New South Wales Supreme Court CITATION : Harvey v Perpetual Nominees Ltd [2009] NSWSC 1379 HEARING DATE(S) : 2 December 2009 JUDGMENT DATE : 2 December 2009 JURISDICTION : Equity Corporations List JUDGMENT OF : Austin J EX TEMPORE JUDGMENT DATE : 2 December 2009 DECISION : Application for interlocutory injunction denied CATCHWORDS : MORTGAGES - exercise of power of sale - injunction to restrain mortgagee completing after sale at auction to a bona fide purchaser - rule in Inglis v Commonwealth Trading Bank Chong v Chanell (No 2) [2009] NSWSC 1066 Fitzsimons v Commonwealth Bank of Australia [2009] NSWSC 1255 CASES CITED : Grose v St George Commercial Credit Corporation Ltd (1991) NSW ConvR 55-586 Inglis v Commonwealth Trading Bank of Australia (1971) 126 CLR 161 Parist Holdings Pty Limited v Perpetual Nominees Ltd [2006] NSWSC 599 Solid Holdings v IMFML Finance [2008] NSWSC 573 Sharyn Enice Harvey (First Plaintiff) Polly-K Pty Ltd (Rec & Mgr Apptd)(Second Plaintiff) Perpetual Nominees Ltd (First Defendant) PARTIES : Equitable Asset Management (Australia) Ltd (Second Defendant) Paul Gidley in his capacity as a joint Rec & Mgr of Polly-K Pty Ltd (Third Defendant) James Shaw in his capacity as a joint Rec & Mgr of Polly-K Pty Ltd (Fourth Defendant) FILE NUMBER(S) : SC 5522/09 COUNSEL : A Narayan (Plaintiffs) D R Stack (Defendants) SOLICITORS : Heidtman & Co (Plaintiffs) Kemp Strang Lawyers (Defendants) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST AUSTIN J WEDNESDAY 2 DECEMBER 2009 5522/09 SHARYN ENICE HARVEY & ANOR V PERPETUAL NOMINEES LTD & ORS JUDGMENT (ex tempore, revised on 7 December 2009) 1 HIS HONOUR: The plaintiffs today move for relief in terms of paragraphs 3 and 6 of their Originating Process filed on 30 November 2009. Paragraph 3 seeks leave under ss 236 and 237 of the Corporations Act 2001 (Cth) to bring the present proceedings in the name of the second plaintiff. For reasons that will emerge, I have decided that the application for leave ought not to be determined today. Paragraph 6 is an application for an interlocutory injunction, upon the plaintiffs giving their usual undertaking as to damages, to restrain the defendants from completing the sale of a property known as the Commercial Hotel at Boolaroo. The first and second defendants are mortgagees of the property and the third and fourth defendants are joint receivers and managers appointed by the mortgagee to the hotel business and to the property. 2 The loan documentation for the mortgage, for an advance of $1.8 million on an interest only basis, was entered into on 21 December 2007 for a period of three years. The evidence indicates that the plaintiffs failed to make an interest payment on 7 December 2008, but subsequently made the payment on 29 December 2008. A s 57(2)(b) mortgagee notice was issued to the plaintiffs. On 7 March 2009 there was another failure by the plaintiffs to make an interest payment, which was subsequently paid, and there was another failure on 7 June 2009, and a partial payment on 24 June 2009. Therefore, by the beginning of September 2009 there was some history of late payment or non-payment of interest payable under the loan instrument. 3 On 1 September 2009 the lender appointed receivers and managers, namely, the third and fourth defendants. The receivers and managers then made investigations and proceeded to implement the sale of the Commercial Hotel, over which the mortgage extends. According to the first plaintiff's affidavit, she became aware of the proposed sale about four weeks before the auction was held, that is in early October 2009. There is no evidence that she complained about the proposed sale at that time or that she made any complaint about the sale procedure that was adopted in the ensuing weeks. 4 The Commercial Hotel was sold at auction on 29 October 2009 for $1.31 million. At that time more than that amount was outstanding under the mortgage loan. By a letter which appears to have been transmitted on 6 November 2009, and is at page 479 of the exhibit to the first plaintiff's affidavit of 30 November 2009, the solicitors for the plaintiffs required an urgent pay-out figure, said to be required by a proposed financier. It appears the figure supplied in response to that request was a total indicative pay out figure of $1,958,225. Previously, by letter dated 5 September 2009, the solicitors for the receivers had said that the indicative pay out figure on 20 September 2009 was $1,744,156. Whether the figure was the larger or the smaller figure, it was clearly much more than the amount realised at the auction. 5 The plaintiffs drew attention to some evidence showing that certain equipment used in relation to the hotel was sold for $249,299.50 and that the proceeds of sale were forwarded by a trust account cheque by the plaintiffs' solicitors to the receivers on 23 September 2009. The plaintiffs complained that that amount does not appear to have been taken into account in the subsequent statements of the total indicative pay-out figure supplied on about 15 September and 6 November 2009. That may be so and is not a matter for me to determine today. 