New South Wales Court of Appeal CITATION : SANYO AUSTRALIA PTY LTD & ANOR v COMPONERE INFORMATIONS SYSTEMS PTY LTD [1999] NSWCA 389 FILE NUMBER(S) : CA 40762/97 HEARING DATE(S) : 21 September 1999 JUDGMENT DATE : 25 October 1999 Sanyo Australia Pty Ltd - First Appellant PARTIES : Peter Rodgers - Second Appellant Componere Information Systems Pty Ltd - Respondent JUDGMENT OF : Spigelman CJ at 1; Priestley JA at 2; Sheller JA at 3 LOWER COURT JURISDICTION : Supreme Court - Equity Division LOWER COURT FILE NUMBER(S) : 2120/97 LOWER COURT JUDICIAL OFFICER : Hamilton J M Ashhurst/J Conomy - Appellants COUNSEL : D P Robinson/P Carr - Respondent SOLICITORS : Geoffrey Cantelo - Appellants Cunich Lawyers - Respondent CATCHWORDS : EQUITY - deed of equitable mortgage - floating charge - default - appointment of receiver under charge - whether appointment invalid because receiver was appointed as agent of mortgagor- appointment valid ACTS CITED : Supreme Court Act 1970 Canberra Advance Bank Limited v Benny (1992) 9 ACSR 179 Harold Meggitt Limited v Discount & Finance Limited (1938) 56 WN (NSW) 23 Kendle v Melsom (1998) 193 CLR 46 Kerry Lowe Management Pty Ltd v Isherwood & Sherlock (1989) 15 ACLR 615 CASES CITED: McMahon v State Bank of New South Wales (1990) 8 ACLC 315 Melsom v Velcrete Pty Limited (1995) 13 ACLC 799 National Australia Bank Limited v Zollo (1995) 64 SASR 63 NEC Informations Systems Australia Pty Ltd v Lockhart (1991) 22 NSWLR 518 Terry Clark & Associates Pty Limited v Carez Nominees Pty Limited (1994) 13 ACSR 314 DECISION : Appeal allowed THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40762/97 ED 2120/97 SPIGELMAN CJ PRIESTLEY JA SHELLER JA SANYO AUSTRALIA PTY LIMITED & ANOR v COMPONERE INFORMATION SYSTEMS PTY LIMITED The respondent entered into a deed of equitable mortgage with the first appellant which charged both its present and future undertaking and property with the payment of its indebtedness by way of floating charge. The charge provided that the first appellant could appoint a receiver or manager if the respondent defaulted on their payments. The first appellant began proceedings in the Local Court by statement of liquidated claim seeking payment for goods sold and delivered. The respondent filed a defence by way of set off denying the debt and claiming damages for breaches of the terms and conditions of sale in excess of the amount claimed by the first appellant. The respondent cross-claimed for this amount. The first appellant purported to appoint the second appellant to be receiver and manager of the property of the respondent. The instrument of appointment stated that the receiver and manager was the first respondent's agent. The respondent filed a summons in the Supreme Court for a declaration that the appointment of the receiver and manager was in invalid because the charge did not authorise the first appellant to appoint a receiver or manager as its agent. The respondent further sought an injunction restraining the second appellant from acting as receiver and manager and a further injunction restraining the first appellant from appointing a receiver and manager because the monetary default alleged was the subject of Local Court proceedings. The trial Judge declared that the appointment of the receiver and manager was invalid and restrained the first respondent from appointing a receiver and manager pending determination of the Local Court proceedings. The appellants appealed from this decision. Held: By Sheller JA, Spigelman CJ and Priestley JA agreeing: (1) There was no reason why the words in the instrument of appointment appointing the second appellant as the first appellant's agent could not be severed leaving in place what the parties did agree, namely that the receiver and manager be the agent of the respondent. The receiver and manager's authority as agent did not derive and was not intended to derive from the terms of the instrument of appointment but from the terms of the deed of equitable mortgage and from the very fact that an appointment under that deed was made. The appointment of the second respondent as receiver and manager was therefore valid. Kendle v Melsom (1998) 193 CLR 46 considered. Fitzgerald v Masters (1965) 95 CLR 420 referred to. Harold Meggitt Limited v Discount & Finance Limited (1938) 56 WN (NSW) 23 distinguished. (2) The trial Judge concluded that the respondent had a valid defence to the claim in the Local Court. Nothing was advanced to throw doubt on this conclusion. The circumstances and the balance of convenience justified the grant of injunctive relief pending the outcome of the Local Court proceedings, particularly when it appeared that the first appellant had not taken steps to bring the Local Court proceedings for hearing. McMahon v State Bank of New South Wales (1990) 8 ACLC 315 and Canberra Advance Bank Limited v Benny (1992) 9 ACSR 179 considered. Terry Clark & Associates Pty Limited v Carez Nominees Pty Limited (1994) 13 ACSR 314 and National Australia Bank Limited v Zollo (1995) 64 SASR 63 referred to. Statutes: Supreme Court Act 1970 Cases: Canberra Advance Bank Limited v Benny (1992) 9 ACSR 179 Harold