New South Wales Court of Appeal CITATION : Wily as Administrator of Macquarie Medical Holdings Pty Ltd & Ors v Endeavour Health Care Services Pty Ltd & Ors [2003] NSWCA 321 HEARING DATE(S) : 03/10/03 JUDGMENT DATE : 11 November 2003 JUDGMENT OF : Meagher JA at 1; Santow JA at 22; Davies AJA at 23 DECISION : Appeal dismissed with Costs. CATCHWORDS : MORTGAGES AND CHARGES: Clogs on the equity of redemption - Whether secured loan with option to purchase a clog - True nature of transaction - Unconscionability. LEGISLATION CITED : Trade Practices Act 1974 (Cth) Kreglinger v New Patagonia Meat and Cold Storage Co Ltd [1914] AC 25 Jones v Morgan [2001] EWCA Civ 995 CASES CITED : Reeve v Lisle [1902] AC 461 Bridgewater v Leahy (1998) 194 CLR 457 Santley v Wilde [1899] 2 Ch 474 Samuel v Jarrah Timber and Wood Paving Corporation Limited [1904] AC 323 Andrew Hugh Jenner Wily In His Capacity as Administrator of Macquarie Medical Holdings Pty Limited & Ors PARTIES : v Endeavour Health Care Services Pty Limited & Ors FILE NUMBER(S) : CA 40605 of 2003 A: B Coles SC, M Lee, R Francois COUNSEL : 1R: A J Bannon SC, B F Katekar 2R: J E Thomson, A V Gruzman A: Freidman Reeves SOLICITORS : 1R: Gilbert & Tobin 2R: Gray & Perkins LOWER COURT Supreme Court - Equity Division JURISDICTION : LOWER COURT SC 2560/03 FILE NUMBER(S) : LOWER COURT Gzell J JUDICIAL OFFICER : IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40605 of 2003 MEAGHER JA SANTOW JA DAVIES AJA Tuesday, 11 November 2003 ANDREW HUGH JENNER WILY IN HIS CAPACITY AS ADMINISTRATOR OF MACQUARIE MEDICAL HOLDINGS PTY LIMITED AND ORS v ENDEAVOUR HEALTH CARE SERVICES PTY LIMITED AND ORS FACTS The respondent, Endeavour Health Care Services Pty Limited ('Endeavour') was a company whose business consisted of locating and then purchasing land or premises suitable for use as medical practices. It was not in the business of being a financier. The business of the appellant company, Macquarie Medical Holdings Pty Limited ('Macquarie'), consisted of the establishment of medical centres. Macquarie required the sum of $300,000 to enable it to complete the fitting-out and establishment of a medical centre. Endeavour agreed to lend that sum to Macquarie in order to effect the completion of the medical centre, which Endeavour was to have the option to purchase. On appeal, Macquarie submitted that the option to purchase was a clog on its equity of redemption, whereas Endeavour contended that the secured loan was collateral to the granting of the option, and that the transactions were really concerned with the acquisition of an option to purchase. HELD per Meagher JA, dismissing the appeal (Santow JA and Davies AJA agreeing): 1. The parties regarded the transaction as one of the granting of an option to purchase. [5];[12] 2. It is necessary to enquire into the real (or true) nature of the transaction, not merely its nominal form. [8];12] 3. The submission that, no matter what the circumstances, an option document must be void and unenforceable whenever the relevant documents comprise documents of loan, documents of security and documents granting an option, is a submission that flies in that face of the authorities. Kreglinger v New Patagonia Meat and Cold Storage Co Ltd [1914] AC 25; Jones v Morgan [2001] EWCA Civ 995; Reeve v Lisle [1902] AC 461, applied. [13-17] 4. No question of unconscionability arose. Bridgewater v Leahy (1998) 194 CLR 457, referred to. [18-19] HELD per Davies AJA: There was no covenant which had the character of a clog on the equity of redemption. The loan was made as an incidental part of the potentially much greater transaction, the option to purchase. The loan could have been repaid at any time and, if so, the charge would no longer have operated in relation to the covenants of the loan. The option to purchase and the charge which secured its performance would have continued; but that was the bargain which Macquarie and Endeavour made, it was what they intended and it was not unconscionable. [31] ORDER That the appeal be dismissed with costs. IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40605 of 2003 MEAGHER JA SANTOW JA DAVIES AJA Tuesday, 11 November 2003 ANDREW HUGH JENNER WILY IN HIS CAPACITY AS ADMINISTRATOR OF MACQUARIE MEDICAL HOLDINGS PTY LIMITED AND ORS v ENDEAVOUR HEALTH CARE SERVICES PTY LIMITED AND ORS Judgment 1 MEAGHER JA: This is an appeal which challenges Gzell J's decision that the option to purchase granted by the appellant to the respondent is not invalid as a clog on the equity of redemption necessarily arising out of a mortgage between the parties. 