ACN 113 137 397 v Winterbottom

Supreme Court of NSW|2010-04-29|Before: McDougall J, Dougall J

CITATION : ACN 113 137 397 v Winterbottom [2010] NSWSC 421

HEARING DATE(S) : 29/4/10 JURISDICTION : Equity Division

DECISION : Injunction continued until further order; ancillary orders.

Antar v Fairchild Development Pty Ltd (R&M App) [2008] NSWSC 638 CASES CITED : Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57 Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 Lake Eerie Pty Ltd (Receiver and Managers appointed) Ltd v Flair Realty Pty Limited (11 February 1992, unreported; BC 9202405)

ACN 113 137 394 Pty Limited (ACN 113 137 394) (Plaintiff) PARTIES : David John Winterbottom (First Defendant) Martin Madden (Second Defendant) Llerevni Pty Limited (ACN 089 415 145) (Receivers and Managers Appointed) (Third Defendant)

COUNSEL : R E Dubler SC (Plaintiff) A A Henskens (Defendant)

SOLICITORS : Bruce Stewart Dimarco (Plaintiff) Henry Davis York (Defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2010/97255 ACN 113 137 397 PTY LIMITED v DAVID JOHN WINTERBOTTOM

1 HIS HONOUR: Llerevni Pty Limited is the owner of hotel premises at Narrabeen. The first floor stratum of those premises is operated as a hotel accommodation business by the plaintiff. The plaintiff was formerly known as Hotel Sands Pty Limited, and I shall refer to it as "Hotel Sands". The defendants have been appointed by Investec Bank (Australia) Limited ("the bank") as receivers and managers of Llerevni, pursuant to a mortgage from Llerevni to the bank over the hotel premises. On 16 April 2010, the defendants served on Hotel Sands notice that it must vacate the property occupied by it within seven days. Hotel Sands seeks interlocutory and final relief, the effect of which, if granted, would be to preserve for the time being, and confirm ultimately after a final hearing, what it says are its rights in relation to the accommodation business. 2 On 8 December 2009, Llerevni and Hotel Sands entered into what has been called "heads of agreement" with ALH Group (ALH). By that document, ALH offered "to purchase the freehold going concern of the Sands Hotel accommodation". The vendors were stated to be Llerevni, as to the "freehold strata", and Hotel Sands, as to the "business". It appears that if the business was sold as a going concern there would be no liability for GST: a saving in the order of $700,000. Accordingly, the heads of agreement recorded that "the parties agree that the Sands Hotel accommodation is a going concern business and is therefore free of GST". 3 The heads of agreement provided for the preparation and execution of a contract for sale of land. They made no provision for a contract for sale of business. That may perhaps be of minimal relevance given that Llerevni and Hotel Sands executed the heads of agreement which thereby, according to its terms, formed "a legal and binding obligation" on each of them. 4 In order to satisfy the "going concern" requirement, it was apparently considered that Llerevni should grant a lease of the stratum in question to Hotel Sands. A letter of 22 December 2009 from Llerevni's then solicitors to the bank's solicitors forwarded a draft lease for the bank's consideration (its consent to the lease being required pursuant to the terms of the mortgage) and stated in effect that the lease was to be granted to enable the parties to the heads of agreement "to claim the 'going concern' exemption for GST". 5 The bank, Llerevni, and other companies associated with Llerevni, executed a "standstill and facilities amendment agreement" ("the standstill agreement") which bears date 22 December 2009. There was some dispute as to when the standstill agreement was executed, but an email from the bank's solicitors to an associate of Llerevni dated 22 January 2010 states that the bank had just confirmed that it had signed the standstill agreement. On that basis, I think, it is safe to proceed, at least today, on the assumption that the effective date of the standstill agreement is, as on one view the evidence indicates, no later than 22 January 2010, and perhaps as early as the stated date 22 December 2009. 6 The standstill agreement is important because one of the matters that the parties to it had in contemplation was the agreement between Llerevni, Hotel Sands, the bank and ALH on the terms of the heads of agreement. Clause 8.6 of the standstill agreement deals explicitly with the heads of agreement. It reads as follows: 8.6 ( Heads of Agreement ) The Borrower: (a) represents and warrants that the Heads of Agreement is now legal and binding on both the Vendor (as referred to in the Heads of Agreement) and the Purchaser (as referred to in the Heads of Agreement); (b) undertakes to do all the things that the Vendor is required to do under the Heads of Agreement; (c) undertakes to provide all reasonable cooperation and assistance to the purchaser and to otherwise do all things within its power which are necessary or desirable to ensure that the purchase contract contemplated under the Heads of Agreement proceeds to completion (and in this regard the Lender acknowledges that the Borrower will need to enter into and register the Lease as a condition to completion of the purchase contract under the Heads of Agreement and, provided that this will not adversely impact the Lender's position under or in connection with the Existing Facilities, the Lender agrees to provide reasonable cooperation to assist the Borrower in ensuring that the Lease is entered into and registered by 22 January 2010); and (d) undertakes to use its reasonable best endeavours to ensure that the purchase contract contemplated under the Heads of Agreement proceeds to completion as soon as practical after the date on which ALH Board approval is obtained and in any event within 2 weeks of that date. 7 It will be seen that, by clause 8.6(c), the bank agreed, on the conditions stated, to provide reasonable cooperation to assist the making and registration of the "lease". The "lease" is defined in cl 1.1 of the standstill agreement to mean "a lease to be granted by the borrower in favour of the operating entity of the Sands Hotel accommodation, required to be entered into for the purposes of the heads of agreement". 8 It is reasonable to infer that the parties to the standstill agreement had in mind that a draft of that lease had been provided to the bank's solicitors on the very day that at least some of them executed the standstill agreement. 9 A lease in terms that were either identical to, or not materially different from, what had been provided on 22 December 2009, was executed on 4 February 2010. That lease is expressed to be for a term of three years commencing on 1 January 2010, with three further terms of three years available at the option of Hotel Sands as lessee. The starting rent is $120,000 annually, with provision for rent review. It is that document upon which Hotel Sands relies in these proceedings as the foundation of its entitlement to the relief claimed on both an interlocutory and a final basis. 10 I return to the notice to vacate of 16 April 2010 (the date on which the defendants were appointed as receivers and managers). I have referred to its substantive effect already. It is, however, to be noted that in the last paragraph of the notice the defendants stated the following: The receivers provide this notice as agent of Llerevni and not in their personal capacity. The receivers do not adopt the lease and nothing in this letter or any actions of the receivers should be construed as adopting the lease.