Meggitt Limited v Discount & Finance Limited (1938) 56 WN (NSW) 23 Kendle v Melsom (1998) 193 CLR 46 Kerry Lowe Management Pty Ltd v Isherwood & Sherlock (1989) 15 ACLR 615 McMahon v State Bank of New South Wales (1990) 8 ACLC 315 Melsom v Velcrete Pty Limited (1995) 13 ACLC 799 National Australia Bank Limited v Zollo (1995) 64 SASR 63 NEC Informations Systems Australia Pty Ltd v Lockhart (1991) 22 NSWLR 518 Terry Clark & Associates Pty Limited v Carez Nominees Pty Limited (1994) 13 ACSR 314 ORDERS 1. Appeal allowed; 2. Set aside the declaration and orders 3, 4 and 5 made by Hamilton J on 15 October 1997; 3. In lieu thereof: '3. Declare that the words 'is Sanyo's agent for the purpose of this charge' should be treated as not part of the Instrument of Appointment of the second defendant by the first defendant under registered charge 357919 as receiver and manager of the plaintiff's undertaking and property dated 16 April 1997 and that such appointment is valid. 4. Upon the plaintiff by its counsel giving the usual undertaking as to damages order that, pending the determination of proceedings in the Local Court of New South Wales at the Downing Centre being proceedings 120329 of 1997, the second defendant be restrained by himself, his servants and agents from acting as receiver and manager of the assets and undertaking of the plaintiff. 5. Each party to have liberty to apply to the Equity Division on 2 days notice to the other parties to move for the dissolution of the injunction or otherwise.' 4. Each party pay its or his own costs of the appeal. ***** THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40762/97 ED 2120/97 SPIGELMAN CJ PRIESTLEY JA SHELLER JA Monday, 25 October 1999 SANYO AUSTRALIA PTY LIMITED & ANOR v COMPONERE INFORMATION SYSTEMS PTY LIMITED JUDGMENT 1 SPIGELMAN CJ: I agree with Sheller JA. 2 PRIESTLEY JA: I agree with Sheller JA. 3 SHELLER JA: Introduction On 13 August 1992 by deed of equitable mortgage the respondent, Componere Information Systems Pty Limited (the Company), charged with the repayment and payment of its indebtedness to the first appellant, Sanyo Australia Pty Limited (Sanyo), (therein referred to as the Mortgagee) "for varying amounts from time to time in respect of goods bought by and services provided to the Mortgagee (the Principal Sum)" its undertaking and all its property whatsoever and wheresoever both present and future including its stock in trade, and book debts by way of floating charge. Clause 5 of the deed provided that the Principal Sum secured or so much thereof as should then remain outstanding and unpaid should become immediately payable to the Mortgagee in any of several events which were set out in paras (a) to (h) of the clause. Clause 6 provided: "The Mortgagee may, at any time in the event of the Company failing to observe or perform any of the covenants conditions or agreements herein contained, and on the part of the Company to be observed or performed, or of the Company making default in paying any monies to the Mortgagee, and such default continuing for a period of fourteen, (14) days, appoint in writing a Receiver or Manager or a Receiver and Manager of the property hereby charged, upon such terms as to remuneration and otherwise as it shall deem fit and may from time to time remove any Receiver and Manager so appointed and appoint another in his place." 4 Clauses 7 and 8 provided as follows: "7. A Receiver or a Receiver and Manager so appointed shall be the agent of the Company and shall have power: (a) to take possession of and get in the property hereby charged; (b) to carry on or concur in carrying on the business of the Company and for this purpose to borrow money on the security of property hereby charged in priority to the charge hereby created; (c) to sell or concur in selling any of the property hereby charged or otherwise deal therewith and on such terms in the interests of the Mortgagee as he shall think fit; and (d) to make any arrangements or compromises which he shall think expedient. PROVIDED always that nothing herein contained shall make the Mortgagee liable to such Receiver or Manager or such Receiver and Manager as aforesaid in respect of this [sic] remuneration costs charges or expenses or otherwise. 8. The net profits of carrying on the said business and the net proceeds of the said sale shall be applied by the Receiver or Manager or Receiver and Manager subject to the claims of all secured or unsecured creditors (if any) ranking in priority to this charge: FIRSTLY in payment of all costs charges and expenses of and incidental to the appointment of the Receiver or Manager or Receiver and Manager and the exercise by him of all or any of the powers aforesaid including the reasonable remuneration of the Receiver or Manager or Receiver and Manager. SECONDLY in or towards payment to the Mortgagee of the Principal Sum hereby secured, THIRDLY any surplus shall be paid to the Company." The charge was duly registered ASC Registered No 357919. 