Supreme Court New South Wales Medium Neutral Citation: LDT O'Brien Property Group Pty Ltd v Trustworthy Nominees Pty Ltd [2023] NSWSC 1100 Hearing dates: 31 August 2023 Decision date: 12 September 2023 Jurisdiction: Equity - Real Property List Before: Ball J Decision: (1) The Cupid Factory Pty Ltd (ACN 147 722 576) and Yixin Meng each be joined as a defendant to this proceeding; (2) The plaintiffs have leave to file and serve a second further amended statement of claim in the form attached to the plaintiffs' submissions filed on 17 August 2023 with the deletion of paragraphs 30 to 38 (both inclusive) and of the heading immediately above paragraph 30; (3) The plaintiffs pay the first defendant's costs of and incidental to the relief sought in paragraphs 1, 2 and 6 of the notice of motion filed on 21 October 2022; (4) The plaintiffs pay 50 percent of the second and third defendants' costs of and incidental to the relief sought in paragraphs 1, 2 and 6 of the notice of motion filed on 21 October 2022; (5) The notice of motion otherwise be dismissed. (6) The matter be stood over before the Real Property List Judge for directions on 15 September 2023. Catchwords: LAND LAW — Mortgages — Interim Management Order — Whether Manager engaged in conduct which necessitated vacation of the management order — Where business conducted through other corporate entity — Business continued to be operated for the benefit of the party in possession — Conduct not of a kind requiring vacation of the Order Legislation Cited: Conveyancing Act 1919 (NSW) Corporations Act 2001 (Cth) Real Property Act 1900 (NSW) Category: Procedural rulings Parties: LDT O'Brien Property Group Pty Ltd (First Plaintiff | First Applicant) The Original Ettamogah Pub Pty Ltd (Second Plaintiff | Second Applicant) Southern Equity Pty Ltd (Third Plaintiff | Third Applicant) Trustworthy Nominees Pty Ltd (First Defendant | First Respondent) Edward River Hotel Pty Ltd (Second Defendant | Second Respondent) Keith William Blackney (Third Defendant | Third Respondent) Representation: Counsel: RJ Boadle (Plaintiffs | Applicants) A Di Francesco (First Defendant | First Respondent) S Clarke (Second and Third Defendants | Second and Third Respondents) Solicitors: Harwood Andrews (Plaintiffs | Applicants) HWL Ebsworth Lawyers (First Defendant | First Respondent) Katherine Moorhouse Perks (Second and Third Defendants | Second and Third Respondents) File Number(s): 2021/236010 Publication restriction: None JUDGMENT Introduction 1. By a notice of motion filed on 21 October 2022, the plaintiffs seek a number of orders including the following: 1 Order 6 of the orders made by Justice Rein on 2 December 2021 (Orders) are vacated. 2 The Cupid Factory Pty Ltd (ACN 147 722 576) and Yixin Meng each be joined as a party to this proceeding. … 6 The Plaintiffs have leave to file and serve a second further amended statement of claim. This judgment concerns that notice of motion insofar as it seeks those orders. Background 1. The first plaintiff, LDT O'Brien Property Group Pty Ltd (LDT), is the owner of a parcel of land in Table Top, New South Wales (the Property) on which is situated a number of buildings including the original Ettamogah Pub. Mr Leigh O'Brien is the sole director and shareholder of LDT. Either LDT or the second plaintiff, The Original Ettamogah Pub Pty Ltd (OEP), which is also controlled by Mr O'Brien, operated a hotel and restaurant on the Property. The third plaintiff, Southern Equity Pty Ltd (Southern Equity), another company controlled by Mr O'Brien, is said to own intellectual property relating to the hotel including certain trademarks and the copyright in certain cartoons, drawings and art works. It is alleged in these proceedings that LDT and OEP have been granted the exclusive rights to use the marks and exploit the material in which copyright subsists. 2. At various dates in 2015, the first defendant, Trustworthy Nominees Pty Ltd (Trustworthy), lent LDT a total amount of $1,448,500.00. The loans were secured by a registered first mortgage over the Property and rights set out in documents described as "General Security Agreements". In addition, Mr O'Brien gave guarantees in respect of the loans. 3. LDT defaulted under the loan agreements and following the issue of notices under s 57(2)(b) of the Real Property Act 1900 (NSW) and s 111(2) of the Conveyancing Act 1919 (NSW), it entered into possession of the Property. 4. On or about 25 May 2021, Trustworthy entered into a management agreement (the Management Agreement) with the second defendant, Edward River Hotel Pty Ltd (ERH), a company controlled by the third defendant, Mr Keith Blackney, to operate the hotel pending its sale. Mr Blackney had in the past managed the hotel on behalf of LDT. At some stage, he and Mr O'Brien had a falling out. 5. The Management Agreement relevantly provides: 1. APPOINTMENT 1.1 The Principal hereby engages the Manager to act as the manager of the Principal to supply the Management Services as set out in Schedule A, and the Manager agrees to supply the Management Services on the terms and conditions set out in this Agreement. 1.2 The Principal hereby authorises the Manager to deal with all matters incidental or relating to the conduct and management of the Business. 