to permit Pathor to sell the property but only if in doing so it places the property with two agents, one of which it nominates and the other of which is approved by the Wichts as conjunction agents. This to be on the basis that the property will be marketed and offers obtained, submitted to the McDonald interests and the Wicht interests and there is agreement between the parties as to whether a particular offer is accepted. 22 I do not, of course, order this to be done. That will be a matter for Mr McDonald to decide. In essentially dismissing the application subject to the variation, I have suggested I do so merely to preserve what is the subject matter of the litigation pending the resolution of the litigation. Should any matter arise in the meantime as a result of action taken by the mortgagee the motion may be brought back before me on 48 hours notice. 23 I reserve the costs of the motion at this stage. 24 I will vary the injunction made by me by adding the following proviso to Order 1: "provided that the first respondent may sell the property at 39 Lords Road, Leichhardt if the following procedure is followed, namely: (a) the property is placed with an agent appointed by the respondents and one appointed by the applicants as conjunction agents; (b) that the property be advertised for sale and marketed by the conjunction agents; (c) that the agents be instructed to submit all offers to both Mr Wicht and Mr McDonald; and (d) that no offer be accepted unless agreed to in writing by Mr and Mrs Wicht or their solicitor." 25 Liberty to apply on 48 hours notice. I reserve costs. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hill. Associate: Dated: 8 March 2000 Counsel for the Applicant: Mr J Duncan Solicitor for the Applicant: J P Gould Counsel for the Respondent: Mr F P Carnovale Solicitor for the Respondent: Gillis Delaney Brown Date of Hearing: 8 March 2000 Date of Judgment: 8 March 2000