2 Endeavour Health Care Services Pty Limited ("Endeavour") was a company whose business consisted of locating and then purchasing land or premises suitable for group medical practices. It was not in the business of being a financier. Macquarie Medical Holdings Pty Limited ("Macquarie") was a company which consisted, wholly or principally, of a Mr Jones and a Mr Reynolds. It set up and established medical centres. At the time in question in this case, Macquarie was building one of these centres, called the Macquarie Medical Centre. It needed an additional $300,000 to complete the centre. 3 It is not, I think, necessary to give a detailed account of the negotiations between the parties which led to the execution of the documents now sought to be impugned. Suffice it to say that the evidence was somewhat tortuous, and that the witnesses of Macquarie and Endeavour contradicted each other. As one would expect, much depends on questions of credit. In this respect, Gzell J found that Endeavour's witnesses were credible, whilst he took a very dim view of the credibility of Macquarie's witnesses. But, if one may take an overall impression of the voluminous evidence, it is clear that the appellant's case was that the final transaction agreed by the parties should be characterised as a secured loan, to which was appended an option to purchase. This option was in the nature of a "collateral advantage" which is a clog on the equity of redemption and therefore unenforceable. 4 The respondents' case was that the secured loan was collateral to the option, was incidental to it; that, as far as the respondents were concerned, the transactions were really concerned with the acquisition of an option to purchase. 5 Of these rival contentions, his Honour preferred the respondents'. I think he was correct to do so. The parties (and not only the respondents) regarded the transaction as one of the granting of an option to purchase. Even Mr Jones (whose evidence his Honour disbelieved when in conflict with the respondents' evidence) said in evidence that at the second meeting between the parties Mr Aitken (an officer of the respondents) stipulated for an option. His Honour's summary of Mr Aitken's evidence (which he accepted) on the point is as follows: "Mr Aitken said he informed Mr Jones and Mr Roberts that if they agreed he would recommend to the board of Endeavour that it pay $300,000 to purchase an option to buy the medical centre exercisable between 18 months and 30 months from start up. He said Endeavour would want a return of 20% per annum and security over the business. The option purchase price would be three times EBITDA for the 12 months before the option was exercised. He said he also planned to suggest to the board that it offer a performance incentive by way of an "earn-up" of two times incremental EBITDA for the 12 months after exercise of the option and a further one times incremental EBITDA for the 12 months after that if Mr Jones was prepared to stay on managing the business." 6 Mr Aitken's version is consistent with a letter he wrote to the respondent's managing director on 22 May 2001, which was in the following terms: "They claim to have 11 local doctors on the hook ready to move in for an opening by 30 June 2001, but they are in need of $300k to finish off what they have started. Beyond the $300k they are more interested in Endeavour shares. The deal that can be done: · Take an option over the practice for $300k for the purchase of the practice on the terms below. They will offer security against the practice and will pay interest or return on the option at 20% per annum on a monthly basis in arrears. · Purchase the practice after 18 months based on the month 7 to month 18 actual results at 3 x EBITDA. · Offer incremental earn-up of 2 x EBITDA for the next 12 months actual results and a further incremental earn-up of 1 x EBITDA for the following 12 months actual results." 7 These facts demonstrate that the respondents were after an option. Certainly, it was an unusual type of option, as they seemed to regard the consideration for the grant of the option to be (at least in part) repayable. Nonetheless, it was an option they sought. 8 Mr Coles QC, learned senior counsel for the appellants, nearly (but not quite) conceded that, if one took into account the preliminary negotiations between the parties, his Honour was correct in categorising the transaction between the parties as being one of the granting of the option. But, in his submission, it is impermissible to have regard to anything but the constitutive documents constituting the transaction. This view, in my opinion, is erroneous. The decisions in this area are replete with statements that the Courts must enquire into the real (or true) nature of the transaction, not merely its nominal form. 9 However, even if one disregards everything which transpired in the events leading up to the execution of the main contractual