2. DURATION AND ASSIGNMENT 2.1 The duration of this Agreement shall be for a period of 180 days from the date of this Agreement however, the principal shall have the right to terminate the Agreement by providing 60 days written notice. In addition to the Principal's rights pursuant to clause 5 of the Agreement. 2.2 Neither party shall assign its rights and entitlements under this Agreement without the prior written consent of the other party. 3. BASIS OF REMUNERATION 3.1 In consideration of the Manager providing the Management Services the Manager ("the Manager's Remuneration") as set out in this clause 3 of this Agreement shall be entitled to any proceeds received from the operation of the Hotel Business ("the Manager's Remuneration"). 3.2 For the avoidance of any doubt, the Manager shall meet all of the costs, expenses and other necessary outlays of the Hotel Business from the Manager's Remuneration. 3.3 At the expiration of six (6) months, there shall be a review of the turnover and expenses to determine what is a fair and reasonable market rental for the premises and a lease will be required to be entered into by the Manager. 1. "Hotel Business" is defined in the Management Agreement as "Hotel at the property". Plainly this is a reference to the business of conducting an hotel and restaurant on the Property. 2. Schedule A of the Management Agreement relevantly provides: The Manager shall manage the Hotel Business for and on behalf of the Principal by conducting, carrying out and performing all management and administration functions which would otherwise be ordinarily conducted by the Principal as the Mortgagee in Possession of the Hotel Business including but without limiting the generality of the foregoing. 1. Observance of and compliance with the requirements of the Liquor Licencing Laws; 2. Management, engagement and dismissal of employees; 3. Purchasing of necessary supplies and ingredients; 4. Banking of receipts in the operating bank account and all other banking functions necessary for the proper management of the Hotel Business; 5. Payment of creditors as when their respective debts fall due; 6. Maintenance of the books and records; 7. Communication and dealing with suppliers and customers; and 8. Payment of insurance premium on a monthly basis in respect Public Liability and building insurance if obtained after the expiration of the initial 180 days from the date of commencement of this Agreement. 1. On 18 August 2021, the plaintiffs, who at that time were unrepresented, commenced these proceedings claiming the following relief: 1. The First Plaintiff and Second Plaintiff claims damages for loss of rents and for loss of income from the sales of food, beverages, retail brewery sales and gaming from the Ettamogah Pub, Albury and shops from 2015 to date and continuing. 2. The Third Plaintiff claims damages for breaches of its Copyright, Trademarks, and Intellectual Property by the unauthorised sale of its merchandise. 3. That the First, Second and Third Defendants account to the First Plaintiff for the initial payment of loan monies from the Third Defendant to the First Defendant and for all payment of monies thereafter into and out of the account held by the First Defendant. 4. The First, Second and Third Defendants pay to the First Plaintiff the proceeds owed to the First Plaintiff from the sales of land in the subdivision of land at 563 Burma Road Tabletop NSW 2640. 1. By an amended statement of claim filed on 31 August 2021, the plaintiffs sought "on an urgent basis" relief including the following: 1. The Third to Sixth Defendants, their employees, successors and assigns (Defendants) vacate Part Folio identifier 11/1211459 being The Ettamogah Pub Albury and Associated buildings at 561 Burma Road Table Top NSW 2640 (Pub) forthwith. 2. The Third to Sixth Defendants be restrained from removing any stock, chattels, equipment, or vehicles from the Pub. 3. The Third to Sixth Defendants be restrained from re entering the Pub. 4. The Third to Sixth Defendants be restrained from coming within 500 metres of the Pub. 1. On 11 October 2021, Trustworthy filed a cross-claim against LDT and Mr O'Brien claiming a declaration that it was at all times from 16 December 2020 entitled to possession of the Property and ancillary orders giving effect to that declaration. Trustworthy also makes a claim personally against Mr O'Brien under the guarantee he had given. It appears that LDT and Mr O'Brien take issue with the amount claimed by Trustworthy. LDT also apparently maintains that the notices served on it do not comply with s 57(2)(b) of the Real Property Act and s 111(2) of the Conveyancing Act, although the basis for that contention is unclear. 2. On 29 October 2021, the first and second defendants filed a notice of motion seeking an order that the plaintiffs' claim be struck out and that judgment be entered in their favour on their crossclaim. That motion came before Rein J on 2 December 2021. Following comments from his Honour, the Court relevantly made the following orders by consent: 1 The plaintiffs' Amended Statement of Claim is struck out pursuant to r.14.28 of the UCPR 2005, subject to Order 2 below. 