6 The appropriate course today is to assume that the pay-out figure stated on 6 November should be reduced by that amount so that the approximate amount owing was $1.65 million at that time. The plaintiffs contended that the receivers were acting unconscionably in misstating the amount of the pay out figure. On the evidence before me today, there does not seem to be a seriously arguable case of unconscionability with respect to that matter, as opposed to, for example, simple mistake. 7 The present proceedings were commenced when an application for abridgement of service was made to me last Monday, 30 November 2009. That was more than two months after the first plaintiff became aware of the proposed auction and more than a month after the auction in fact took place. The Originating Process seeks relief of various kinds, but importantly, for present purposes, to restrain completion of the sale of the hotel. 8 One of the issues before me today is whether the evidence read on the interlocutory application, namely, the affidavit of the first plaintiff and the exhibit to that affidavit shows that there is a serious question to be tried on the issue whether the method of conducting the auction amounted to a breach of the mortgagee's duties in respect of the exercise of the power of sale and of the receiver's duties under s 420A of the Corporations Act. 9 Counsel for the defendants submitted that the evidence in the affidavit and exhibit did not rise even to the level of a serious question to be tried, and also noted that the first plaintiff had not complained about the procedure adopted for the sale of the hotel prior to the initiation of the proceedings. It seems to me that the evidence of breach of the mortgagee's duty in exercising the power of sale and concurrent breach of the receiver's duties is rather thin, on the material before me today. I think the appropriate course is to proceed on the basis, without reaching any firm conclusion, that there is a serious question to be tried on that issue. 10 In addition to complaining about the method of sale and complaining about the misdescription of the purchase price (a matter I have already dealt with) the plaintiffs submitted that equity should intervene to protect their equity of redemption, even though there is no dispute that at least a substantial part of the mortgage debt claimed is outstanding and that the mortgagee is, therefore, entitled to exercise the power of sale. 11 Essentially, the submission was that it is sufficient that the plaintiffs have offered to redeem and are in a position to redeem the mortgage in a fairly short space of time. The evidence as to the offer to redeem is as follows: On 2 September 2009 a business called Oasis Home Loans of the Sunshine Coast wrote to the solicitors for the plaintiffs confirming that the first plaintiff had engaged it as a broker to refinance her hotel. They said they were confident that they should have a formal approval for the refinancing by the end of the week. It appears, however, that no such formal approval emerged. 12 Eventually, however, a company called Nationwide Capital Pty Limited prepared a written offer concerning advances to the second defendant on the security of the hotel dated 27 October 2009. Apparently the letter was made available to the first plaintiff on 29 October, the day of the auction. The letter is curious in some respects. It appears to be taken from a form or precedent where provision is made for application and valuation fees, but as there were apparently none to be charged then zero figures are inserted in that part of the form. The amount of the advance is said to be $2 million and the amount available to be advanced is $1,978,000. That would probably be sufficient to pay out the whole of the amount claimed by the defendants if there were no other payments to be made at that stage. Curiously, one of the terms of the letter is that Nationwide Capital would acquire a 50 percent shareholding in the hotel. Additionally, the letter said: "The money advanced by Polly-K Pty Limited, the second plaintiff, is conditional upon providing Nationwide with full and frank disclosure of all of your financial details and also subject to Nationwide being satisfied by its own due diligence inquiries as to your credit rating and the information specified by you in your application for finance." 13 It seems to me that as at 29 October 2009, when this offer was communicated, quite a deal of work still remained to be done before money would be placed on the table. Apart from the due diligence inquiries to which the letter refers, including a credit rating check, there would be substantial documentation required. In particular there would need to be some documentation of the proposal for Nationwide Capital to acquire a 50 percent shareholding in the hotel. There would presumably be an issue as to whether that would be achieved by the sale or issue of shares in the second plaintiff or in some other way. I understand from the evidence that the title to the land on which the hotel stands is vested in the first plaintiff and if there were to be shares representing that value, there would be some further restructuring needed. All in all, the letter of 27 October 2009 falls substantially short of being an unconditional offer to refinance. 