5 On 11 March 1997 Sanyo began proceedings by a statement of liquidated claim in the Local Court to recover $23,764.20 [sic the correct amount was $23,744.20] for goods sold and delivered by Sanyo to the Company in December 1996 and January 1997. On 7 April 1997 the Company filed a defence by way of set off admitting the agreement but denying the debt as alleged. The Company claimed breaches of the terms and conditions of the sale which gave rise to damages in excess of the amount claimed. On the same date the Company filed a notice of cross-claim for $25,225.79. 6 On 16 April 1997 Sanyo purported to appoint the second appellant, Peter Rodgers, to be receiver and manager of the property of the Company. Relevantly the instrument of appointment stated: "Appointment of Receiver & Manager to Componere Information Systems Pty Ltd ACN 050 611 115 (Componere) by Sanyo Australia Pty Ltd ACN 004 981 873 (Sanyo) Registered Company Charge No 357919 Sanyo appoints Peter Rogers [sic] of Love & Rogers Hall Chadwick, Level 29, St Martins Tower, 31 Market St, Sydney, NSW to be Receiver & Manager of the property of Componere referred to in the Schedule. Peter Rogers is Sanyo's agent for the purpose of this Charge and has all the powers, authority and discretion under the Charge. Peter Rogers accepts this appointment. Schedule Componere's undertaking and all its property whatsoever and wheresoever, both present and future including its stock in trade and book debts." The document was executed for and on behalf of Sanyo and signed by Mr Rodgers. 7 On 18 April 1997 the Company filed a summons seeking a declaration that the appointment of the receiver and manager was invalid. The Company also sought an injunction restraining Mr Rodgers acting as receiver and manager and a further injunction restraining Sanyo from appointing a receiver and manager under the deed of equitable mortgage in reliance upon alleged monetary default "which concerns monies the subject of the Local Court proceedings". 8 On 18 and 22 April 1997 Hamilton J granted the Company interim injunctive relief. On 13 and 15 October 1997 Hamilton J declared that the appointment of Mr Rodgers by Sanyo under registered charge 357919 as receiver and manager of the Company's assets and undertakings by instrument of appointment dated 14 April 1997 was invalid, ordered Sanyo to pay the Company's costs of the proceedings and made the following orders: "3. Upon the [Company] by its counsel giving the usual undertaking as to damages the Court orders that, pending the determination of proceedings in the Local Court of New South Wales at the Downing Centre being proceedings 120329 of 1997 ('the Local Court proceedings') [Sanyo] be restrained from appointing a receiver and manager to the [Company] under the charge by reason of (a) the non payment of the amount claimed by [Sanyo] from the [Company] in the Local Court proceedings or (b) any event occurring before 15 April 1997 provided always that the [Company] diligently prosecute its defence and cross claim in the Local Court proceedings. 4. Each party has liberty to apply on 2 days notice to the other parties. 5. Grant leave to [Sanyo] to move to dissolve the injunction for default in the prosecution of the Local Court proceedings." 9 Sanyo and Mr Rodgers have appealed from this decision. Hamilton J's Reasons for Judgment of 13 October 1997 10 The Company argued that the appointment was invalid because the terms of the deed of equitable mortgage did not authorise Sanyo to appoint a receiver or manager as its agent. Clause 7 provided that a receiver and manager appointed in accordance with the deed should "be the agent of the Company". Hamilton J said that the real question in the case was whether "the additional words in the Instrument of Appointment could be treated as mere surplusage and therefore could be disregarded." On this aspect of the matter, his Honour referred to cases in this Court, the Federal Court, the Supreme Court of Western Australia and the New Zealand Court of Appeal concerned with the appointment "jointly and severally" of a plurality of receivers and managers. 11 On this appeal the appellants submitted that either the whole of the sentence in the appointment which begins "Peter Rogers" or alternatively the words in it "is Sanyo's agent for the purpose of this charge" should be treated as surplusage and ignored. They relied upon what was said by Kirby P and Meagher JA in NEC Informations Systems Australia Pty Ltd v Lockhart (1991) 22 NSWLR 518 at 527 and 530. Samuels JA agreed with Meagher JA. Their Honours followed Kerry Lowe Management Pty Ltd v Isherwood & Sherlock (1989) 15 ACLR 615 at 618 where Priestley JA, in a judgment with which Samuels and Clarke JJA agreed, said: "The deed by which the receivers were appointed separated the joint and several appointments in a way which in my opinion calls for the conclusion that if the power of appointment was only that of appointing one receiver or joint receivers, then the deed of appointment succeeded in achieving the latter; and that the further purported appointment of the receivers as several receivers effected nothing and should simply be disregarded." Validity of the Appointment as Receiver and Manager 12 One of the cases Hamilton J referred to was Melsom v Velcrete Pty Limited both at first