2 On or before 17 December 2021, the plaintiffs shall file and serve: a. Any further amended statement of claim. b. Any defence to the First Cross-claim. 3 ... 4 … 5 Pending further Order, the Third Defendant [then, a reference to Trustworthy] shall have possession of the land at 561 Burma Road, Tabletop NSW 2640 (Property). 6 Pending further Order, the Sixth Defendant [then a reference to ERH] shall manage The Ettamogah Pub (Pub) located at the Property for and on behalf of the Third Defendant. 7 Pending further Order, Harry Flood shall on 24 hours' notice to the Fourth Defendant [then a reference to Mr Blackney] be entitled (but not with a frequency of more than once weekly) to inspect the Property and the records of the Sixth Defendant's trading activities pursuant to Order 6 above. 8 Pending further Order, and without admission as to liability to do so, the Third Defendant pay all statutory costs and utilities necessary for the Sixth Defendant to trade pursuant to Order 6 above, with any such costs that are attributable to the First Plaintiff in its capacity as the registered proprietor of the Property being added to any indebtedness of the First Plaintiff to the Third Defendant, or otherwise being a debt of the First Plaintiff to the Third Defendant. 9 … 10 … 11 … 1. In accordance with the Rein J's orders, the plaintiffs filed a further amended statement of claim. The effect of the amendments was to delete all claims other than a claim that Trustworthy, ERH and Mr Blackney have breached (and continue to breach) the intellectual property belonging to Southern Equity. Vacation of order 6 1. Underlying a number of the plaintiffs' submissions in support of an order vacating order 6 made by Rein J on 2 December 2021 (Order 6) is the contention that by that order ERH was appointed a receiver of the Property. The plaintiffs contend that the appointment of ERH as receiver breached s 418(1)(d) of the Corporations Act 2001 (Cth), which provides that a person is not qualified to be appointed and must not act as a receiver of property of a corporation if the person is not a registered liquidator. The plaintiffs also contends that ERH has breached its duty as a receiver or as a manager in a number of respects. 2. In my opinion, the first of these contentions depends on a misconception. Order 6 did not appoint ERH as a receiver of the Property. Rather, order 5 of the orders made by Rein J on 2 December 2021 confirms that Trustworthy is to remain in possession of the Property as mortgagee in possession. Order 6 confirms that ERH is to manage the Property on behalf of Trustworthy. Although the orders do not explicitly say so, it is to be inferred that ERH was to manage the hotel and restaurant business in accordance with the terms of the Management Agreement. Plainly, the parties must have intended that ERH would manage the business for Trustworthy in accordance with some terms, including terms relating to ERH's remuneration, and the only terms are those set out in that agreement. It is true that the Management Agreement was only expressed to last for a period of six months. However, in agreeing to the consent orders made by Rein J, the parties to the agreement must have intended that those terms would continue to operate until further order. 3. The plaintiffs contend that Order 6 should be vacated because there is evidence that the ERH has breached its duties as manager. They point to a substantial number of matters, but in substance the position appears to be as follows. 4. The revenue derived from running the business is paid to the proposed fourth defendant, The Cupid Factory Pty Ltd (Cupid), the sole director of which is the proposed fifth defendant, Yixin Meng, the wife of Mr Blackney. It appears that Cupid provides the staff for the hotel and restaurant and accounts for GST payable on the goods and services supplied by ERH. ERH itself has only recently been registered for GST purposes. Mr Blackney is paid a salary from the revenue of the hotel. ERH has not yet lodged a tax return in respect of the financial year ending 30 June 2022. 5. Sometime after Trustworthy took possession of the Property, the business of the hotel was moved to another building on the Property, known as the "Barn", and the names under which the hotel trades have been changed to "Table Top Hotel", "The table Top Pub" and "Ettamogah". ERH and Cupid have registered various business names including "The table Top Pub", "Ettamogah Village", "Table Top Hotel" and "TABLE TOP HOTEL (FORMERLY ETTAMOGAH PUB)". It appears that the hotel business was moved to another building on the Property because the original hotel building was difficult to heat and cool. More significantly, it did not comply with relevant fire regulations and the cost of making it compliant were substantial. It appears that ERH has changed the names under which the business trades in response to the allegation that the defendants have infringed the intellectual property of Southern Equity. 6. As part of the business, Mr Blackney has arranged for the production of merchandise containing the mark "The Table Top Hotel aka Ettamogah Hotel", which the plaintiffs claim infringe its trademarks. 