Court of Appeal Supreme Court New South Wales Medium Neutral Citation: Toltz Pty Ltd v City Garden Australia Pty Ltd (in liq) (stay application) [2024] NSWCA 179 Hearing dates: 26 July 2024 Date of orders: 26 July 2024 Decision date: 26 July 2024 Before: Kirk JA; Stern JA; Basten AJA Decision: (1) Grant the applicant (cross-appellant) leave to file in Court a notice of motion dated 25 July 2024. (2) Dismiss the notice of motion. (3) Order that the costs of the motion be costs in the cross-appeal. Catchwords: CIVIL PROCEDURE – appeal – interlocutory injunction – extension of order granted pending hearing of appeal – owner of property in default under loan agreement – receiver and manager appointed by lenders – proceeds of sales of secured property and rental income held by receiver and manager – application by owner to prohibit payment to lenders pending outcome of challenge to loan agreement Legislation Cited: Corporations Act 2001 (Cth), s 129 Cases Cited: City Garden Australia Pty Ltd (subject to deed of company arrangement) as trustee for the Ming Tian City Garden Unit Trust v Gemi 130 Pty Ltd [2024] NSWCA 139 Category: Procedural rulings Parties: City Garden Australia Pty Ltd (in liq) as trustee for Ming Tian City Garden Unit Trust (Respondent / Cross-Appellant) Gemi 130 Pty Ltd (Third Cross-Respondent) Bridge Street Capital No 2 Pty Ltd (Fourth Cross-Respondent) Sam Kaso (Respondent on motion) Representation: Counsel: P Clarke/F Lim (Respondent) F Lim (Cross-Appellant/Applicant on motion) H Somerville/M McGirr (Third Cross-Respondent) M Young SC (Fourth Cross-Respondent) G Gee (Respondent on motion) Solicitors: Francis Lim Barristers & Solicitors (Cross-Appellant/Applicant on motion) Summer Lawyers (Third Cross-Respondent) VMV Lawyers (Fourth Cross-Respondent) File Number(s): 2023/461689 Publication restriction: N/A [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] JUDGMENT 1. THE COURT: On 25 July 2024 the Court reserved its judgment with respect to an appeal and cross-appeal from a judgment delivered by Rees J in the Equity Division on 5 December 2023 and final orders entered on 31 January 2024. The effect of those orders was to dismiss a claim by City Garden Australia Pty Ltd (in liq) (City Garden) as the developer of land at North Rocks for declarations that three loan agreements, with accompanying security documentation, were invalid and unenforceable against the company. (As a practical matter, it was only the third agreement, entered in October 2019, that was material.) 2. Following the filing of the cross-appeal, City Garden sought interlocutory relief to prevent the lenders' receiver, Mr Sam Kaso, disposing of or otherwise dealing with the proceeds of sale of the remaining townhouses subject to the security held by the lenders, and similarly disposing of or dealing with the rent collected from those properties. Orders were made by Meagher JA which expire at 5pm today. City Garden seeks an extension of those orders pending determination of its cross-appeal. 3. Meagher JA gave a full explanation of the nature of the proceedings, the factual circumstances as before the Court in June 2024, and his tentative assessment of the issues on the appeal and cross-appeal. [1] That material does not require repetition; the basic facts can be identified briefly. 4. The development involved the construction of 50 townhouses, of which 22 were sold, with the proceeds going to repayment of a development loan provided by Westpac. On 5 September 2023 City Garden went into voluntary administration, the administrators being appointed by Mr Liang, who controlled both City Garden and two companies which had also provided substantial funds to City Garden. On 11 October 2023 City Garden went into liquidation and the administrators were appointed as the liquidators of City Garden. 5. Pursuant to the security documents for the third loan transaction, following an event of default by the borrower, on 21 February 2024 the lenders appointed Mr Sam Kaso as receiver and manager of the secured assets of City Garden. Procedural background 1. The appeal concerned an order made in favour of City Garden against an incorporated legal practice, Gerrard Toltz Pty Ltd, which Rees J found was liable for breach of fiduciary duties owed to City Garden in relation to the execution of the loan agreements which were secured over City Garden's property. A cross-appeal by City Garden challenged orders dismissing its claim to set aside the loan transactions, including that completed in October 2019, as invalid and unenforceable. 2. On 6 June 2024, Meagher JA made orders to the following effect: "1. Order that until 5pm on 26 July 2024 or until otherwise provided by further order Mr Sam Kaso as receiver and manager over the 22 lots secured by two mortgages dated 15 October 2019 and as receiver and manager over all present and after acquired property of City Garden pursuant to the General Security Deed dated 15 October 2019 be restrained from: a. paying away moneys received or held as receiver and manager of City Garden to Gemi 130 and or Bridge Street; or b. assigning, charging or otherwise dealing with any property, real or personal, which is held as receiver and manager of City Garden to or at the direction of Gemi 130 and or Bridge Street. 