3 Property Group 13 Pty Ltd (in liq) v 3 Property Group 17 Pty Ltd

Federal Court of Australia|2021-09-21|Before: Halley J

The second applicant via his counsel continues to give the usual undertaking as to damages.

The applicants file and serve a statement of claim by 4.30 pm on Friday, 1 October 2021.
The respondents file and serve a defence by 4.30 pm on Friday, 15 October 2021.
The applicants file and serve any reply by 4.30 pm on Friday, 22 October 2-21.
The proceeding be listed for a case management hearing in the week commencing 1 November 2021.
The respondent pay the applicants' costs of and incidental to the hearing on 21 September 2021.
Any party wishing to apply for a costs order different to Order 6 is to file and serve written submissions (limited to three pages) within seven days of the publication of reasons for declining to vacate Order 3 of 13 September 2021.
Any party wishing to reply to any such written submissions is to file and serve written submissions in reply (limited to two pages) within seven days of receipt of the submissions referred to in Order 7.
The proceeding be referred to the National Operations Registrar for allocation to a docket judge. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

HALLEY J: 1 The second applicant, Stephen John Hundy (Liquidator) is the liquidator of the first applicant, 3 Property Group 13 Pty Ltd (In Liquidation) (Company). 2 By an originating application filed on 13 September 2021, the applicants commenced these proceedings seeking final relief in relation to transactions which they claimed were voidable under the Corporations Act 2001 (Cth) (Act). 3 By way of interlocutory relief, the applicants sought an order pursuant to s 107(2)(b) of the Land Titles Act 1925 (ACT) (LTA) that the operation of caveat number 3058533 be extended until further order of the Court (Caveat). The Caveat was lodged by the Company in respect of Unit 4 situated at 4/58 Jacka Crescent, Campbell in the Australian Capital Territory (gy). 4 By way of final relief, the applicants sought against the first respondent, 3 Property Group 17 Pty Ltd, a declaration that the transfer of the Property by the Company to the first respondent on or about 6 October 2020 was one or more of: (a) an uncommercial transaction within the meaning of s 588FB of the Act; (b) an unreasonable director-related transaction within the meaning of s 588FDA of the Act; and (c) a creditor defeating disposition for the purposes of s 588FDB of the Act. 5 On 13 September 2021, Katzmann J made an order extending the operation of the Caveat until further order. 6 The respondents challenge the continuation of the Caveat on the grounds that the Liquidator cannot take an interest in the Property that is greater than a prior secured interest. The respondents seek an order that the order made by Katzmann J on 13 September 2021 extending the operation of the Caveat be vacated. 7 The applicants submit that the order extending the Caveat should not be disturbed. 8 At the conclusion of the interlocutory hearing before me on 21 September 2021, I declined to vacate the order made by Katzmann J and instead made directions for the filing and service of pleadings. These are my reasons for declining to vacate the order extending the operation of the Caveat. 9 The applicants rely upon three affidavits sworn by the Liquidator, namely two affidavits sworn on 13 September 2021 and one affidavit sworn on 20 September 2021. 10 The Liquidator continues to proffer the usual undertaking as to damages. 11 The respondents rely upon an affidavit of Jaime Charles Farrelly (the third respondent and a director of the first respondent) sworn on 16 September 2021 and an affidavit of David Messing (the Chief Financial Officer of the first respondent) also sworn on 16 September 2021.

