FEDERAL COURT OF AUSTRALIA Mhanna v Sovereign Capital Limited [2004] FCA 1252 JOHN MHANNA & ANOR v SOVEREIGN CAPITAL LIMITED & ANOR N 908 OF 2004 STONE J 23 SEPTEMBER 2004 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 908 OF 2004 BETWEEN: JOHN MHANNA FIRST PLAINTIFF EMAN SHONODA SECOND PLAINTIFF HIGHWATCH PTY LIMITED (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) THIRD PLAINTIFF AND: SOVEREIGN CAPITAL LIMITED FIRST DEFENDANT RONALD JOHN DEAN-WILLCOCKS AND IAN JAMES PURCHAS AS ADMINISTRATORS OF HIGHWATCH PTY LIMITED (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) SECOND DEFENDANT JUDGE: STONE J DATE OF ORDER: 23 SEPTEMBER 2004 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application for interlocutory relief be dismissed. 2. The first and second plaintiffs pay the defendants' costs of the application for interlocutory relief. 3. The plaintiffs have leave to appeal from this interlocutory decision. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 908 OF 2004 BETWEEN: JOHN MHANNA FIRST PLAINTIFF EMAN SHONODA SECOND PLAINTIFF HIGHWATCH PTY LIMITED (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) THIRD PLAINTIFF AND: SOVEREIGN CAPITAL LIMITED FIRST DEFENDANT RONALD JOHN DEAN-WILLCOCKS AND IAN JAMES PURCHAS AS ADMINISTRATORS OF HIGHWATCH PTY LIMITED (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) SECOND DEFENDANT JUDGE: STONE J DATE: 23 SEPTEMBER 2004 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The plaintiffs seek interlocutory relief to restrain the second defendants, administrators under a deed of company arrangement, from proceeding with a meeting of creditors scheduled for 11 am on Friday 24 September 2004. Immediately following the hearing of the application on the afternoon of 23 September 2004 I dismissed the application and undertook to provide written reasons as soon as possible. These are my reasons. 2 The deed of company arrangement referred to in [1] above was made between Highwatch Pty Limited (Receivers & Managers Appointed) (Subject to a Deed of Company Arrangement) ('Highwatch') and the second defendant ('Administrators'). The first plaintiff is a former director and shareholder of Highwatch. The second plaintiff is currently a director and shareholder of Highwatch. By orders made on 13 August 2004 Hely J gave the plaintiffs leave under s 237 of the Corporations Act 2001 (Cth) ('Corporations Act') to bring proceedings on behalf of Highwatch against the first defendant, Sovereign Capital Limited ('Sovereign'), to claim relief set out in a 'draft amended application' that was annexed to the notice of motion that was before his Honour; [2004] FCA 1040. The form of his Honour's order was quite specific and, before me, no party submitted that it extended to the 'second amended application' filed on 20 September, which greatly expands the relief sought by the plaintiffs; in particular, an order to restrain the meeting of creditors was sought. Mr Gray, counsel for the plaintiffs, confined himself to seeking leave under s 237, 'to the extent that leave is necessary'. As I have refused to grant the interlocutory relief sought it is not necessary for me to decide if the leave granted by Hely J would extend to an application for such relief. If such leave were required I would refuse to grant it because, for reasons given below, I am not satisfied that there be a serious question to be tried; Corporations Act s 237(2)(d). Background 3 In February 2003, Highwatch purchased a property at Chiswick in New South Wales view a view to developing it. The development was to be financed by funds obtained from Sovereign and secured over a mortgage of the Chiswick property. The facility agreement between Sovereign and Highwatch provided for an initial advance of $6,270,000 and for the balance to be paid in regular monthly advances as the development proceeded, subject to certain conditions. The initial advance was paid but, for reasons not explained to me, no further advances were made. 4 By Deed of Charge dated 13 August 2003 Highwatch also granted a fixed and floating charge over all its 'property rights and assets' in favour of Sovereign. Clause 24 of the deed between Sovereign and Highwatch provided that, at Sovereign's option, the secured moneys should be immediately payable without demand or notice if, inter alia, 'a petition is lodged … for the winding up' of Highwatch. 5 On 8 September 2003 Gavcon Building & Construction Pty Limited (in liquidation) ('Gavcon') commenced winding up proceedings against Highwatch in the Supreme Court of New South Wales. On 2 March 2004 Sovereign appointed Mr DJF Lombe and Mr PG Yates to be Receivers and Managers of Highwatch. On 5 March 2004 Sovereign appointed the Administrators as voluntary administrators of Highwatch pursuant to s 436C of the Corporations Act. 6 Since their appointment, the Administrators have carried out the responsibilities imposed on them under the Part 5.3A of the Corporations Act with a view to executing a deed of company arrangement. Pursuant to a resolution of the creditors of Highwatch passed at a meeting on 14 May 2004, Highwatch and the Administrators entered into a Deed of Company Arrangement on 4 June 2004. On the same date the plaintiffs, Highwatch and the Administrators entered into a Deed of Guarantee and Indemnity ('Guarantee') and a Deed of Deferral. Under the Guarantee both plaintiffs assumed primary liability for the obligations of Highwatch under the Deed of Company Arrangement. The Deed of Deferral the plaintiffs undertook not to make certain claims against Highwatch until termination of the Deed of Company Arrangement. 