KONSTANTINIDIS v. BALOGLOW & ORS [2000] NSWSC 483

New South Wales Supreme Court

CITATION : KONSTANTINIDIS v. BALOGLOW & ORS [2000] NSWSC 483 CURRENT JURISDICTION: EQUITY FILE NUMBER(S) : SC 2571/99 HEARING DATE(S) : 30/05/00 JUDGMENT DATE : 2 June 2000

PARTIES : JUDGMENT OF : Bryson J at 1

G. Segal - Plaintiff COUNSEL : L. Parker - First Defendant J. Chippindall - Receiver (2D) Charles G Roth & Co - Plaintiff SOLICITORS : Gordon & Johnstone - First Defendant Carneys Lawyers - Receiver CATCHWORDS : RECEIVERS - application for liberty to exercise power of sale - assets of dissolving partnership - where separate companies were proprietors of real property on behalf of partnership. LEGISLATION CITED : Conveyancing Act 1919 s 54A DECISION : See paras 22 and 23

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

BRYSON J

FRIDAY 2 JUNE 2000

2571/99 SIMON KONSTANTINIDIS v THEO BALOGLOW & ORS

JUDGMENT 1 HIS HONOUR: Mr Elliot, who has become the Receiver and Manager of the assets of the partnership between Mr Konstantinidis and Mr Baloglow under orders made on 4 June 1999, has applied by Notice of Motion of 16 May 2000 for directions of the Court giving him liberty to sell the rest of the property of which he is Receiver. Mr McDonald the first Receiver was, and now Mr Elliot is, fully empowered as Receiver and Manager of the partnership business by the terms of the orders. 2 The arrangement under which partnership assets were held was structured in a complex way. The real property investments appear in a Schedule to the orders of 4 June 1999. Order 1 speaks of the partnership assets in this way: The partnership…which in part involved Real Property investment effected through the companies set out in Schedule hereto and which related to the properties set out in the Schedule hereto … 3 In the Schedule the first property at Enfield was purchased in the name of the first defendant, and four different companies were the registered proprietors of properties: Carlisle Developments Pty Limited at Leichhardt, Balkon Pty Limited at Chullora, Larripalm Pty Limited at Marrickville and Ricvale Holdings Pty Limited at 54 Whistler Street, Manly. The defendant and his three children were the registered proprietors of 58 Whistler Street and the plaintiff was the registered proprietor of 4 Denison Street, Manly. 4 The orders do not establish, and as far as appears from the evidence it has not been established in any other definitive way whether the partnership was the beneficial owner of the four properties held by the companies, the companies being bare trustees, or whether the partnership's interest in the properties was that it was entitled to shareholdings in each of the companies; and there could be permutations of these relationships. 5 If a secured creditor held cross-collateralised securities over several properties it would be appropriate for the Receiver and Manager to apply proceeds of realisation of one company's property subject to security towards discharge of a cross-collateralised secured debt of another company secured over another property. If there is no cross-collateralisation it is prudent for the Receiver and Manager to proceed in a more careful way, not to apply surplus proceeds of realisation of property of one company to discharge secured debt over property of another company, but keep the surplus in its hands and liquidate the company in a regular way so as to be sure that there are no claims of creditors or other persons interested that assets have been paid away in uncommercial transactions. 6 So far as it is known in these proceedings the risk of untoward outcomes is not high, as the indications are that there are no significant outside creditors and realisation of partnership assets will produce a surplus. However, it is appropriate for the Receiver and Manager to proceed carefully and avoid unnecessary risks. The Receiver and Manager was under the impression until 19 April 2000 that all secured debts owing to the partnership's principal secured creditor, Suncorp Metway, were cross-collateralised, but on that day Suncorp Metway advised that it was of the view that not all were cross-collateralised, and that it would be at risk if it received a payment out of realisation to the Marrickville property in reduction of another mortgage which was not cross-collateralised with the Marrickville security, the risk being that its receipt of the funds may later be challenged as an uncommercial transaction of Larripalm which owned the Marrickville property. 7 In the circumstances it is not appropriate for the Receiver and Manager to treat all properties and funds as a common pool of partnership assets. The Receiver and Manager must consider carefully the extent to which prudence and the protection of the Receiver's own position require the affairs and assets of companies to be kept separate and subject to regular liquidations. 