14 On the morning of the auction it appears that the first plaintiff signed what she called the Nationwide loan offer. According to her affidavit, paragraph 79, at about 9am she telephoned a person called Catherine Antaw of the receivers. She had a conversation in which she told Ms Antaw she had faxed a copy of the signed loan offer to their offices. There was a further discussion at 10am in which Ms Antaw requested contact particulars for someone at Nationwide who could be spoken to. 15 Then, apparently at 10.15am, the first plaintiff had a discussion with a person called Gary Mikos at Nationwide's office, and while they were speaking, a caller, apparently Ms Antaw, called Mr Mikos. According to the first plaintiff's evidence, the caller asked Mr Mikos whether he knew his letterhead was being fraudulently used and he made statements rebutting that statement, in effect. During the conversation, according to first plaintiff's evidence, Mr Mikos told the caller that the offer was genuine and the document was authentic, and that Nationwide had finished its inquiries and was completely happy with everything. She then deposed that she formed the belief, in light of what had been said, that the auction would not proceed. She did not attend the auction, and later she discovered that the auction did indeed proceed and the property had been sold. 16 As I have said, the submission made on behalf of the plaintiffs was that they were entitled to an equity of redemption, which equity would intervene to protect in circumstances where they had offered to redeem and were in a position to do so. It seems to me that the evidence to which I have referred falls short of the kind of offer to redeem that would be sufficient to satisfy a court of equity to intervene to protect the equity of redemption. 17 The evidence comprises a letter, which I have said is conditional and would require substantial steps before it could be implemented by making a cash advance, coupled with a conversation on the morning of the auction without any direct evidence about that conversation from Mr Mikos, who participated in it, or any follow up documentation that would indicate, as the plaintiffs allege, that indeed an unconditional offer was subsequently made available. It seems to me the court should treat that evidence, in the absence of a formal unconditional offer, with very great caution. The need to be cautious is of course enhanced in this case because, unlike many other cases in which the equity of redemption is sought to be protected, this is a case where the property has already been sold and completion is fairly imminent. 18 There is an indication in the correspondence that the settlement of the sale is intended to take place on 7 December 2009. There is also evidence before me that the purchaser is a bona fide purchaser. That evidence is in the affidavit of Vanessa Marquez, when she reports on a discussion she had with the solicitor for the purchasers who referred to his clients as bona fide purchasers of the hotel and she did not demur. 19 Given the intervention of a bona fide purchaser, the Court has to be particularly careful about granting interlocutory relief that would interfere with that party's rights. I received submissions concerning the so-called rule in Inglis v Commonwealth Trading Bank of Australia (1971) 126 CLR 161 and exceptions to that rule. The rule is said to be that if a mortgagor is to restrain the exercise of a mortgagee's power of sale, the mortgagor must pay to the court the amount sworn to by the mortgagee as the amount owing, or a lesser amount if it appears from the terms of the mortgage instrument that the lesser amount is due: see Fitzsimons v Commonwealth Bank of Australia [2009] NSWSC 1255. In Solid Holdings v IMFML Finance [2008] NSWSC 573 White J usefully reviewed authorities on that proposition, including the judgment of Hamilton J in Parist Holdings Pty Limited v Perpetual Nominees Ltd [2006] NSWSC NSWSC 599. There is a suggestion in the authorities that some aspects of the Inglis proposition are controversial and there may be some exceptions to it. The plaintiffs, in particular, relied on the judgment of Bryson J in Grose v St George Commercial Credit Corporation Ltd (1991) NSW ConvR 55-586. 20 It may be that something less than payment into court of the amount claimed or acknowledged to be due will suffice to permit equity to intervene to protect the equity of redemption in an appropriate case. For example, it may be sufficient, though it is unnecessary for me to decide, for the mortgagor to tender an absolute and unconditional offer to provide immediate refinance should the mortgagee withdraw the sale. At any rate, that might suffice if bona fide third parties' rights have not intervened. But here, even putting aside the problem presented by the bona fide purchaser, the evidence falls considerably short of the kind of absolute and unqualified offer to refinance that I have envisaged, for the reasons explained above. 21 Consequently, it seems to me that according to the principle underlying Inglis, if not the "rule" invoked by the plaintiffs, it would be unjust to deprive the mortgagee of the fruits of exercise of its rights under the power of sale, by granting an injunction restraining completion of the purchase in circumstances where it was not given complete protection by access to the amount that it is owed. Whether that complete protection would be by way of unqualified letter of offer or by payment into court is, as I have said, something I need not decide. 