7 Clause 4.1(e) of the Deed of Company Arrangement provided that Highwatch would, within 30 days, pay to the Administrators sufficient funds to pay in full all the claims of Highwatch's creditors. Subsequently, the Administrators extended the deadline for payment to 4 August 2004 but Highwatch did not make any payments. The Administrators convened another meeting of creditors to consider further action including whether to terminate the Deed of Company Arrangement and appoint the Administrators as Liquidators of Highwatch. At that meeting, held on 18 August 2004, the creditors resolved, 'That the meeting be adjourned for a period of three weeks and that [the First Plaintiff] contribute by 27 August 2004 $10,000 to the costs of the Administration.' 8 On 31 August 2004 the solicitors for Sovereign provided a proposed Deed of Company Arrangement ('Sovereign Deed') for consideration of the parties and creditors. That proposal has now been withdrawn. 9 The minutes of the adjourned meeting on 8 September 2004 show that the creditors resolved that the meeting be further adjourned to 29 September 2004 provided that the plaintiffs contribute $12,500 to the remuneration of the Administrators by 13 September 2004. The resolution provided that if that amount was not paid, the meeting would be 'immediately reconvened' for the purpose of considering termination of the Deed of Company Arrangement and the liquidation of Highwatch. The plaintiffs have not paid the amount specified in the resolution and the meeting of creditors was reconvened to 11am on 24 September 2004. It was this meeting that the plaintiffs sought to restrain. This application 10 For the plaintiffs to have been successful in their application for an interlocutory injunction it was necessary for them to demonstrate that there was a serious question to be tried and that the balance of convenience favours the grant of the relief sought; American Cyanamid Co v Ethicon Ltd [1975] AC 396. This is despite the plaintiffs positing the more strict requirement that they demonstrate a 'prima facie case'; see Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618. The plaintiffs understandably did not want to enter into a debate as to the appropriate test to be applied in applications for interlocutory injunctions, however it appears clear to me that the test outlined in American Cyanamid has been widely accepted in Australia including, without express reference, by the High Court in Fejo v Northern Territory of Australia (1998) 195 CLR 96 at 122 and Murphy v Lush (1986) 65 ALR 651 at 653. Therefore the application proceeded on the basis that the plaintiffs needed to demonstrate that there was a serious question to be tried. 11 The plaintiffs claimed that the appointment of the Administrators is invalid and that, consequently, any action purporting to have been taken by them acting pursuant to Part 5.3A of the Corporations Act, is anullity. They based this claim on the allegation that the difficulties in which Highwatch has been placed all stem from Sovereign's failure to make advances it was obliged to make under the facility agreement referred to in [3] above. They asserted that Sovereign is in breach of the agreement and cannot be permitted to act on the basis that Highwatch is in default of its obligations to Sovereign where that default was caused by Sovereign's failure to perform its obligations under the facility agreement. 12 The plaintiffs further asserted that on the balance of convenience the merits are all with them. They said that there was no pressing need for the meeting on 24 September to proceed. It was not in dispute that Highwatch is not trading and there is no urgency to decide whether it should go into liquidation. They asserted that should the creditors resolve to liquidate Highwatch there would be a significant change in the status of the company and the plaintiffs would be materially prejudiced in relation to the relief they could be granted or the implementation of that relief should the claims made in the second amended application be upheld. Those claims are set down for hearing before a judge of this Court on 5 October 2004 and the plaintiffs urged me to grant the injunction sought at least until that date. 13 In resisting the plaintiffs application for interlocutory relief the defendants made the following points: · under clause 24 of the Deed of Charge the moneys secured by that deed became immediately payable (with or without notice) on the winding up petition being brought in the Supreme Court by Gavcon; · since the appointment of the Administrators and the Receivers in