Background 12 The Company was incorporated on 14 September 2017. The Company's sole shareholder is 3 Property Group Holdings 2 Pty Ltd (Shareholder). 13 On or around August 2018, the Company purchased a site at 58 Jacka Crescent, Campbell in the Australian Capital Territory (Site) for $1.48 million for the purpose of developing and building four townhouse units. 14 The Liquidator understands from his investigations to date that the Company financed the acquisition of the Site from loans obtained from Perpetual Corporate Trust Limited trading as La Trobe, private financiers (Mezzanine Lenders) and a group of associated entities. 15 The exhibits to the Liquidator's affidavits included a loan agreement dated 9 November 2018 between the Company and the Mezzanine Lenders in the amount of $841,000, a security deed between the Shareholder and the Mezzanine Lenders and an unregistered mortgage. 16 In a statutory report to creditors dated 22 January 2021, the Liquidator found, although he was yet to form a conclusion in relation to when the Company became insolvent, that based on his review of the books and records he considered that the Company likely became insolvent some time between April and June 2020. 17 On 1 July 2020, the Company obtained a valuation of the Site "In One Line" (that is, the aggregate value of the four incomplete units) in the sum of $4 million. On the basis of an "As if Complete" gross realisation, the units were valued at $6.775 million. 18 On 4 July 2020, the Company entered into a contract for the sale of the Site to the first respondent for a sale price of $4.05 million (Sale Contract). The third respondent and Gary James Kelly, the second respondent, were at that time directors of both the first respondent and the Company. The settlement date on the Sale Contract was specified to be on or before 11 September 2020, but settlement ultimately did not occur until 6 October 2020. 19 The first respondent obtained finance from Win Senior No. 381 Pty Ltd (Wingate), which was secured by way of a first priority registered mortgage. 20 In addition, the first respondent contends that it obtained secondary lending from AMAL Trustees Pty Ltd (Realside), which it submits was secured by a mortgage over the Site. The third respondent gives evidence that a "General Security Deed", a "Registration Deed" and a "Mortgage over the Site" were executed by the first respondent on or about 25 November 2020 in order to "facilitate the lending from Realside and provide it with the required security over the Site" (Realside Security Documents). None of the Realside Security Documents were dated or executed by Realside. 21 Clauses 2.2 and 2.3 of the Registration Deed relevantly provide: 2.2 The Lender agrees: 2.2.1 in respect of the Security Documents (other than the Tranche 2 Security Documents) to hold those Security Documents in accordance with the terms of this deed and may not deal with any Security Document unless and until the Effective Date occurs for a Security Document; … 2.3 Each security provider intends that: 2.3.1 by delivering the Security Documents (other than the Tranche 2 Security Documents) to the Lender under clause 2.1: 2.3.1.1 the Security Documents will not be valid, binding and enforceable upon that Security Provider; and 2.3.1.2 no Security Interest will be created or otherwise arise under or in connection with the Security Documents; unless and until, in respect of a Security Document, the Effective Date occurs for that Security Document. The Lender agrees to accept possession of the Security Documents on this basis; … 22 The Registration Deed provided for four tranches of security documents. The Tranche 4 security documents included the mortgage over the Site executed by the first respondent. 23 The "Effective Date" in respect of a Tranche 4 security document was defined in clause 1.1 of the Registration Deed to be the earlier of the date on which: the senior lender was repaid in full; the security interest granted over a property in favour of the senior lender was discharged; an event of default occurred; or, without the prior written consent of the lender, the security provider sold or transferred or otherwise disposed of any of its property or agreed to do so. 24 In the period between July and September 2020, the Company engaged Lifestyle Homes (ACT) Pty Ltd, the fifth respondent, to complete construction of the four units on the Site. The fifth respondent invoiced the Company in excess of $2 million in rectification and construction costs between 1 July and 2 October 2020. The Company made payments to the fifth respondent totalling $782,219.29. 