documents, and concentrates on those documents alone, one arrives at the same result. For example, in the mortgage itself (the Fixed and Floating Charge) the opening recitals are: "A. The chargor is the owner of the charged property and carries on a medical business. B. In consideration of the chargee advancing the chargor the loan, the chargee has granted the grantee an option to purchase the charged property on the terms and conditions contained in the option" 10 In the Deed of Loan, by condition 3 (lease "Conditions Precedent") the following (inter alia) is stated: "Endeavour is only obliged to lend the Advance to Macquarie on the date requested by Macquarie if (a) Macquarie has ……….. (iii) executed the Option Deed and delivered the Option Deed to Endeavour." 11 In the Deed of Option, the Recitals are as follows: "A. Macquarie owns and carries on the business from the premises. B. In consideration of Endeavour agreeing to make the Loan, Macquarie has agreed to grant Endeavour an option to buy the Assets upon the terms and conditions contained in this Deed." 12 Thus, whether one restricts oneself to the documents or explores the surmounting circumstances, whether one looks to the substance or to the form, the conclusion seems inescapable that the parties were concerned to enter into an option, and that the secured loan was only ancillary to that. 13 Mr Coles was eventually constrained to argue that whenever the relevant documents comprise documents of loan, documents of security and documents granting an option, no matter what the circumstances, the option document must be void and unenforceable. 14 Such a submission flies in the face of the authorities. In Kreglinger v New Patagonia Meat and Cold Storage Co Ltd [1914] AC 25, Lord Parker of Waddington said at 52-3: "I have pointed out that in mortgages in common form an option to purchase is inconsistent with and repugnant to the proviso for reconveyance on payment of the money secured. But is there any such repugnancy or inconsistency in the following case? A agrees to give B an option for one year to purchase a property for 10,000 l. In consideration of such option B agrees to lend, and does lend, A 1,000 l to be charged on the property without interest, and be repayable at the expiration or earlier exercise of the option. I cannot myself see that there is any inconsistency or repugnancy between the provisions of this perfectly simple and straightforward transaction. It would have been very different if A had conveyed the property to B with a proviso that on payment of the 1,000 l there should be reconveyance, and the deed had then provided for the year's option. Here the option would be inconsistent with, and would in fact have been destroyed by, the reconveyance." On his Lordship's view, therefore, it is essential first to categorise the transaction as being either one of mortgage or one of option. To similar effect is Chadwick LJ in Jones v Morgan [2001] EWCA Civ 995 at para 55: "it is essential in any case to which the sale is said to apply to consider whether or not the transaction is, in substance, a transaction of mortgage." 15 The same analysis emerges from Reeve v Lisle [1902] AC 461, where Lord Lindley said at 465: "In point of fact, the real transaction was not taking a mortgage security for 5000 l or getting a better security than they had. The real transaction was that the mortgagees were bargaining for a share in the partnership on certain terms." 16 To quote again from what Lord Parker said in Kreglinger's Case (supra): "In the present case it is clear from the evidence, if not from the agreement of August 24, 1910, itself, that the nature of the transaction was as follows: The defendant company wanted to borrow 10,000l, and the plaintiffs desired to obtain an option of purchase over any sheepskins the defendant might have for sale during a period of five years. The plaintiffs agreed to lend the money in consideration of obtaining this option, and the defendant company agreed to give the option in consideration of obtaining the loan." 17 For these reasons I am of the view that any attempt to discover a clog on the equity of redemption in the present circumstances must fail. 18 Nor can it be said that the transaction was in any way unconscionable. Mr Coles argued that Macquarie was at all relevant times impecunious, that no legal advice was sought by Macquarie, that the final documents were executed in undue haste, that the interest (20%) was too high, that the purchase price under the option was so low as to constitute an undervalue, that Macquarie did not understand the transaction and that Mr Jones (from Macquarie) was non-plussed by the illness of his mother. Needless to say, the precise details were in dispute: the accounts of Endeavour's witnesses do not tally with those of Macquarie's witnesses. His Honour believed Endeavour's witnesses and disbelieved Macquarie's whenever there was a conflict between them: Mr Coles accepts his Honour was entitled to, and does not challenge that finding. Although the submission was made somewhat faintly, however, Mr Coles did submit that the transaction was unconscionable. 