March 2004 the plaintiffs have acquiesced in the process of external administration that led to the making of the Deed of Company Arrangement in June 2004 and in the subsequent meetings of creditors convened pursuant to s 445F of the Corporations Act. This acquiescence is evidenced by the Deed of Company Arrangement being signed on behalf of Highwatch by the second plaintiff in her capacity as director of Highwatch, the execution of the Deed of Guarantee and the Deed of Deferral by both plaintiffs, the plaintiffs' attendance at meeting of creditors and their promises of payment to the Administrators and creditors; · since June 2004 the plaintiffs have consistently failed to make payments that they have undertaken to make and to enable Highwatch to carry out its obligations under the Deed of Company Arrangement; · there have been two adjourned meetings of creditors to consider the Sovereign Deed which has subsequently been withdrawn; it was implied this was to the disadvantage of Highwatch's creditors; · even if the creditors resolve to liquidate Highwatch at the meeting on 24 September this would not prevent relief being given should the plaintiffs establish their claims at trial. The defendants submit that, under the Deed of Company Administration, Highwatch is presently not in control of its own processes and that a decision to liquidate the company, if that is what the creditors were to decide, would merely be the next step in the implementation of the terms of that deed. 14 I am not satisfied that the appointment of the Administrators under Part 5.3A of the Corporations Act is a nullity. Section 436C(1) of the Corporations Act provides: 'A person who is entitled to enforce a charge on the whole, or substantially the whole, of a company's property may by writing appoint an administrator of the company if the charge has become, and is still, enforceable.' 15 The evidence before me supports the view that: · virtually the whole of Highwatch's property is subject to the Deed of Charge. · under clause 24 of the Deed, that charge became enforceable by virtue of the proceedings commenced by Gavcon and was still enforceable at the time the Administrators were appointed; and · the appointment of the Administrators was made in writing by a deed of appointment dated 5 March 2004. 16 Even if Sovereign is in breach of the facility agreement, on the argument put to me I do not believe the claim that the appointment of the Administrators is a nullity raises a serious question. The statutory requirements (ie the requirements of s 436C of the Corporations Act) have been met. The plaintiffs' argument appeared to be based on some implication of law or equity that was not articulated. The plaintiffs referred to the well-established principle that a person is not entitled to take advantage of his or her own wrong; CSS Investments Pty Ltd v Lopiron Pty Ltd (1987) 16 FCR 15 at 31-32. They did not however cite any authority for the further element of their argument, namely that the application of this principle would render void, ab initio, the appointment of the Administrators which was made in accordance with the express terms of the statute. 17 Because I am of the opinion that the plaintiffs have not demonstrated that there is a serious question to be tried, I am not obliged to consider the balance of convenience. However, in case I am wrong on the question of a serious question, I have considered the balance of convenience. In my view the convenience of the parties is finely balanced but leans slightly in favour of the defendants. The history of this matter shows that the creditors have suffered considerable delay and have extended to the plaintiffs a number of opportunities to resolve the difficulties in which Highwatch has found itself. Those concessions have been fruitless. The meeting that has been reconvened for 24 September 2004 has been adjourned at least once. There is nothing before that suggests that this will change. In my view further delay for the creditors in being able to decide the fate of the company and proceeding to recover the debts owed to them will be to their disadvantage. Highwatch being placed in liquidation (if this is what the creditors decide) would not be a barrier to leave being obtained under s 237 of the Corporations Act; Charlton v Baber (2004) 47 ACSR 31 at [28]; Mhanna v Sovereign Capital Ltd [2004] FCA 1040 at [15]-[16]. 18 The plaintiff has been unsuccessful in obtaining the relief sought. There is no reason why the normal rule that costs follow the event should not apply. For this reason I have also ordered that the plaintiffs pay the defendants' costs. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone. Associate: Dated: 23 September 2004 Counsel for the First and Second Plaintiffs: Mr VR Grey Solicitor for the First and Second Plaintiffs: Malcolm Johns & Company Counsel for the First Defendant: Mr G George Solicitor for the First Defendant: Holding Redlich Counsel for the Second Defendant: Mr R Dick Solicitor for the Second Defendant: Kemp Strang Date of Hearing: 23 September 2004 Date of Judgment: 23 September 2004