22 I note that in the Solid Holdings case White J saw the Inglis proposition as an aspect of the general issue whether there is a serious question to be tried. If the mortgagee is not offered protection, then it cannot be argued that the mortgagee has failed to act in good faith by proceeding to exercise the power of sale notwithstanding approaches made by the mortgagor. Additionally, the Inglis proposition is highly pertinent to the balance of convenience. In weighing up the factors relevant to the exercise of the court's discretion, it is highly relevant to take into account that the injunction will deprive the mortgagee of its rights temporarily, without giving the mortgagee recourse to the amount that is owed. 23 There are other matters that bear on balance of convenience in this case. One is that there seems on the facts to be some doubt about the utility of the plaintiffs' proffered undertaking as to damages. The evidence given by the first plaintiff herself raises some real doubt as to whether she and the second plaintiff would be able to meet a claim for damages in the event that the court were to prevent completion of the sale and work to keep the mortgagee out of an amount of $1.31 million for what would inevitably be a substantial period of time. Another aspect of the balance of convenience relates to competing equitable interests. 24 I was referred by counsel for the plaintiffs to Chong v Chanell (No 2) [2009] NSWSC 1066 in which reference was made to the balance of convenience considerations that arise on an application to set aside a caveat. Brereton J pointed out if he were wrong to allow the caveat to remain until ultimate determination of the matters in issue, the long term rights of the parties would be unaffected, the property would be preserved and it would remain available to satisfy the claimed interest so no one would suffer undue prejudice. On the other hand, if the caveat were to be removed wrongly, the property would be sold, the proceeds appropriated and the claimed interest would be destroyed forever. 25 By analogy, counsel for the plaintiffs submitted that if their application for an injunction were denied, the completion of the sale would take place, the property would pass to the hands of the purchaser, and the plaintiffs' claimed equity of redemption would be destroyed forever. Additionally, they submitted that, because there would be a shortfall on the sale, it would be very likely that the second plaintiff would be placed in liquidation and its prospect of pursuing a claim for damages or equitable compensation in respect of breach of the mortgagee's duties would be rendered useless, because presumably the liquidator would not take it up. 26 There are two points to make about that argument. The first is that there is no suggestion that a caveat was lodged to protect the plaintiffs' interest in this case, and moreover, the analogy with an application for extension of a caveat is misleading. Where there is a caveat on the title, the purchaser can be taken to have notice at that time of the claimed interest. Whereas, in the present case, there is no ground for contending that the purchasers were other than bona fide purchasers. This is a case where to do what the plaintiffs have asked the court to do would be to interfere with the third party rights, whereas to deny the injunction would be to leave the plaintiffs to their other remedies in terms of equitable compensation and damages. 27 The other point to make about the argument is that the court would not assume at this stage, on the evidence, that a shortfall on the sale of the property would inevitably lead to an application to wind up the second plaintiff; or that if it did, the liquidator would inevitably decline to pursue any claim for compensation that he or she might have on behalf of the company against the present defendants. 28 All in all, while there may be a serious question to be tried about some aspects of the plaintiffs' claims, the balance of convenience strongly points against the court granting an interlocutory injunction. Therefore the application for that relief in paragraph 6 of the Originating Process is dismissed. So far as paragraph 3 is concerned, the application under ss 236 and 237 of the Corporations Act, there is no urgency in dealing with that matter and I shall refer the proceedings to the Registrar for further directions. 29 I think the appropriate orders for costs is that costs of the application should be the defendants' costs in the proceedings. That is the order I shall make. 30 My orders are: 1. Paragraphs 6 and 9 of the Originating Process, in so as far as they seek interlocutory injunctive relief are dismissed; 2. The defendants' costs of this application are the defendants' costs in the proceedings; 3. The remainder of the Originating Process is stood over to the Registrar's Corporations List on 14 December 2009. ********** 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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