25 On 6 October 2020, settlement under the Sale Contract took place. 26 On 22 October 2020 the Company's two directors, the second and third respondents, resigned. Paul Hamilton was appointed as the Company's sole director. 27 On 23 October 2020, Mr Hamilton resolved that the Company was insolvent and that a meeting of the shareholders should be convened to resolve to wind up the Company. Later that day, the Shareholder resolved to wind up the Company and the Liquidator was appointed as liquidator of the Company. 28 Annexed to Mr Messing's affidavit are two letters on Realside letterhead dated 31 August 2021, allegedly sent from Realside to David Messing purporting to provide a "Working capital loan statement for FY21" (Realside Letters). The author of the Realside Letters is not identified. The respondents allege that these letters demonstrate that the total balance of lending from Realside was $20,770,997 as at 30 June 2021. The first letter, which sets out a summary of the amounts owed to "3PG Trust 1" and "3PG Trust 2", records that $11,985,877 was owed to 3PG Trust 1 at the relevant date and $8,785,120 was owed to 3PG Trust 2. In their written submissions, the respondents state that "3PG Trust 1" is a reference "to the lending that has been made for companies including [the second respondent]", and "3PG Trust 2" is a reference to "lending that has been made for the project called 'Form' in Coombs", which is not related to the second respondent. The respondents submit that these trusts are the vehicle by which Realside makes funds available to borrowers. 29 The second of the Realside Letters allegedly shows progressive drawdowns in relation to each trust, including a drawdown on 12 December 2020 of $1,884,892.00 from the 3PG Trust 1. Mr Messing annexes to his affidavit an excel spreadsheet entitled "Realside Summary of transactions and balances - 3PG Trust 1 as at 30/06/2021". He states that he has prepared the spreadsheet from his "reconciliation of the books and records" of the first respondent, and records that $1,293,007.98 of the $1,884,892.00 advance from the 3PG Trust 1 on 12 December 2020 was used to repay funds to the Mezzanine Lenders that were previously alleged to be payable by the Company. 30 The applicants allege that on or about 24 December 2020, the Liquidator caused a caveat referrable to the Site to be delivered to the Access Canberra Land Titles Office on the Company's behalf (Original Caveat). 31 The Original Caveat was registered on 14 January 2021 on the title to the Site. 32 The applicants contend that on or about 28 January 2021, the Liquidator caused the Original Caveat to be withdrawn to enable a units plan to be registered to enable the creation of four separate titles. 33 On or about 16 February 2021 the Liquidator caused caveats to be registered in the Company's name over each of the four units, including the Caveat with respect to Unit 4. 34 In the period between February and June 2021, the Liquidator provided withdrawals of the caveats referrable to Units 1 and 3 and permitted the Unit 2 caveat to lapse to enable the sale of those Units to be completed. Unit 1 was sold for $1.8 million and the sale was completed on 23 March 2021. Unit 2 was sold for $1.65 million and the sale was completed on 16 April 2021. Unit 3 was sold for $1.7 million and the sale was completed on 25 February 2021. 35 On or about 13 April 2021, the website allhomes.com.au indicated that contracts had been exchanged for the sale of Unit 4 with a sale price of $1.75 million. That sale has not been completed. 36 The Liquidator submits that in aggregate, it would appear that the first respondent has sold or will sell the four units for an amount of $6.9 million resulting in a gross profit of $2.85 million, prior to taking into account any costs incurred by the first respondent to complete the construction of the units (much of which, in any event, appears to have been paid by the Company). 37 On or about 25 August 2021, the amount owing by the first respondent to Wingate, which held a first priority registered mortgage over the Property, was repaid.