7. The plaintiffs submit that it might be inferred from these facts that: a. Edward River Hotel may not have prepared and lodged business activity statements and income tax returns for the Pub's business, and may not have retained out of money from the Pub's business sufficient money to pay tax which is or will become due; b. either Edward River Hotel might have employees for whom it does not hold appropriate insurance or Cupid might have employees working at the Pub for which Cupid holds insurance; c. a business or businesses other than the Pub's business is or are being operated from the Pub; and d. Cupid (and not Edward River Hotel) might be declaring revenue from the Pub's business as its own revenue. 1. In my opinion, none of these matters demonstrate that ERH has breached its duties as a manager, and certainly not in a way that would justify its removal on the application of the plaintiffs. 2. As I have explained, the evidence suggests that Cupid provides the staff for the hotel and is responsible for complying with laws in relation to their employment, including paying workers compensation insurance. Similarly, it pays the GST on the goods and services supplied in the hotel. 3. One complaint appears to be that, as a consequence of what has happened, ERH, is no longer running the business. Another is that the business that is being run on the Property is no longer the business of the Ettamogah Pub (because it is being operated from different premises and under a different name). 4. In my opinion, these complaints are incorrect and largely irrelevant. 5. The force of Order 6 is not that ERH must run the business or that the business that is run on the Property corresponds precisely to what might be described as the "Ettamogah Pub", but rather that it is run for the benefit of Trustworthy. 6. The context in which the orders were made is relevant. Trustworthy had taken possession of the Property as mortgagee. Although its rights to do so are disputed, there was no dispute that it should remain in possession pending determination of the case. There was also no dispute that an hotel and restaurant should continue to be operated on the Property on behalf of Trustworthy. As Rein J pointed out to the parties at the time, that that business should continue to operate was for the benefit of both Trustworthy and LDT, since it would help preserve the value of the Property and the value of the hotel business itself. In that context, what is important is that the business operate. It seems unimportant if ERH chooses to use another associated company to provide the services necessary to operate the business. And it seems irrelevant if ERH chooses to pay the whole of the revenue generated by the business to an associated company, since, under the terms of the Management Agreement, ERH is entitled to all the revenue and must bear all the expenses of the business. In that context, many of the matters about which the plaintiffs complain are not breaches of Order 6. 7. The position might be different if the plaintiffs could establish that the business was being run in a way that was detrimental to the value of the Property or to the value of the hotel business itself. But the evidence led by the plaintiffs falls far short of that. The plaintiffs have not explained how the Property or the business has been detrimentally affected by the things about which they complain. ERH has explained why the business has been moved to a different building and why the name under which it has operated has changed. The first change appears to be reasonable. The plaintiffs can hardly complain about the second change when it is a response to the claim that the defendants have been breaching Southern Equity's intellectual property rights. 8. Four other points should be mentioned. 9. First, the plaintiffs do not propose an alternative to ERH to manage the business. Nor do they suggest that order 5 of the orders made by Rein J should be vacated. Consequently, the effect of making the order they seek would be that the Property would remain vacant apparently until these proceedings are resolved. For the reasons given, that is not in the interests of any of the parties. 10. Second, although it is a matter for the final hearing, it is not obvious on the material currently before the Court that LDT will be entitled to regain possession of the Property. It is not clear on what basis it is said the notices served by Trustworthy are defective. It appears to be suggested that the plaintiffs have an offsetting claim arising out breaches of Southern Equity's intellectual property rights. But, in the absence of evidence, there must be a real question whether that claim is sufficiently valuable that it would provide an answer to Trustworthy's claim to recover the amount that it is owed. 11. Third, Trustworthy does not object to the way in which the hotel business is currently been run. As the consent orders make plain, the business is being run on its behalf. It has a real interest in ensuring that the business is run properly, since that is likely to affect the value of its security. The Court would not readily vacate Order 6 against Trustworthy's wishes, when it remains the mortgagee in possession. 