instance, (1995) 13 ACLC 799, and in the Full Court of the Supreme Court of Western Australia, (1996) 17 WAR 316. In that case the mortgagee bank had by cl 1 of an Instrument of Appointment appointed two persons as receivers and managers of the undertaking and assets of Velcrete under a power contained in the charge to "appoint in writing any person to be receiver of the mortgaged premises or any part thereof" (cl F3). The assets in question included those held by Velcrete as trustee of certain trusts of which Ivan John Kendle later became trustee. Clause 2 of the Instrument of Appointment stated "Where this appointment is directed to more than one person their appointment hereunder is joint and several." At first instance Parker J declared the appointment invalid. On appeal the Full Court declared that the appointment of the appellants as joint and several receivers and managers of the assets of Velcrete was valid. Mr Kendle successfully applied for special leave to appeal to the High Court. On 25 February 1998 after Hamilton J's decision, the High Court, Kendle v Melsom (1998) 193 CLR 46, varied the decision of the Full Supreme Court of Western Australia. 13 Although Brennan CJ and McHugh J, in a joint judgment, at 55, held "that the charge did not authorise the Bank to confer the power stipulated in clause F3 severally on a plurality of receivers", their Honours said that it did not follow that the appointment was invalid. "It is clause 1 of the appointment which confers the relevant powers and authorises the receivers to do the acts of which the appellants can claim in the further re-amended statement of claim. Clause 2 must be construed, if possible, consistently with the authority to appoint conferred on the Bank by the charge. Clause 2 of the appointment is apposite to impose on the receivers who accept appointment a joint and several liability for any breach of the duties owed by them to the Bank. As between the Bank and the receivers it appointed, a stipulation for the joint and several liability of the receivers is valid. In other words, the receivers are the joint repositories of the powers conferred under the charge but they have accepted a joint and several liability to the Bank for any breach of the duties they have undertaken." 14 Their Honours upheld the validity of the appointment as one reposing in the receivers powers to be exercised jointly and not severally by reading down clause 2 so that it was not inconsistent with the authority conferred on the Bank by the equitable mortgage. 15 Gummow and Kirby JJ, at 57, said: "The first question is whether a plurality of receivers might be appointed. If so, the next question is whether joint receivers so appointed had the leave and licence of Velcrete to act severally as well as jointly in dealing with the assets of Velcrete which were secured to the Bank by the charge." 16 At 60 their Honours held that when clauses of the charge were read together it followed that the Bank might appoint to be receiver and manager of the mortgaged premises not only "any person" but "any persons" and at 61-2 that, consistently with the joint nature of their office, of which the requirement to account was an incident, the receivers were bound under the clause specifying the manner of application of monies jointly with respect to monies received by them and each of them. Clause 1 of the appointment, which first stated that the Bank appointed to persons to be receivers and managers of the assets of the company, was a joint appointment validly made. What followed in cl 1 concerned the specification of the powers which were to attach to the office and be exercised by the office holder. Of this their Honours said, at 63: "However, the powers, authorities and discretions referred to in cl 1 of the appointment as capable of conferral upon them under the charge were, in accordance with cl F3, and therefore in accordance with the appointment which adopted them, susceptible of exercise by either or both of the receivers." On that basis there was no element of invalidity in cl 2 or the appointment as a whole and no question of severance arose. 17 At 64 their Honours said: "The agency from Velcrete, rather than the Bank, had the peculiar incidents referred to in the authorities. With respect to dealings by the receivers with third parties, liability was imposed upon Velcrete rather than upon the Bank or the receivers personally. If the Bank itself had taken possession of the property over which it held the charge, in equity and as mortgagee in possession, it would have become the manager of property in which Velcrete was still interested. As mortgagee in possession, the Bank would have owed duties to Velcrete, including a strict liability to account. In the charge, this situation was avoided by provision for the appointment by the Bank of the receivers and their treatment as agents not of the Bank but of Velcrete. Further, this agency of the receivers was such that their acts would bind Velcrete in relation to third parties." 