19 The correctness of his Honour's findings can be ascertained without recourse to any of the contested evidence. It is clear that the 20% interest figure came from Macquarie not Endeavour; no attempt was made to prove that the purchase price set out in the option was an undervalue; that the officers of Macquarie were astute businessmen who understood precisely what the commercial aspects of the deal were; that any speed in executing the documents was due to Macquarie's repeated requests for speed; and that the officers of Macquarie knew precisely at all stages what was happening. In the circumstances, even by the lax standards embraced by the majority of the High Court in Bridgewater v Leahy (1998) 194 CLR 457, no question of unconscionability arises. 20 An attempt to argue that the transactions could be invalidated under the Trade Practices Act 1974 (Cth) was abandoned. 21 In my view, the appeal should be dismissed with costs. 22 SANTOW JA: I agree with Meagher JA. 23 DAVIES AJA: The facts are set out in the reasons for judgment of Meagher JA . I agree with his Honour but would add a few words of my own. 24 Macquarie Medical Holdings Pty Ltd ("Macquarie") and Endeavour Health Care Services Pty Ltd ( "Endeavour") entered into a complex transaction comprising a loan agreement, an option to purchase and a fixed and floating charge. The charge secured the performance by Macquarie of its obligations under the loan agreement and under the option to purchase. 25 So far as Endeavour was concerned, the option to purchase was the significant document. Endeavour was not a financier, its interest was in developing and running medical centres. The loan came about because Macquarie required an additional $300,000 to enable it to complete the fitting out and establishment and its Macquarie Medical Centre. Having ascertained that it was not commercially feasible to provide the $300,000 by way of a premium for the option to purchase, Endeavour agreed to lend the sum to Macquarie so that Macquarie could establish and develop the business which Endeavour was to have the option to purchase. 26 Mr B.A.J Coles QC, senior counsel for the appellant, submitted that the option to purchase was a clog on Macquarie's ability to redeem its property. He submitted that it was sufficient that the making of the loan and the granting of the option to purchase were associated transactions. He took pains to ensure that the Court understood how the terms of the various agreements dovetailed with each other. Mr Coles submitted that it was not necessary to find something which could be described as a real or true clog on the equity of redemption, it was sufficient that, if the appellant wished to pay off its loan, it could not recover the secured property clear of any right which Endeavour had over it. Mr Coles submitted that it was sufficient that the transactions were associated and that the option to purchase was not an entirely independent transaction. 27 Meagher JA has rejected the essence of the submissions. So do I. The principle was made clear in Santley v Wilde [1899] 2 Ch 474. In that case, a person interested in a theatrical venture borrowed money on the terms that the money would be repaid and that the lender would share in the profits of the enterprise. Security was granted covering both obligations. At 476 Lindley M.R said: "The plaintiff says, 'I will pay off the balance of the 2000 l. and interest, and you will give me back the lease, and this is the end of my obligation'. But the mortgagee says, 'No; that is not the bargain: you cannot redeem on those terms. On the contrary, you may pay me 2000 l. and interest, but if you do, you must also pay the one third profit rents'. On principle that is right : it follows from what I have said. That is the bargain, and there has been no oppression, and there is no reasonable legal ground for relieving this lady". Sir F.H. Jeune made the same point at 478 when his Lordship said: " Therefore, we come back to this - what under the bargain is the event upon which the equity of redemption arises? Here it arises only when the money actually lent has been repaid, and when the share of profit rents has also been paid. So regarded, there is no fetter on the equity of redemption; and there is no hardship or oppression". Romer L. J took a like view and said at 478-9 said: "I take it that it is clearly established now, in the first place, that there is no such principle as is suggested, namely, that a mortgagee shall not stipulate for any collateral advantage for himself. He may so stipulate; and, if he does, he may obtain a collateral advantage: nothing can be said against it, and he can enforce it, always assuming that the bargain is not unconscionable or oppressive". 