12. Fourth, the plaintiffs complain that Mr Blackney has arranged the production of merchandise using intellectual property belonging to Southern Equity. There is a question whether Trustworthy obtained a security interest in that intellectual property. The revenue that has been derived from the sale of that merchandise is minimal. Moreover, ERH has kept records of that revenue. Having regard to those matters, the sale of the merchandise does not provide a ground for vacating Order 6. The amendments 1. The amendments are not opposed by Trustworthy. They are opposed by ERH and Mr Blackney. 2. The amendments fall into two categories. First, they seek to join Cupid and Ms Meng on the basis that they are involved in running the business of the hotel and consequently are involved in breaches of the Southern Equity's intellectual property rights. 3. Second, the plaintiffs seek to advance a case (in pars 30 to 38 of the proposed amended statement of claim) that: 1. By order of the Court ERH was appointed to manage the business of the hotel and restaurant; 2. In undertaking that task, ERH owed duties to LDT; 3. ERH has breached those duties by running a different business on the Property than the business it was appointed to run; 4. Mr Blackney, Cupid, Ms Meng and Trustworthy were each a party to or aided, counselled, directed or joined in those breaches; 5. By reason of those breaches, LDT or OEP have suffered loss and damage which is characterised as damage to business goodwill, lost sale of their own services and lost profits. 1. It is apparent that this proposed claim mirrors the plaintiffs' complaints which are said to justify the vacation of Order 6. 2. I have concluded the plaintiffs should be permitted to join Cupid and Ms Meng. If the business of the hotel has been operated in a way that infringes the plaintiffs' intellectual property rights, it is at least arguable that, because of Cupid and Ms Meng's involvement in the business, they in addition to ERH and Mr Blackney have infringed those rights. Given their relationship with ERH and Mr Blackney their joinder is unlikely to delay substantially the preparation of the case for hearing or lengthen the hearing. 3. On the other hand, I am not prepared to allow the other amendments sought by the plaintiffs. In my opinion, those amendments, like the submissions in support of the vacation of Order 6, proceed on a misconception. They assume that the effect of Order 6 was to appoint ERH as an independent manager who owed duties to the Court. As I have sought to explain, that is not correct. ERH was appointed by Trustworthy and acts as Trustworthy's agent. The effect of Order 6 is that it was agreed between the parties and accepted by the Court that that state of affairs would continue until further order. If ultimately the Court concludes that Trustworthy was entitled to take possession of the Property, then the plaintiffs would have no claim against Trustworthy and could not possibly have a claim against ERH, Mr Blackney, Cupid or Ms Meng arising from the conduct of the business. Alternatively, if the Court ultimately concludes that Trustworthy was not entitled to take possession of the Property, then LDT or OEP may have a claim against Trustworthy. But that is not what the proposed pleading alleges. Orders and costs 1. In my opinion, it is appropriate to order that the plaintiffs pay Trustworthy's costs of the notice of motion. Trustworthy did not resist the amendments to the statement of claim. It was successful in resisting the application to vacate Order 6. ERH and Mr Blackney were also successful in resisting the vacation of Order 6. However, they were not successful in resisting the joinder of Cupid and Ms Meng and the amendments arising from their joinder, although they were successful in resisting the other amendments. It is not practical to separate out the costs of the amendment application and the costs of the application to vacate Order 6. On the other hand, any order in relation to costs should reflect the fact that the plaintiffs as well as ERH and Mr Blackney enjoyed some success. In those circumstances, it is appropriate to order that the plaintiffs pay 50 percent of ERH and Mr Blackney's costs of the motion. 2. The orders of the Court therefore are: 1. The Cupid Factory Pty Ltd (ACN 147 722 576) and Yixin Meng each be joined as a defendant to this proceeding; 2. The plaintiffs have leave to file and serve a second further amended statement of claim in the form attached to the plaintiffs' submissions filed on 17 August 2023 with the deletion of paragraphs 30 to 38 (both inclusive) and of the heading immediately above paragraph 30; 3. The plaintiffs pay the first defendant's costs of and incidental to the relief sought in paragraphs 1, 2 and 6 of the notice of motion filed on 21 October 2022; 4. The plaintiffs pay 50 percent of the second and third defendants' costs of and incidental to the relief sought in paragraphs 1, 2 and 6 of the notice of motion filed on 21 October 2022; 5. The notice of motion otherwise be dismissed; 6. The matter be stood over before the Real Property List Judge for directions on 15 September 2023. ********** Amendments 12 September 2023 - Order (5) inadvertently omitted from published judgment. Previous order (5) now order (6). 12 September 2023 - Typographical error in order (5) on coversheet DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 12 September 2023