11 Mr Dubler of Senior Counsel, who appeared for Hotel Sands, put his client's case for interlocutory relief on four bases. The first two were related. He submitted that the lease was binding as between Llerevni and Hotel Sands and that the actions taken by the defendants in their capacity as Llerevni's agents, could not disclaim, or in effect set aside the effect of, that to which Llerevni was bound. He conceded, I think, that if the bank exercised its rights under the mortgage to take possession of the mortgaged land, then its legal rights as registered mortgagee may well lead to a different analysis. 12 Alternatively, Mr Dubler submitted, the bank had consented to the lease or was estopped from denying that it had consented. 13 In the further alternative, Mr Dubler submitted, the bank was bound to consent and was therefore not in a position through its receivers and managers to take some action which would render that obligation nugatory. 14 Mr Henskens of counsel, who appeared for the defendants, submitted that the receivers had not only the undoubted right, pursuant to the terms of the mortgage, to act as agents of Llerevni, but also the right, pursuant to the terms of the mortgage and their instrument of appointment, to exercise all the rights and powers of the bank in relation to the mortgaged property. Thus, he submitted, they could exercise, or take the benefit of, the bank's statutory and contractual rights, on breach, to possession. 15 Thus, Mr Henskens submitted, it was open to the defendants to evict Hotel Sands, whose rights derived from an unregistered lease that was subsequent in time to registration of the bank's mortgage, from possession of the mortgaged premises. 16 Mr Henskens submitted that the case on actual consent and estoppel was, at the very least, weak. (I put it that way, because Mr Henskens submitted that the evidence was to the effect that I could not conclude that there was any consent, or any basis for finding an estoppel.) Further, Mr Henskens submitted, the bank was required to do no more under clause 8.6 of the standstill agreement than cooperate to the extent that doing so would not adversely impact its position under or in connection with the mortgage, and that it was clear that the bank had come to the view that to consent, and thereafter to stand by and allow Hotel Sands to operate the accommodation business, would adversely impact its interests. 17 More broadly, Mr Henskens submitted that it was clear even on the evidence available to date that the lease was no more than a sham. 18 I start with the notice actually given which, as I have indicated, was in terms given by the defendants in their capacity as agents of Llerevni. 19 In Antar v Fairchild Development Pty Ltd (R&M App) [2008] NSWSC 638, Palmer J pointed out at [11] that even if s 53(4) of the Real Property Act 1900 (NSW) operated as between a lessee under an unregistered lease and a prior registered mortgagee, that had no impact "on the rights and obligations between the lessor and the lessee themselves". His Honour noted that a lease entered into without the requisite consent of the mortgagee could not prevent the mortgagee from evicting the lessee so as to exercise its power of sale with vacant possession. But even in those circumstances, his Honour concluded, "the lease would be enforceable by the lessee against the lessor and against any one else other than the mortgagee." His Honour referred to authority which, in my view, makes good the propositions that I have quoted. 20 Mr Henskens sought to distinguish what his Honour had said on the basis that that case was not concerned with the exercise of a power of sale of the mortgaged property, but, rather, with an attempt by the receivers to sell other property of the mortgagor, for the purpose of which, they said, they needed vacant possession. That does not seem to me to matter. It does not have any impact on the proposition that as between lessor and lessee, a lease may be enforceable even though it is not enforceable against a prior registered mortgagee from the lessor. 21 In this case, if the bank had itself gone into possession, or had gone into possession through the defendants, and if the defendants had purported to exercise the bank's rights to possession, there could be no case for injunctive relief. But, as Mr Dubler submitted no doubt for good practical and legal reasons, the defendants chose to act not as the bank in possession, but as agent of Llerevni. It seems to me that if (as Palmer J said in Antar was the case) Llerevni could not evict Hotel Sands, then its agents, the receivers, acting in that capacity, could not do so. For those reasons, it seems to me, the notice to vacate given on 16 April 2010 is not effective in law as between Llerevni (or the defendants in their capacity as its agents) and Hotel Sands. 22 Mr Henskens submitted, relying on a decision of the Full Court of the Supreme Court of Queensland, that the defendants had not only their powers as agents of Llerevni but also their powers as representatives of the bank, and that their powers under the former head could be exercised in aid of their powers under the latter head. The decision was Lake Eerie Pty Ltd (Receiver and Managers appointed) Ltd v Flair Realty Pty Limited (11 February 1992, unreported; BC 9202405). That case undoubtedly supports the point of principle for which Mr Henskens contended. However, the receivers in that case were not arguing the point of entitlement to possession as against an unregistered lessee, but, rather, the rights of that unregistered lessee, pursuant to a deed of assignment, to receive the rents of the property in effect as agent of the lessor. McPherson JA made this plain at BC 3, 4. To my mind, that says nothing in the particular factual circumstance with which I am concerned. 23 Accordingly, I conclude that there has been made out at least a case for the grant of limited relief. I shall return to the relevant discretionary considerations, but before doing so, I will deal with the other ways in which the case was put. 24 The case for consent was said to depend on some documents emanating from the bank's solicitors in January 2010. The starting point is the letter of 22 December 2009, seeking consent, to which I have referred. The next document appears to be an email of 19 January 2010 from the bank's solicitors to an associate of Llerevni noting that, under the standstill agreement, the bank "agreed to provide reasonable cooperation to ensure that the proposed lease is registered by 22 January 2010". It is clear from that email that the bank acknowledged its obligations under cl 8.6. I do not think that it can be said, on a reasonable reading of that email, that the bank had indicated that it did consent. 25 The other email of the same date is the one to which I have referred, of 22 January 2010, confirming that the bank had executed the standstill agreement. That does not seem to me to add anything to the previous email. Nor, in my view, is anything added to it by the fact that five days later, on 27 January 2010, the bank's solicitors distributed a copy of the standstill agreement executed by the bank. 26 It is also to be noted that on 4 February 2010, being the date on which the lease was executed, Llerevni's then solicitors wrote by email to the bank's solicitors referring to the letter of 22 December 2009 and stating: Our client considers it reasonable to require the bank to consent to the said lease in order to progress the sale to ALH. We note the document is currently with your client's in-house counsel. Considering the document was forwarded to you over a month ago, we do not consider it unreasonable to request confirmation of the consent.

