New South Wales Supreme Court CITATION : Allatech Pty. Limited & Anor. v. Law Mortgage Queensland Pty. Limited [1999] NSWSC 925 CURRENT JURISDICTION : Equity Division FILE NUMBER(S) : No. 3496 of 1999 HEARING DATE(S) : 7th and 8th September 1999 JUDGMENT DATE : 8 September 1999 PARTIES : Allatech Pty. Limited, Kalidome Pty. Limited, Whitehall Property Holdings Pty. Limited, Blue Hills Management Pty. Limited - Plaintiffs. Law Mortgages Queensland Pty. Limited - Defendant JUDGMENT OF : Hodgson CJinEq at 1 COUNSEL : B. Coles QC with Mr. V. Kerr for Plaintiffs D. Fagan SC with Mr. L. Aitken for Defendant SOLICITORS : Harris & Company, Sydney for Plaintiffs Holman Webb, Sydney for Defendant CATCHWORDS : INJUNCTIONS - BALANCE OF CONVENIENCE. MORTGAGES DECISION : See pp.6 and 7 of judgment IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORAM: HODGSON, CJ in Eq. Wednesday 8th September 1999 NO. 3496 OF 1999 ALLATECH PTY. LIMITED & ANOR. V. LAW MORTGAGE QUEENSLAND PTY. LIMITED JUDGMENT 1 The plaintiffs are engaged in the development of a retirement village. The defendant is a financier which has advanced money to finance that development. The amount owing under the facility is something like $4 million. As security for the advance, the plaintiffs have provided a mortgage over the site of the development and an adjacent site, and also certain charges and guarantees. The defendant alleges there have been defaults under the loan agreement, and is threatening to exercise remedies, including the appointment of a receiver. In particular, the defendant alleges a default in payment of interest which was due to be paid on 22nd July this year, and default in relation to failure to rectify an alleged deficiency in the ratio between the value of security and advances made. 2 I am dealing with an application for an interlocutory injunction to restrain the defendant from exercising remedies based on those two alleged defaults. 3 In relation to the latter of the defaults, it is accepted by the defendant that there is a serious question to be tried on whether the defendant has properly determined, pursuant to cl.4.3 of the loan agreement, that the ratio between the money secured and the value of the security exceeds the specified ratio. However, Mr. Fagan SC for the defendant has submitted that no serious question to be tried has been shown in relation to the other matter of default, namely the failure to pay interest due on 22nd July. 4 Mr. Fagan submitted that, while the defendant accepted that the plaintiffs could seek draw-downs to cover interest, and while draw-downs were in fact permitted which covered interest, there was no promise or representation that interest did not have to be paid on the due dates, irrespective of whether a draw-down covering interest occurred or not. Mr. Fagan further submitted that, even if there was some representation based on the practice adopted which could require the giving of notice to the plaintiffs that payment of interest was required, such notice was in fact given on 30th July this year, and interest was not then paid prior to 5th August this year, when the notice of default was issued. 5 Notwithstanding that submission, my opinion is that there is a serious question to be tried on this aspect. There is evidence that an arrangement was made whereby interest could be claimed in the applications for draw-downs, and at least until June, draw-downs covering interest were provided. The proceeds of such draw-downs were paid into an account of the plaintiffs, and then the amount of the interest was recovered by the defendant through its own act. The defendant had authority to that extent to have the plaintiffs' account debited. 6 It appears that in June this year, despite an earlier indication that something over $407,000.00 was to be provided, only $192,000.00 was provided; but it seems that interest was paid, presumably by the defendant securing the payment of interest out of the amount of $192,000.00 credited to the plaintiffs' account. 7 In July, a draw-down was sought, apparently at the usual time. It was not paid at the usual time; but on 30th July 1999, the defendant advised the plaintiffs that the payment could be expected early the following week. I interpolate here that 30th July was a Friday. On the same day, the defendant gave notice that interest had not been paid, and required immediate payment of interest. However, it did not, in that letter, suggest that the July draw-down was not to be available early the following week as had been stated in the other letter of 30th July, nor did it state that the payment was required within any specified time after the letter. It appears that no particular time limit was imposed until a letter of 4th August, which imposed a time limit of 12 noon the following day. The notice of default was in fact issued on 5th August. 8 In my opinion, there is a serious question to be tried on whether the arrangement plus the practice I have outlined, coupled with the statement that the July draw-down was to be made early in the week following 30th July, gave rise to a situation where payment of interest otherwise than out of that draw-down could be insisted upon only after reasonable notice had been given, such notice requiring the express limit of a reasonable time, coupled with advice that payment was required irrespective of whether the draw-down was provided. 9 In my opinion, should the plaintiffs, at a final hearing, succeed on that point, it would have the result that the notice of default given on 5thAugust was invalid. 10 I turn to the question of balance of convenience. 11 Mr. Fagan for the defendant submitted that the balance of convenience does not favour the grant of relief, because the plaintiffs can continue with their project only if they are able to use the proceeds of the sale of units in order to pay the builder. Sale of units requires the consent of the defendant, and there is no evidence that that consent has been given. The sale of units and use of the proceeds to pay the builder would reduce the value of the security, and the defendant is under no obligation to consent to the sale of units, at least on any terms other than the payment of the whole of the proceeds to the defendant. 12 Mr. Coles QC for the plaintiffs has submitted that that was not a matter raised in the evidence, and that on his instructions, evidence can be led showing consent by conduct or an appropriate estoppel in relation to sales which had been effected of about twenty units; and it is the settlement of those sales already entered into which would be required to enable the project to continue. Mr. Coles further submitted that the application of the proceeds of sales of units for that purpose would in fact improve the security position of the defendant, by reducing the amount still to be paid to complete the project. I would note that the defendant has indicated an intention, if a receiver is appointed, that the receiver proceed to complete the project. That could be done either with the existing builder, in which case the receiver would have to pay the amounts which the plaintiffs are now proposing to pay from the sale of units; or alternatively, with a new builder, which may save the cost of paying the present builder for amounts due for work in the past, but would certainly involve substantial establishment costs in relation to such a new builder. 