2. Order that the costs of the present application be costs in the cross-appeal." 1. Pursuant to leave granted at the time those orders were made, a variation was sought of order 1(b), which was duly made on 12 June 2024, adding the following qualification: "However, this restraint does not prevent the receiver and manager from applying funds received from the sale of any of the 22 lots, or rent received from any of those lots, to satisfy any costs, expenses and/or remuneration of Mr Sam Kaso incurred in the ordinary course of the receivership, including costs and expenses incurred in holding, preserving, preparing for sale and/or selling any of those properties." 1. At the time the interlocutory relief was granted, Meagher JA was aware that the appeal and cross-appeal had been set down for hearing on 24-26 July 2024. It was the judge's expectation that little activity would occur over the six weeks during which the interlocutory orders would operate. He observed, unremarkably, that it had not been possible to assess the likely prospects of either the appeal or, more importantly, the cross-appeal. However, the judge was able to conclude that the cross-appeal raised a "serious issue" for the determination of this Court, identified as "whether the lenders, whose personnel were also involved in the earlier loan transactions, were entitled to rely upon the assumption in s 129(2)(a) of the Corporations Act": at [29]. 2. As understood by reference to the grounds of the cross-appeal, which were numerous and interrelated, the judge's understanding was correct. However, as the written submissions prepared by the lenders demonstrated, there was a separate issue as to their entitlement to rely upon the assumption under s 129(5) of the Corporations Act 2001 (Cth). 3. Meagher JA was conscious of the fact that the cross-appellant offered no undertaking as to damages in consideration for a grant of interlocutory injunctive relief. Because of the limited effect of the relief granted, the judge was not inclined to treat that as a dispositive reason for not granting relief. However, the risk that further losses will accrue increases over time. The Court is again without any undertaking proffered by or on behalf of City Garden, a matter which attracts greater weight now than it did in early June. 4. Although it was not the subject of evidence, if the cross-appeal succeeds, no doubt there will be real concerns as to the solvency of the lenders and hence their ability to repay any amounts paid out by the receiver. On the other hand, there are factors which militate against the continuation of the stay. 5. Three changes in circumstances are material. First, there is evidence that three townhouses have been sold, and have settled or will settle today, giving an estimated net return of a little under $3 million. Three further lots will be auctioned over the next three weekends. Accrued rental is $419,649. The receiver's costs (including legal costs) are currently estimated at $636,000. Monthly interest is accruing at $495,000, with no ability to pay down capital. The receiver expresses doubt that sales and rental will cover the growing debt to the lenders. 6. Secondly, the lenders have registered mortgages over the 28 secured lots. That was not a matter relied upon in relation to the cross-appeal, in part because City Garden indicated that it would challenge the registration of the mortgages. A stay on the registration of the mortgages which had been in effect during the proceedings in the Equity Division was lifted, by consent, following the delivery of judgment and the making of orders by Rees J. Accepting that there is a dispute as to the validity of the registration of the mortgages (although the basis of the challenge is unclear), the existence of the registered mortgages is a factor which is relevant to the exercise of the application to extend the stay. Even if the cross-appeal succeeds, there is likely to be further litigation in the Division and further delay in payment out of funds accruing from rental and sales. 7. Thirdly, the legal costs and disbursements of the lenders, not identified in monetary terms by the receiver, are estimated at some $3 million. 8. In these circumstances, the Court is not persuaded that the balance of convenience favours a continuation of the stay. Accordingly, the Court makes the following orders: 1. Grant the applicant (cross-appellant) leave to file in Court a notice of motion dated 25 July 2024. 2. Dismiss the notice of motion. 3. Order that the costs of the motion be costs in the cross-appeal. ********** Endnote 1. City Garden Australia Pty Ltd (subject to deed of company arrangement) as trustee for the Ming Tian City Garden Unit Trust v Gemi 130 Pty Ltd [2024] NSWCA 139. 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: 26 July 2024