18 Hayne J had no doubt that the mortgage permitted the Bank, upon the happening of the events described, to appoint more than one person to be receiver of the mortgaged premises or any part thereof. His Honour continued at 67-68: "If then, as I consider to be the case, the mortgage permitted the appointment of more than one person as receiver and manager, unless cl 2 of the Bank's appointment ('where this appointment is directed to more than one person their appointment hereunder is joint and several') makes the whole appointment bad, the conclusion that the Bank might validly appoint more than one person as receiver and manager, and has done so, may be sufficient answer to the appellant's claim. And I should say at once that even if I were of the view that the mortgage did not permit the Bank to appoint receivers and managers otherwise than to act in all respects jointly, I would sever cl 2 of the deed of appointment. I do not accept that if faced with the choice of appointing only jointly or not at all, the Bank would have chosen to refrain from making any appointment; Whitlock v Brew (1968) 118 CLR 445 at 461 per Taylor, Menzies and Owen JJ; Fitzgerald v Masters (1956) 95 CLR 420 at 427 per Dixon CJ and Fullagar J; Life Insurance Co of Australia v Phillips (1925) 36 CLR 60 at 72 per Knox CJ." 19 At 68 his Honour said that in his view the Bank was not limited by its mortgage to appointing more than one receiver only on terms that those receivers act jointly. At 69 his Honour observed: "Even if the office is held jointly (and I need not decide if that is so) this would not mean that the appointment could not provide for the powers of the office to be exercised jointly and severally." 20 Ultimately at 70 his Honour concluded that the Bank's power to appoint more than one receiver or receiver and manager over parts or all of the mortgaged premises was not limited to a power to do so on terms that the persons appointed always acted jointly. 21 The High Court's decision in Kendle v Melsom emphasises, in cases where a plurality of receivers or receivers and managers are given joint and several powers, the significance of the particular nature of the office and of the function of a receiver or a receiver and manager. Thus the cases to which Hamilton J referred throw little light on the particular problem of this appointment. 22 In the High Court only Hayne J found it necessary to deal with severance. However, all the judgments encourage the view that in looking at the document of appointment it is permissible to separate the appointment of Mr Rodgers to the office of receiver and manager of the property of the Company from the authority purported to be conferred upon him to act as Sanyo's agent for the purpose of the charge. Consistently with what Gummow and Kirby JJ said at 62, the first paragraph of the Instrument of Appointment operates to appoint Mr Rodgers to the office of receiver and manager. The second paragraph specifies the powers which are to attach to that office and be exercised by the office holder. The deed of equitable mortgage comprehends, in part, the Company's agreement that the receiver or manager appointed under cl 6 shall be the agent of the Company. If the purported appointment of Mr Rodgers as Sanyo's agent is invalid, it is not because Sanyo has no power to appoint him its agent, but because implicitly it has agreed not so to appoint him but to appoint him the agent of the Company. Sanyo's failure to appoint Mr Rodgers as agent of the Company is said to make the appointment invalid. Sanyo does not press upon the Court that the appointment of Mr Rodgers as its agent accorded with the requirements of the deed or was essential. 23 In Fitzgerald v Masters at 427, in that part of the judgment to which Hayne J referred, Dixon CJ and Fullagar J said: "The appellants accordingly contend that there is no effective contract. The parties, they say, intended to agree on certain terms which they believe to be ascertainable by reference to a document. No such document exists. Therefore the terms upon which the parties intended to buy and sell are not ascertainable, and it follows that there is no contract. The argument cannot, in our opinion, be sustained. It depends, in the last analysis, on an inference that the parties did not intend to contract otherwise than by reference to the terms of a document which they mistakenly believed to exist. It is only putting the same thing in another way if we say that the question is whether clause 8 is severable from the rest of the instrument. No effect can be given to clause 8, but there is good reason, in our opinion, for saying that clause 8 is severable. No inference can be drawn that the parties did not intend to contract unless effect could be given to clause 8. It seems indeed almost absurd to say that the parties, having agreed on everything essential, intended that that agreement should be nullified if effect could not be given to clause 8." 24 If, as the Company contended, Sanyo was precluded from appointing Mr Rodgers Sanyo's agent for the purpose of the charge, there seems no reason why those words should not be severed leaving in place what the parties did agree, namely that a receiver and manager appointed under cl 6 of the deed of equitable mortgage "shall be the agent of the Company"; cl 7. The receiver and manager's authority as agent does not derive and is not intended to derive from the terms of the Instrument of Appointment but from the terms of the deed of equitable mortgage and from the very fact that an appointment under that deed has been made. Different considerations would arise if any authority of Mr Rodgers as agent depended only on the terms of the Instrument of Appointment. 25 The Company relied on the decision of Owen J in Harold Meggitt Limited v Discount & Finance Limited (1938) 56 WN (NSW) 23. In that case the defendant was entitled under a debenture deed to appoint a receiver and manager on the plaintiff's default under its security. The defendant appointed a receiver. Owen J held that the appointment did not operate as a valid appointment. But in that case to strike down the appointment as a receiver was to strike down the appointment as a whole. In the present case to strike down the appointment of the receiver and manager as agent of Sanyo does not affect the appointment of the receiver and manager and restores the parties to the terms of the appointment agreed upon in the equitable mortgage. I do not think there is anything in Harold Meggitt Limited v Discount & Finance Limited which requires a conclusion different from that at which I have arrived. My conclusion is that the appointment of Mr Rodgers as receiver and manager was valid and that the provision in the deed of appointment that he be Sanyo's agent for the purpose of the charge can and should be severed and accordingly has no operation. 26 To that extent the appeal succeeds. The consequence is that Sanyo has no need again to exercise the power to appoint a receiver and manager under clause 6 of the deed of mortgage and accordingly, order 3 made by Hamilton J on 15 October 1997 has no operation. However, it seems to follow from Hamilton J's reasons that if his Honour had found the appointment of the receiver and manager was valid, he would in accordance with order 2 sought in the summons have restrained Mr Rodgers from acting as receiver and manager over the assets of undertaking of the Company pending the determination of the proceedings in the Local Court. Section 75A (10) of the Supreme Court Act 1970 enables the Court of Appeal to make any finding or assessment, give any judgment, make any order or give any direction which ought to have been given or made or which the nature of the case requires. The question is then whether the Company is entitled to such an order. Injunction Pending Resolution of Local Court Proceedings 27 Sanyo submitted that the Company was in breach of cl 8 (c) of the Office Automation Merchandising Agreement which was referred to in the deed of equitable mortgage and in particular cl 2 which provided that if the Company failed to adhere to the terms of the agreement, the mortgagee was entitled to "reply" [sic - rely] upon the terms of the deed to enforce payment of the Principal Sum. Clause 8 (c) of the agreement provided: "The invoice value in respect of each particular item of goods invoiced to you by Sanyo will be paid by you to Sanyo by the last working day of the month following the invoice month." 28 The evidence was that as at 31 March 1997 there was $12,149.30 outstanding for sixty days and $11,594.90 for ninety days making up the total of $23,744.20 claimed in the Local Court. This meant that the greater sum had been outstanding since the end of January and the smaller sum since the end of December 1996. Thus it was said that by the end of February 1997 there was a breach of cl 8 (c) in respect of both amounts and that after a further fourteen days at latest cl 6 of the deed of equitable mortgage became operable. 29 Hamilton J, in his reasons for judgment of 13 October 1997 dealt with the trading relationship of the parties under the heading "No occasion for appointment". The Company's argument depended upon its having an arguable defence to the whole of the claim in the Local Court. His Honour said: "The debt is alleged but denied and it seems to me on the material that it is reasonably arguable that there is a valid defence to the whole of the claim." 30 Nothing has been advanced to throw doubt on this conclusion. Based upon it his Honour restrained a receiver and manager being appointed or, if appointed, from acting in his or her office until the determination, either in the same court or in a different court, of a challenge to the existence of the debt or otherwise a challenge to the proposition that an occasion of appointment had arisen. His Honour referred to Terry Clark & Associates Pty Limited v Carez Nominees Pty Limited (1994) 13 ACSR 314 and National Australia Bank Limited v Zollo (1995) 64 SASR 63. Sanyo began the proceedings in the Local Court and no doubt there were reasons of convenience for allowing that court to determine what the state of the running account between the parties was before allowing the receiver and manager to act as such. 31 In Terry Clark & Associates Pty Limited a plaintiff sought an order that the appointment by the first defendant of the second defendant as receiver