8 In fact the Receiver and Manager has sold the Marrickville property, the registered proprietor of which is Larripalm Pty Ltd, and has collected funds which would go most of the way, not I think all the way, toward paying off all secured debts owed to Suncorp Metway if the difficulties to which I have just referred did not have to be considered. The figures in a reconciliation of proceeds (Ex P3) are not exact or up to date but generally they show, in a calculation made on 17 April 2000 before completion of the sale of the Marrickville property, that it was projected that that sale would bring in $2.46 million; the Receiver and Manager otherwise had $3,907.29 cash in hand; that the amount owing to Suncorp Metway at 24 February 2000 was $2,237,868; and that when allowances were made for expenses related to the sale, there would be a deficiency of $29,810.53 in funds available to pay out Suncorp Metway. It would no doubt be prudent to keep funds in hand for the purpose of conducting the Receivership, but the Marrickville sale came close to providing enough money, if it could be prudently made available, to clear the Suncorp Metway debt. 9 The Suncorp Metway debt at 24 February 2000 was made up as follows: Larripalm Pty Limited (Marrickville) $904,000 Baloglow (58 Whistler Street, Manly) $426,742 Konstantinidis (4 Denison Street, Manly) $443,247 Ricvale Holdings Pty Ltd (54 Whistler Street, Manly)$463,879 10 With the settlement of the Marrickville sale there no longer is a Larripalm debt, however, the debts secured on the Manly properties, amounting as at 24 February 2000 to $1,337,868, together with interest since that date, are still owing and are still secured. 11 Suncorp Metway now takes the position that they are not willing to accept Larripalm's money, but they are pressing for payment of the debt secured over the Manly properties (which it seems are cross-collateralised inter se) and have threatened to appoint an agent for the sale of the properties under its power as mortgagee, and have been in communication with the Receiver and Manager on the subject of acceptance of that agency for Suncorp Metway. In the circumstances I see nothing to impede Suncorp Metway from proceeding towards the sale of the Manly properties under its mortgagee powers, by the agency of Mr Elliot or any other agent Suncorp Metway cares to appoint, and there is a pressing danger that control of events and of any sale may pass out of the partnership and its Receiver and Manager. 12 Sale by mortgagee by exercise of its power of sale is an outcome which it is in the interest of the former partners to avoid. Further, the sale of the Manly and other properties is a step which the Receiver and Manager could reasonably be expected to take in exercise of the central task conferred on him by the Court's orders of 4 June 1999. In the ordinary course of carrying out the duty to wind up the partnership business it would be expected that the Receiver and Manager would sell the Manly properties and pay the debts secured on them out of the proceeds of realisation; it would not be the ordinary course that the secured debts are paid out of the proceeds of realisation of another property while keeping the Manly properties on hand. 13 Two things at present stand in the path of the Receiver and Manager, impeding the sale of the Manly properties. The first is that on 30 September 1999 Registrar Howe made directions by consent in relation to a then pending application by Notice of Motion, directing fixed times for affidavits and included this direction: Receiver and Manager shall not sell any of the assets of the partnership including those of the companies of which he has been appointed Receiver without the written consent of the parties. 14 The applications which were then current were disposed of later in 1999. It is clear that the Registrar's direction was not intended permanently to stay realisation of winding up of the partnership but was an interlocutory arrangement pending the contemplated applications. It is not appropriate that that stay should continue now that they have been disposed of. 15 The second circumstance impeding the Receiver and Manager from proceeding with any sales of properties is that the solicitors representing the plaintiff on behalf of Mr Konstantinidis have contended that sale of the Manly property is inappropriate. Mr Konstantinidis claims, by affidavit sworn in proceedings No. 4656/99, that on 28 July 1999 an agreement was made between Mr Konstantinidis and Mr Baloglow, and also the latter's three children, under which the partners would settle their differences and claims in the various proceedings, on the terms set out in paragraph 15 of the Amended Statement of Claim filed in those proceedings on 27 April 2000. Those terms were lengthy and included dealings with shareholdings in companies, amounts standing to credit in loan accounts of companies and beneficial ownership of two of the Manly properties, 58 Whistler Street