13 Mr Coles further submitted that, even on the defendant's own figures, the security the defendant presently has over the subject property substantially exceeds the amount owing. The ratio which the defendant claims to have been exceeded is a 60% ratio, and the ratio presently claimed is 67%. In addition, the defendant has the benefit of other securities which Mr. Coles submits, on the material before me, are of substantial value. 14 One other matter I should mention is that there is evidence that the plaintiffs have applied for finance to pay out the defendant; and there is evidence that the plaintiffs are expecting two letters of offer of such finance within about 48 hours, and that the actual advance would then be arranged within a further period of 4-8 weeks. Mr. Coles submitted that interlocutory relief should not be limited in such a way as to make the plaintiffs reliant on such re-financing: there is a serious question to be tried as to whether the plaintiffs are in default at all, and they should not be put in the position of having to accept whatever offer they can achieve in such a short time. 15 I should add that it is common ground that if any relief is given, it should be limited to the earlier of 21st February 2000 or further order, because the date for repayment of the principal is 21st February 2000. 16 In my opinion, when one has regard to the very serious consequences for the plaintiffs of the appointment of a receiver, and the other factors I have mentioned, the balance of convenience does favour the granting of relief. At present, no order is sought by the plaintiffs requiring consent to the completion of existing sales. The orders sought propose the application of proceeds of any such sale, first, in payment of interest falling due in the future to the defendant, and secondly, in payment of the builder and other expenses of the development. 17 I am not able in this hearing to determine whether consent to sales has been granted, or even if there is a serious question to be tried as to whether consent has been granted. I would express the tentative view that, if there is a serious question to be tried as to whether there has been consent, at least by conduct, or an equivalent estoppel, then the balance of convenience would favour allowing the sales to be completed on the terms proposed by the plaintiffs. In my opinion, the use of proceeds for payment of interest is a use for the benefit of the defendant, notwithstanding Mr Fagan's submission that it reduces the security without reducing principal. In my opinion also, payments made to the builder and other persons engaged in the development substantially increase the value of the security for the reasons I have already given. I would therefore hope that, if there is a serious question to be tried on the matter of consent, this is not a matter that has to be made the subject of a further lengthy interlocutory contest before the Court. In taking the approach that I do, I do give weight to the consideration that, on the material before me, the total security available to the defendant seems to be more than adequate to ensure that it is repaid in full. 18 The other matter I need to decide is whether I should limit the relief to two weeks in the first instance, and if a letter of offer is obtained, a further ten weeks. On the whole, I do not think it appropriate to limit the relief in that way. I have found that there is at least an arguable case that the plaintiffs are not in default at all. I have found that on the material before me, the defendant seems to have ample security. For those reasons, I do not think it appropriate to subject the plaintiffs to the requirement of immediately accepting the first offer they can obtain for re-financing. I also take account of the fact that such a restriction could lead to further interlocutory skirmishing, if the defendant takes the view that a letter of offer may not be adequate to give a reasonable prospect of the defendant being paid out. 19 In substance then, I would propose to grant the relief in the form sought by the plaintiffs. I would make the relief limited to 21st February 2000 or further order, whichever is the sooner. I might also be minded to impose some requirement of notice in relation to proposed settlements by the plaintiffs, and any proposed action by the defendant based in any way on an allegation that the settlement of sales is a default under the mortgage. (Submissions ensued) 20 Having heard further submissions, I would propose to include in the order a provision for notice of proposed settlements and application of proceeds, and notice from the defendant of any intention to treat a settlement as a default. At present, I am inclined to think that 7 days' notice in each case would be appropriate. The order should provide for payment of interest on due dates irrespective of any settlements. 21 A question arises as to the extent to which proceeds of sale could be held back from payments under lower categories of paragraph 6, because of an anticipated claim for payment in the near future of one of the higher categories. When attempting to draft the order precisely, in my opinion the order should allow a small amount of flexibility to the plaintiffs because the time for payment of the items under paragraph 6 will not necessarily coincide with the time of the settlement. (Submissions on costs) 22 On the question of costs, Mr. Coles has submitted that there should be an order for costs in the plaintiffs' favour. Mr. Fagan submits that costs should be costs in the proceedings. In my view, the proper order for costs is that they be plaintiffs' costs in the proceedings. I would make it clear that that is not a final determination that the defendant cannot ultimately add the costs to the mortgage. However, if it is sought, I would make an interlocutory order that for the purpose of determining security ratio and the like, the costs of this interlocutory application not be included by the defendant in this calculation until further order. 23 I stand the matter over to tomorrow for short minutes. 24 The exhibits may be returned. ******************* Last Modified: 09/10/1999 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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