28 This approach was firmly established by the decision of the House of Lords in G and C Kreglinger v New Patagonia Meat and Cold Storage Company, Limited [1914] AC 25. At 37, Viscount Haldane L.C said: "The result is that a collateral advantage may now be stipulated for by the mortgagee provided that he has not acted unfairly or oppressively, and provided that the bargain does not conflict with the third form of the principle. This is that a mortgage (subject to the apparent exception in the case of family arrangements to which I have already alluded) cannot be made irredeemable, and that any stipulation which restricts or clogs the equity of redemption is void. It is obvious that the reason for the doctrine in this form is the same as that which gave rise to the other forms. It is simply an assertion in a different way of the principle that once a mortgage always a mortgage and nothing else". At 39 His Lordship said: "The question is not of form but of substance, and it can be answered in each case only by looking at all the circumstances, and not by mere reliance on some abstract principle, or upon the dicta which have fallen obiter from judges in other and different case". At 41 His Lordship said: "No doubt it is the fact that on redemption the respondents will not get back their business as free from obligation as it was before the date of the security. But that may well be because outside the security and consistently with its terms there was a contemporaneous but collateral contract, contained in the same document as constituted the security, but in substance independent of it. If it was the intention of the parties, I think it was, to enter into this contract as a condition of the respondents getting their advance, I know no reason either in morals or in equity which ought to prevent this intention from being left to have its effect". Lord Halsbury and Lord Atkinson agreed. At 46 Lord Mersey said: "The obligation to sell sheepskins created by clause 8 of the agreement was to endure in any event until August, 1915. That was the plain intention of both parties to the agreement, and the only effect of applying to the contract the equitable doctrine against clogging the right to redeem would be to defeat that intention and to enable one of the parties to inflict an injustice on the other. I have nothing to say about the doctrine itself. It seems to me to be like an unruly dog, which if not securely chained to its own kennel, is prone to wander into places where it ought not to be. Its introduction into the present case would give effect to no equity and would defeat justice". 29 Lord Parker examined the authorities at great length and at 60-1 concluded: "My Lords, after the most careful consideration of the authorities I think it is open to this House to hold, and I invite your Lordships to hold, that there is now no rule in equity which precludes a mortgagee, whether the mortgage be made upon the occasion of a loan or otherwise, from stipulating for any collateral advantage, provided such collateral advantage is not either (1.) unfair and unconscionable, or (2.) in the nature of a penalty clogging the equity of redemption, or (3.) inconsistent with or repugnant to the contractual and equitable right to redeem". 30 Mr Coles relied heavily upon Samuel v Jarrah Timber and Wood Paving Corporation Limited [1904] AC 323. However, in that case, the option to purchase was contained in and was a term of the mortgage. Moreover, as Lord Lindley pointed out at 329, the option could not be exercised after repayment of the loan. Those factual circumstances were materially different from the present. 31 In the present case, there was no covenant which had the character of a clog on the equity of redemption. The loan was made as an incidental part of the potentially much greater transaction, the option to purchase. The loan could have been repaid at any time and, if so, the charge would no longer have operated in relation to the covenants of the loan. The option to purchase and the charge which secured its performance would have continued; but that was the bargain which Macquarie and Endeavour made, it was what they intended and it was not unconscionable. 32 I agree with the views expressed by Meagher JA and with the orders which his Honour proposed. ***** Last Modified: 11/11/2003 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.