Legal principles 38 This court has jurisdiction to make an order extending the operation of a caveat pursuant to s 107(2)(b) of the LTA: see generally Crosby v Kelly (2012) 203 FCR 451; [2012] FCAFC 96 at [35] and [39] (Robertson J, with whom Bennett and Perram JJ agreed); Lo Pilato (Trustee) v Kamy Saeedi Lawyers Pty Ltd, in the matter of Adzic (Bankrupt) (2017) 249 FCR 69; [2017] FCA 34 at [287]-[292] (Katzmann J). 39 It is well established that an applicant seeking an extension of a caveat is required to establish that there is a serious question to be tried and that the balance of convenience favours the extension of the caveat: GR8 Constructions Pty Limited v Carol Ann O'Donnell & Ors [2011] ACTSC 92 (GR8 Constructions) at [24]-[27] (Refshauge J); Stone Living Pty Ltd v 3 Property Group Pty Ltd [2020] ACTSC 149 at [11] (McWilliam AsJ). 40 The caveatable interest asserted in the Caveat is that: The transfer of land to the registered proprietor that was completed on or about 6 October 2020 is voidable pursuant to s 588FE of the Corporations Act 2001 (Cth) and is liable to be set aside pursuant to s 588FF of the Corporations Act 2001 (Cth). 41 The right to avoid a transfer under insolvent trading provisions involves an assertion that a plaintiff is entitled to be the registered proprietor of the land, which amounts to an interest in land that can provide a caveatable interest: Ozem Kassem and Jason Tang as Liquidators of and agents for Amflo Holdings Pty Limited (in liquidation) ACN 002 001 649 v Crystal Car Wash Pty Ltd ACN 101 595 493 [2015] NSWSC 973 at [13]-[14] (Brereton J). 42 As the respondents submit, the starting presumption is that a registered proprietor has a prima facie right to deal freely with its land: GR8 Constructions at [25]. Further, the onus is on the party lodging the caveat to show that there is a serious question to be tried, or in other words, that the caveat should be maintained: National Australia Bank Ltd v M.C.M.C. Pty Ltd & Anor [2005] WASC 104 at [27]. 43 Generally, a party seeking to claim a caveatable interest against a registered first mortgagee is unlikely to succeed: Lewenberg and Pryles v Direct Acceptance Corporation Limited [1981] VR 344 (Lewenberg) at 347-8 (O'Bryan J). 44 The position may be very different, however, if the registered first mortgage is challenged. As the Court of Appeal of the Supreme Court of Western Australia explained in Navarac Pty Ltd v Moondancer Holdings Pty Ltd (2009) 40 WAR 150; [2009] WASCA 95 (Navarac) at [22] (Pullin JA): It is true that experience shows that parties are most commonly in dispute about the existence of a caveatable interest. Balance of convenience issues are usually of little or no significance where the caveator claims an estate in fee simple or a leasehold estate. In those fairly common cases, it is "unusual", as Owen J states, that once an arguable case is made out by the caveator that there is such a caveatable interest, that balance of convenience issues will result in removal. However, if for example the interest claimed by the caveator is a security interest or an interest in competition with another claimant against the registered proprietor, then balance of convenience issues may become decisive. Owen J, at 49 in Custom Credit, gave an example where he referred to Lewenberg v Direct Acceptance Corporation Ltd [1981] VR 344. In that case, the contest was between a registered mortgagee and the holder of an unregistered mortgage. The unregistered mortgagee had lodged a caveat. The registered mortgagee was being prevented by the caveat from passing title under a power of sale which appeared to have been validly exercised. There, the validity of the interest which both contestants had in the land was not in dispute and therefore the holder of the registered mortgage had an unquestionably superior interest in the land. As Owen J said "but the case was, and could only have been, about the balance of convenience" (49). The Custom Credit case is significantly different from this case, because in Custom Credit the respondent had proceedings on foot seeking to have the appellant's mortgage set aside, to the extent that it contained a charge over the land in question. If the proceedings to set aside the mortgage succeeded, then the respondent would have had an unencumbered interest in the land.

Serious question to be tried 45 The respondents do not seek to contend that the applicants have failed to establish the existence of a serious question to be tried. 46 The applicants submit that by entering into the Sale Contract in July 2020 at a time when it was likely insolvent, the Company sold its primary asset to a related entity at a price reflecting the incomplete status of the units to be constructed on the Site. The effect of the deferral of settlement to a date when the units would be completed, in circumstances where the Company would continue to incur the costs of completing the units, resulted in a related entity purchaser obtaining value that reflected completed units. The Liquidator has estimated that the benefit to the related entity purchaser of the Property was a gross profit of $2.85 million and the respective detriment to the Company was both the loss of that gross profit and the costs of completing the construction of the units. 47 In the circumstances I am satisfied that the applicants have established that there is a serious question to be tried.

Balance of convenience 48 The respondents submit that the balance of convenience does not favour the continuation of the Caveat. They contend that there "is no useful purpose in the Liquidator's caveat being maintained as it would be subordinate to the interests of Realside at the completion of whatever form of proceedings the Liquidator elects to take". They submit that the Liquidator will not receive any funds from any sale of the Property if Realside has a security interest over the Property and the continuation of the Caveat will "just cause detriment to no positive end". 49 The respondents submit that Realside had forwarded funds that were utilised for the purpose of improving the Site. They contend that clause 3.1 of the General Security Deed provided Realside with a security interest over the Site and that as a secondary lender, by reason of clause 2.2 of the Registration Deed, it had the right to the security from a registered mortgage after satisfaction of the debt to Wingate as the first secured lender. They submit that Realside's interest should be considered to be a prior secured interest as the mortgage was provided and the borrowing occurred prior to the Liquidator raising the issues with the sale and prior to the lodgement of the Caveat. 50 The respondents further submit that there is a possibility that Realside will claim a default of the loans, with the current balance of the loans being approximately $20 million, resulting from its loss of security as it is unable to register its mortgage. They submit that "Realside's representative" has indicated that "no further drawdowns on the finance will be permitted if the caveat is not removed". The respondents contend it is possible that Realside may seek to take possession of the Property to force a sale and claim its priority over the proceeds. 51 The applicants submit that the question of the validity of the alleged security interest taken by Realside is a serious question favouring the ongoing maintenance of the Caveat. They contended that this is particularly apposite in circumstances where the Court issued production orders in mid-June 2021 concerning Realside, which remain unsatisfied, and the evidence of the Liquidator is that he was unaware of Realside's purported security interest at any time prior to 16 September 2021. 52 The applicants further submit that there is no evidence before the Court from Realside and it has not sought to participate in these proceedings. In addition, the applicants point to evidence that they have adduced of similar transactions on the part of the same directors, the second and third respondents, in relation to other entities. 53 I am satisfied that the balance of convenience favours a continuation of the Caveat. 54 Unlike the position in Lewenberg and Navarac, Realside does not have the benefit of registered first mortgages over the Property. Moreover, there is, at least on the evidence currently before the Court, some doubt as to the validity of the security interest asserted to be held by Realside over the Property, given the cumulative effect of the following matters. 55 First, the Liquidator, notwithstanding relatively comprehensive orders for production issued in mid-June 2021, was not aware prior to 16 September 2021 of the existence of the Realside security interest over the Property alleged to be created by the Realside Security Documents (Realside Security Interest). 56 Second, it is clear from clause 2.2 of the Registration Deed that the alleged Realside Security Interest was not created until on or about 25 August 2021, being the date on which the primary lender, Wingate, was repaid. This was some ten months after the commencement of the winding up of the Company and the appointment of the Liquidator. 57 Third, none of the Realside Security Documents were dated and none were executed by Realside. The third respondent's evidence is that the Realside Security Documents were executed by the first respondent on or about 25 November 2020. This is a date that was more than a month after the commencement of the winding up of the Company and the appointment of the Liquidator. 58 Fourth, the respondents have not adduced any evidence of the documents containing the terms on which the alleged Realside loans secured against the Property were advanced. It would appear from the Realside Security Documents that these documents would include the facility agreement identified in the Registration Deed as between Realside and other parties as borrowers and security providers (including the first respondent) dated 28 February 2019. This facility agreement was amended and restated by a deed dated 30 October 2019 and subsequently amended and restated by a deed said to be dated "on or about 26 November 2020" with an "Effective Date" specified in that deed. 59 Fifth, the absence of relevant documentation is not cured by any probative evidence from Realside and it has not sought to intervene in the proceedings, notwithstanding its alleged security interest in the Property. Little weight can be given, even on an interlocutory basis, to any corroboration sought to be provided by the Realside Letters. The author of the Realside Letters is not identified and the documents can readily be inferred to have been prepared in contemplation of litigation or for the purposes of litigation. Further, I am not satisfied that the conversation that Mr Messing recounts with Mr Nick Nicolaides of Realside, in which he is alleged to have told Mr Messing that if the Caveat remains on the title to the Property "we are not going to allow any further drawdowns on any of the facilities", is of much probative value. Given the potential significance of this evidence to balance of convenience issues, the quality of this hearsay evidence needs to be assessed having regard to and in accordance with s 140 of the Evidence Act 1995 (Cth): Ashby v Commonwealth and Another (No 3) (2012) 206 FCR 444; [2012] FCA 788 at [11] (Rares J). More probative evidence, even in an interlocutory context, would be required before any significant weight could be given to the "no further drawdowns representation" in determining where the balance of convenience might lie. 60 Sixth, the schedules to the Registration Deed record that there are some 11 "security providers" including the first respondent, eight of which had provided real property mortgages to Realside over some 52 properties. There may well be significant marshalling issues in the event that the applicants are ultimately successful in these proceedings that might facilitate a potential recovery by the applicants of the proceeds of the sale of the Property, notwithstanding any security interest that Realside might otherwise be able to establish. 61 Seventh, the nature and extent of the precise relationship between Realside and the first respondent is not presently clear, nor is it apparent what, if any, knowledge Realside might have had of the solvency of the Company at the time it agreed to provide the alleged funding to the first respondent to enable it to complete the Sale Contract. 62 In the circumstances, I am not satisfied that the applicants' interests in the Property, if they are ultimately successful in the causes of action that they advance against the first respondent, will, contrary to the submissions of the respondents, necessarily be subordinate to the interests of Realside. 63 Five other matters are relevant to the balance of convenience. 64 First, I consider that the Liquidator has established the existence of a strong prima facie case that the first respondent has contravened the Act in the respects alleged by the Liquidator. While it is clearly not determinative, I note in this respect that the respondents did not challenge the existence of a serious question to be tried at the interlocutory hearing. 65 Second, the Liquidator has offered to cause the Caveat to be withdrawn to permit the completion of a genuine sale of the Property, provided that the proceeds of sale are paid into Court or into a trust account pending the determination of these proceedings. I note that the Liquidator has previously agreed to withdraw caveats in a cooperative fashion to permit the sale of the other three units on the Site. 66 Third, I am not satisfied that there has been any material delay in the conduct of the liquidation of the Company or the conduct of these proceedings that would provide a sufficient basis for the order extending the operation of the Caveat made by Katzmann J to be vacated. 67 Fourth, I am not satisfied that there is any compelling evidence of any third party interests being affected. Inferences might well be drawn as to the impact of the Caveat on Realside's alleged security interest over the Property, but on the evidence before me on the interlocutory application there appear to be material questions that need to be answered as to the validity of that security. 68 Fifth, the Liquidator has proffered the usual undertaking as to damages and it has not been suggested by the respondents that the undertaking would not be sufficient to protect their interests. 69 In all the circumstances, I am satisfied that the balance of convenience favours the continuation of the Caveat.

Disposition 70 I am satisfied that the applicants have established that the Caveat should be continued and I therefore decline to vacate the order made by Katzmann J on 13 September 2021 extending the operation of the Caveat. I otherwise make orders for the expeditious provision of pleadings to facilitate the efficient determination of the proceedings and for the proceedings to be referred to the National Operations Registrar for allocation to a judge of the Court for case management. I certify that the preceding seventy (70) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Halley.

Corporations Act 2001(Cth)ss 588FB, 588FDA, 588FDB

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