of the plaintiff was invalid on grounds that the notice given to the company was inadequate and the appointment was made in bad faith. The Full Supreme Court of South Australia held, in dismissing an appeal from the Master, that it was not its function on such an appeal to determine finally whether, as a matter of law, the first defendant was under an obligation to exercise good faith in relation to the appointment of a receiver and that there was a serious question of law to be determined. The Court ordered that the first defendant be restrained, pending the trial of the action, from taking any further action in the exercise of its power to appoint a receiver of the plaintiff and that the second defendant be restrained, pending the trial of the action, from acting as a receiver of the plaintiff. 32 In National Australia Bank v Zollo the appellant bank claimed from the respondents substantial amounts owing on loan accounts and a current account with interest. At the same time the appellant claimed possession of three properties owned by the respondents over which the appellant had registered mortgages. The respondents filed separate defences and counter claims alleging matters going to defeat particularly the securities. The appellant appointed a receiver of the income of the mortgaged properties and to exercise powers conferred upon him by the mortgage or the relevant legislation. The respondents applied for an order setting aside the appointment of the receiver. Prior J made orders against which the bank appealed. The appeal was dismissed. At 68 Mathieson J, who delivered a judgment with which the other members of the Court agreed, said: "An injunction issued upon the judge's view that it was not fair and equitable to allow the plaintiffs to exercise a power concurrently with an attempt to enforce rights by way of action in the court. Counsel also referred to Argyle Art Centre Pty Limited v Argyle Bond & Free Stores (1976) 1 NSWLR 377 at 383,384 and 386. It was contended that in this case the appointment of the receiver of income was calculated to interfere with the course of justice in these proceedings. It was put that the bank had made an election to pursue a court remedy by way of an action for possession and in the alternative, for the appointment of a receiver. Whilst the action is pending in this court, it is submitted that the exercise of powers outside the court, calculated to interfere with the determination of the issues in the case, is open to restraint by proper order of the court. It is also put that a further factor of aggravation in this case justifying the grant of some order in restraint is that the bank's action is likely to render extremely difficult the abilities of the defendants to respond to the proceedings." 33 At 69 Mathieson J said that he was not sure about the precise reason for the orders of the judge at first instance, but at 71 his Honour said, while acknowledging the strength of the appellant's arguments: "I have reached the conclusion that they are outweighed by the respondents' argument that they would not be able to litigate if the order was not made, an argument that gains strength when one considers that the rents payable between the date of the order and the date of the forthcoming trial would amount to a relatively insignificant sum in relation to the alleged debt. It is true that the appellant now wants the rents to be paid into court, but such payments would have the same practical effect as payments to the appellant." 34 Sanyo submitted that its contractual powers to enforce its entitlements should not be circumscribed or curtailed by dictates of reasonableness and relied upon the decision of this Court, on appeal from Bryson J, in McMahon v State Bank of New South Wales (1990) 8 ACLC 315 particularly at 319 and Canberra Advance Bank Limited v Benny (1992) 9 ACSR 179. In the second case the Full Federal Court, after referring to passages in the judgment of Bryson J in McMahon about the obligation of a secured creditor to conduct its affairs in a "reasonable" manner and not to take advantage of "technical" breaches of security documents, said at 185-186: "Understandable though those views may be, there is strong authority that constrains a court of law from delving too deeply, in cases such as this, into the question whether the action of the lender was reasonable or fair. For example in White & Carter (Councils) Limited v McGregor [1962] AC 413 Lord Reid said at 429-30: 'He [the Lord President] went on to say that the only reasonable and proper course which the pursuer should have adopted would have been to treat the defender as having repudiated the contract, which must, I think, mean to have accepted the repudiation. It is this reference to 'the only reasonable and proper course' which I find difficult to explain. It might be, but it never has been, the law that a person is only entitled to enforce his contractual rights in a reasonable way, and that a court will not support an attempt to enforce them in an unreasonable way. One reason why that is not the law is, no doubt, because it was thought that it would create too much uncertainty