and 4 Denison Street; Mr Konstantinidis would also secure control of 54 Whistler Street because he would receive all the shareholdings in Ricvale Holdings Pty Ltd. If an agreement in those terms exists, performance of the agreement would require that the Receivership be brought to an end. 16 It is alleged that the terms of the agreement were agreed orally between Mr Roth, solicitor, on behalf of Mr Konstantinidis and Mr Zenos, solicitor, on behalf of Mr Baloglow and his children, recorded in writing and read out and orally acknowledged as correct by Mr Zenos at a meeting on 28 July 1999. The written record (Ex P2) is a rough note, does not take the form of an agreement and is not signed; it appears to be heads on the basis of which a written agreement would be drafted. The plaintiff's counsel pointed for confirmation of the agreement to a message dated 5 August 1999 from Mr Zenos to an employee of the Receiver and Manager which said that the parties had reached an agreement in principle, the heads of agreement had been prepared and Mr Roth was currently preparing an agreement reflecting the terms and conditions. 17 Although a defence has not yet been filed and I have been told there has been correspondence about particulars, it is clear that the defendants in proceedings No. 4656/99 dispute that any agreement was in fact made. If an agreement was made it should be considered whether a memorandum under s. 54A of the Conveyancing Act 1919 is necessary for its enforcability. If s. 54A does apply, it is open to question whether the message of 5 August 1999 constitutes such a memorandum. 18 The plaintiff has not applied for an injunction restraining either the first defendant or the Receiver and Manager from taking any particular step relating to the Manly properties so as to preserve the plaintiff's opportunity to obtain specific performance of obligations in the agreement alleged in the other proceedings relating to the Manly properties. 19 The Receiver and Manager, confronted with conflict and in the presence of the threatened sale or other intervention by Suncorp Metway, has applied to the Court for directions, has not strongly advocated any particular course, and has through counsel expressed readiness to comply with the Court's direction. In my view the Receiver and Manager has behaved in a proper way in these respects, as is not in a position to desist from the duties imposed by the orders of 4 June 1999, or to stand by idly while the partnership properties are sold by a secured creditor. 20 The plaintiff has resisted the Receiver and Manager's application, with a view to preventing disposal of the Manly properties, in which the plaintiff feels a particular personal interest as he wishes to live in them, and to which he asserts an entitlement under the alleged agreement. If his resistance is successful and the Court does not direct that the Receiver and Manager might proceed with the sale, the plaintiff will in effect have gained the advantages of an interlocutory injunction restraining sale without actually applying for one, and without passing the tests to which such applications are usually subjected or accepting the disadvantages which they usually involve. 21 The Receivership is stalemated in several ways, and in my judgment it is not appropriate that this should continue. One stalemate is that the Receiver controls a large sum of money which is almost but not quite enough to pay off Suncorp Metway, but cannot prudently apply it in that way. The Receiver probably now has enough money, if that stalemate were broken, to retain a sufficient amount for protection of all proper claims and also to pay sufficient sums to secured creditors to allay, for a long time, the possibility of any forced sales. The second stalemate is that in effect the plaintiff has been sheltering behind the Registrar's consent direction of 13 September 1999 and effectively getting the protection of an injunction without the burdens associated with obtaining one. Further, the plaintiff has not in the application before me shown grounds on which it could obtain an Injunction, as it has not produced proof of a prima facie case of the existence of the alleged agreement; no evidence of the truth of the conversations and events alleged in the Amended Statement of Claim has been proffered. Both proceedings have been pending since November 1999, there has been ample time and opportunity to apply for an Injunction, the plaintiff does not do so and his counsel made submissions to the effect that he should not have to and that the Court can maintain sufficient control through exercise of the power to give directions to the Receiver and Manager. 22 In my judgment I should give the Receiver and Manager the directions asked for in the notice of motion unless the plaintiff gives undertakings, and a secured indemnity to the Receiver and Manager, and agrees to arrangements which will have the following effect: