McMAHON v STATE BANK OF NEW SOUTH WALES SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MAHONEY, PRIESTLEY and MEAGHER JJA 6 March 1990, 20 March 1990 [1990] NSWCA 123 Appointment of receiver — creditor's reliance on breaches unknown to him at time of appointment — creditor's reliance on breaches discovered only as a result of appointment — sufficiency of evidence of breach. Mahoney JA I agree with the judgment of Meagher JA. Before this Court, Mr Evatt, for the appellant, stated his grounds of appeal as being: whether, in justification of appointment of the receiver, the Bank could rely on the information found by the receiver only after his appointment; and whether there was evidence that the vehicle leased by the company was of a value more than $10,000. On the first ground, Mr Evatt relied on passages in Bunning v Cross 141 CLR 54 at 78-80, and in Miller v Miller 141 CLR 269 at 277 to establish that the information as to the leasing transaction was obtained illegally and so could not be relied on. The argument was essentially that, if the leasing transaction had to be relied on as to the ground for appointing the receiver, the receiver's entry into possession was not justifiable unless it could be justified by the leasing transaction and therefore the discovery of the facts as to that transaction in some way involved illegality. There may be circumstances in which entry into possession by a chargee or his receiver may involve, in the relevant sense, illegality. But in this case what was done was done pursuant to a claim of right which, were the trial pursued, might well prove to be justified. What the receiver did was done in the pursuit of that claim of right. I do not think that any illegality resulted in this case. One matter relevant to this arose in argument. The receiver may be appointed when the moneys received by the charge become payable. They become payable upon a breach, such as the leasing transaction, not automatically but only "at the option of the Bank": CL24. And the question arose whether, if the leasing transaction was known when the Bank, by appointing the receiver, exercised its option, it could be said to have exercised the option granted by the charge by reason of that breach. For the reasons given by Meagher JA, it is not necessary to pursue this question in detail. The Bank did demand payment of the moneys and it did purport to exercise its option to have the moneys paid, relying on other breaches. As at present advised, I am of the view that, in the circumstances of this case, that option was effectively exercised notwithstanding that the leasing transaction breach was discovered only subsequently. On the second ground, I do not desire to add to what Meagher JA has said. Priestley JA Subject only to the option point mentioned by Mahoney JA, I agreeboth with his reasons and those of Meagher JA. During argument I thought there might be something in the option point, but on re-reading the materials, including the transcript of the argument before us, it seems clear the point was not argued before Bryson J. Had it been raised, the 2 UNREPORTED JUDGMENTS respondent Bank may well have taken some different course, either before Bryson J or, as a matter of precaution, out of court. In these circumstances, I do not think this court should take the argument into consideration. The case presents a vivid illustration of the sweeping powers lenders obtain for themselves against borrowers of large sums of money. This is part of the price borrowers pay for use of the money. On what was presented to Bryson J there was no reason shown to justify the court in interfering with the respondent's exercise of its power to appoint a receiver. In my opinion, the appeal should be dismissed with costs. Meagher JA This is an appeal from a decision by Bryson J entering summary judgment for the defendant respondents in an action by the plaintiff appellant seeking orders that the first respondent's action in appointing the second respondent as receiver of a company called Restana Pty Ltd be set aside, that the sale of the company's assets by the respondents be enjoined, and that the respondents account to the company for all monies received by either of them. The plaintiff below, the appellant in this Court, is a shareholder in Restana Pty Ltd, and there must therefore be some doubt about his standing to bring the proceedings at all. However, as no point was taken below as to the plaintiff's standing, and as counsel for the respondents conceded that it was too late for the respondents to rely on it, the Court should assume that the plaintiff had sufficient locus to bring the proceedings. The company, Restana Pty Ltd, was at all material times indebted to the first respondent, State Bank of New South Wales, in a sum well in excess of $4 million. The Company, on 23rd February 1989, gave the Bank an equitable mortgage by way or floating charge. Some parts of it must be quoted. the second covenant was the following form: "THAT the Mortgagor will upon demand or until such demand at such time or times and in such manner as may have been agreed upon between the Mortgagor and the Bank pay to the Bank the moneys hereby secured and in the event of this covenant becoming merged in any judgment or order will pay interest on the amount for the time being owed under such judgment or order at the rate aforesaid." The fourth covenant was in the following form: "THAT the Mortgagor: (a) will not without the consent in writing of the Bank enter into any leasing arrangement as Lessee in respect of any item of property having a value of more than Ten thousand dollars, and (b) will duly and punctually pay all rents and perform and observe all covenants and conditions on the part of the Lessee contained or implied in any leasing or underleasing arrangement for the time being entered into by the Mortgagor and will forthwith hand to the Bank the receipt for every such payment." The twenty-fourth covenant commences with the following words: "THAT the moneys hereby secured shall not only be or become payable on demand as aforesaid but shall ALSO at the option of the Bank notwithstanding any delay or previous waiver of the right to excercise such option become payable immediately without demand or notice in each or any of the following events:" There then follows, in nine lettered paragraphs, a description of various events. Paragraph (e) is in the following form: "if the Mortgagor shall without the consent in writing of the Bank first had and obtained dispose of or otherwise deal with its book debits, or create or purport or attempt to create any charge or mortgage ranking or which might by any means URJ McMAHON v STATE BANK OF NEW SOUTH WALES (Meagher JA) 3 be made to rank on the mortgaged premises or any part thereof in priority to or pari passu with these presents, or enter into any leasing arrangement as Lessee in respect of any item of property having a value of more than Ten thousand dollars" The twenty-fifth covenant provided, inter alia, that at any time after the monies secured by the equitable charge become payable the security shall become enforceable and the Bank may without any demand or notice appoint any person to become a receiver and manager. On about Ist November 1989 the Bank served a written demand on the company in the following form: DEMAND TO: RESTANA PTY LTD a company incorporated in New South Wales having its registered office situate at 22 Clissold Street, Ashfield WHEREAS by Equitable Mortgage and Floating Charge dated 23 February, 1989 ("the Charge") between you and the State Bank of New South Wales ('the Bank') of Martin Place, Sydney being Registered No 37106 in the Register of Company Charges you agreed that the monies secured by the Charge would be payable at the option of the Bank if, inter alia you failed to observe or perform any of the covenants contained inter alia in the charge. AND WHEREAS you have failed to pay to the Bank interest on the monies secured by the Charge AND WHEREAS you have failed to provide to the Bank receipt for every rate, tax, duty, charge, outgoing and assessment charged or chargeable upon the mortgaged premises as defined in the Charge. AND WHEREAS you have failed to carry on and conduct your business in a proper and efficient manner. AND WHEREAS there is presently outstanding by you to the Bank the total sum of $4,530,509.79 and interest is continuing to accrue on that sum at a daily rate of $2,210.80 from this date until payment. NOW TAKE NOTICE THAT: 1. THE Bank hereby requires you to pay to it forthwith the sum of $4,530,509.79 together with interest continuing to accrue from this date at a daily rate of $2,210.80 until payment. DATED 1 November, 1989 Duly authorised officer of The State Bank of New South Wales The demand not having been complied with, the Bank on 20th November 1989 appointed Mr Star, the second respondent, receiver and manager of the company. On 18th December 1989, the plaintiff initiated these proceedings by a summons claiming the relief which I have already described. The plaintiff successfully sought an interlocutory injunction restraining the Receiver from exercising any of his powers of sale except in the ordinary course of business, and this injunction was extended on a number of occasions up until 28th February 1990, on which date his Honour acceded to an oral application by the Bank to dismiss the proceedings summarily. The learned trial judge first considered whether the Bank had right to appoint a receiver on the ground of the Company's failure to pay interest. This, it will be remembered, is the first default alleged in the Bank's notice of demand. The facts were as follows: the Bank had approved of an overdraft on a "work carrying on" account of $755,000.00 but required interest to be paid month by month. Late in October 1989 the position was reached that unless interest were paid in the near future the overdraft limit would be exceeded. Mr Green, a chartered accountant with some responsibility for the company's affairs, stated that on 27th October 1989 he telephoned Mr Stevens, an officer of the Bank, and requested the Bank: 4 UNREPORTED JUDGMENTS 'To quarantine to a loan account the interest charges totalling $52,097.02 for the month of October 1989 on the understanding that such interest and all other interest due would be paid to the State Bank by the company on or before 31 December 1989." According to Mr Green, Mr Stevens said he would seek approval of this. The Bank never expressed formal approval of this request, but it did debit the interest charges to a separate account. His Honour's findings on this matter were as follows: "I see nothing in the facts put forward by the plaintiff which would constitute a contractual binding arrangement preventing the bank from relying on its rights according to the terms of the equitable mortgage, if it wished to do so. However, the facts do seem to show, at least in outline, a basis or an arguable basis for a case in which the bank was under an equitable estoppel which prevented it from relying on the overdraft limit being exceeded by reason of the debit to any account of the interest charges." His Honour therefore concluded that the Bank's entitlement to rely on the non-payment of interest did not achieve that degree of unarguable certainty which is necessary to sustain a summary judgment in its favour. His Honour then turned to consider whether or not there had been a breach of covenants 4(a) and 24(e) in relation to the lease by the Company from Esanda Finance Ltd of a motor car described as a "Hyundai XL Sedan". The Company did enter a lease of such a vehicle on 27th October 1989. There was abundant evidence that the Bank did not consent to the lease, and counsel for the appellant did not submit to the contrary. But counsel for the appellant did submit that it was not sufficiently clear that the motor vehicle in question had a value in excess of $10,000. On this point, in my view the appellant must fail. The Company's own application to lease the vehicle, dated 4th October 1989, shows: "Cash price $14,281". That can only mean that on that day $14,281 was the price which a member of the public would have had to pay if he bought it for cash. In addition, another document from the finance company of about the same period, and dealing with the same vehicle, contains the entry "Glass DGT $11,592". That entry, we were informed by counsel for the appellant, referred to Mr Arnold Glass's "Dealer's Guide to Trade Prices". The appellant did not lead, and could not point to, any evidence to the contrary. It follows, in my view, that his Honour was undoubtedly correct in holding that the company was in breach of covenant 4(a) as at the date of the lease, on 27th October 1989. A further submission was made by Mr Evatt, counsel for the appellant, to the effect that his Honour was not entitled to rely on any of the documents establishing either the existence of the lease or the value of the vehicle because (which undoubtedly was the case) the existence of the lease was unknown to both the Bank and its receiver at the date of the latter's appointment. This argument has more ingenuity than substance. When spelled out it must be seen as follows: the receiver was appointed as a result of the November demand; the only defaults relied on in that demand cannot be sustained; the appointment of the receiver was therefore unjustified; and information discovered subsequently by an invalidly appointed receiver is in the same position as information obtained illegally. Apart from any other defects in this submission, the third step in the argument must be rejected. As Mr Libling, counsel for the respondents, submitted, the correct legal position is that a party who takes a step pursuant to a contract is entitled to justify the taking of that step if the objective facts which justify the taking of that step existed at the relevant time even although that party at the time that step was taken did not know of these facts. The valuable judgment of Brooking J in Nund URJ McMAHON v STATE BANK OF NEW SOUTH WALES (Meagher JA) 5 v McWaters (1982) VR 575, particularly at 585, cites the authorities which support that proposition. Indeed, to hold otherwise would be to put a premium on concealment. But there is an even more convincing reason why Bryson J is right, although nobody seems to have relied on it before him. That is that the provisions of the second covenant, which I have set out in full, enables the Bank at any time to demand payment in full of all monies secured. This the Bank's demand manifestly did. The spectral equitable estoppel which his Honour thought might have blocked the Bank's right to summary judgment on the basis that the appointment of the receiver was justified by the non-payment of interest, could not conceivably have been a fetter to the exercise by the Bank of its rights under the second covenant of the equitable mortgage. For these reasons the appeal should, in my opinion, be dismissed with costs. Appeal dismissed with costs. Counsel for the Appellant: C Evatt Solicitors for the Appellant:McMahon and Meagher Counsel for the Respondent: D Libling and J Dupree Solicitors for the Respondent: Abbott Tout Russell