to require the court to decide whether it is reasonable or equitable to allow a party to enforce his full rights under the contract.' Lord Wilberforce pointed to the need for certainty in mercantile contracts. In Bunge Corporation, New York v Tradax Export SA, Panama [1981] 1 WLR 711 at 715 he said: 'The text suggested by the appellants was a different one. One must consider, they said, the breach actually committed and then decide whether that default would deprive the party not in default of substantially the whole benefit of the contract. They invoked even certain passages in the judgment of Diplock LJ in the Hong Kong Fir case [1962] 2 QB 26 to support it. They may observe in the first place that the introduction of a test of this kind would be commercially most undesirable. It would expose the parties, after a breach of 1, 2, 3, 7 and other numbers of days to an argument whether this delay would have left time for the seller to provide the goods. It would make it, at the time, at least difficult, and sometimes impossible, for the supplier to know whether he could do so. It would fatally remove from a vital provision in the contract that certainty which is the most indispensable quality of mercantile contracts, and lead to a large increase in arbitration. It would confine the seller - perhaps after arbitration and reference through the courts - to a remedy in damages which might be extremely difficult to quantify. These are all serious objections in practice. But I am clear that the submission is unacceptable in law. The judgment of Diplock LJ does not give any support and ought not to give any encouragement to any such proposition; for beyond doubt it recognises that it is open to the parties to agree that, as regards a particular obligation, any breach will entitle the party not in default to treat the contract as repudiated. Indeed, if he were not doing so he would, in a passage which does not profess to be more than clarificatory, be discrediting a long and uniform series of cases - at least from Bowes v Shand [1877] 2 App Cas 455 onwards which have been referred to by my noble and learned friend Lord Roskill.' " The Full Court said that it was of opinion that the views expressed in these authorities should be applied to a commercial lending transaction such as that the subject of the appeal. 35 Clause 2 of the deed of equitable mortgage entitles the mortgagee, if the Company fails to adhere to the terms of the Office Automation Merchandising Agreement, to rely upon the terms of the deed to enforce payment of the Principal Sum. The Principal Sum is defined in a way which the Company submitted described a balance on a running account. By cl 3 the Company, as beneficial owner, charged its undertaking and property with the repayment and payment of the Principal Sum. The point made is that if the defences and cross-claim are substantiated there would be shown to be no balance owing to Sanyo on the running account. Hamilton J found that there was an arguable case to the effect that there was no such balance owing. If this had been demonstrated to be the position as at 31 March 1997, the Company has a powerful argument that Sanyo would not have been able to rely upon the deed of equitable mortgage to appoint a receiver simply because invoices had not been paid in accordance with cl 8 (c) of the merchandising agreement. Thus the circumstances and the balance of convenience justify the grant of injunctive relief pending the outcome of the Local Court proceedings. Particularly is this so when it appears that Sanyo has not taken steps to bring on the Local Court proceedings for hearing. In the ordinary course these proceedings should have been concluded. If this had happened almost certainly this appeal would have been unnecessary. 36 Mr Robinson, who appeared for the respondent, referred to material supporting the Court's power to grant the injunction the respondent now seeks. I have no doubt about that power. Orders 37 In my opinion, the following orders should be made: 1. Appeal allowed; 2. Set aside the declaration and orders 3, 4 and 5 made by Hamilton J on 15 October 1997; 3. In lieu thereof: '3. Declare that the words 'is Sanyo's agent for the purpose of this charge' should be treated as not part of the Instrument of Appointment of the second defendant by the first defendant under registered charge 357919 as receiver and manager of the plaintiff's undertaking and property dated 16 April 1997 and that such appointment is valid. 4. Upon the plaintiff by its counsel giving the usual undertaking as to damages order that, pending the determination of proceedings in the Local Court of New South Wales at the Downing Centre being proceedings 120329 of 1997, the second defendant be restrained by himself, his servants and agents from acting as receiver and manager of the assets and undertaking of the plaintiff. 5. Each party to have liberty to apply to the Equity Division on 2 days notice to the other parties to move for the dissolution of the injunction or otherwise.' 4. Each party pay its or his own costs of the appeal. ***** 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.