27 A request for "confirmation of the consent" could be thought to indicate some understanding that at least informal consent had been given. However, the opening words, by which Llerevni required the bank to consent, are not consistent with any such interpretation. 28 The reply to that email was not sent until 15 February 2010, and hence may be thought to be of limited relevance. Nonetheless, it made it clear that the bank had not, at least in its view, given consent by that date. 29 Mr Henskens submitted that even if, contrary to the terms of the mortgage, consent other than in writing, of some formal nature, were sufficient then, nonetheless, there was no evidence of consent that could be distilled from the documents to which I have referred, even viewed against the background spelled out in the affidavit evidence. Mr Dubler stressed that the question of whether or not consent had been given was one of fact and that the material to which I have referred, construed against the relevant background, raised a serious question to be tried. 30 In my view, the case that the bank has given consent is at best weak; I would be inclined to say, very weak. I do not think that the documents on which reliance was placed could properly be read as indicating that the bank had given consent. As I have said, insofar as they relate to the standstill agreement, they do no more than confirm that the bank was aware of, and intended to honour, its obligations under that agreement. There was no unconditional obligation on the bank to give that consent. It is clear, from the correspondence to which I have referred, that Llerevni at least, through its lawyers, understood this. 31 Hotel Sands appears to suggest that it had a somewhat different understanding. Insofar as that understanding is based on the material to which I have referred, I do not regard it as capable of giving rise, on proper consideration, to the view that consent had in fact been given. 32 Those matters are relevant also to the case based on estoppel. It is not clear what is the reliance alleged. Undoubtedly, the lease was executed on 4 February 2010. It remains the case, that on that date, the solicitor for Llerevni appears to have thought that the consent had not been given, and that it was reasonable to require that it should be given. It is difficult to see how, in those circumstances, the lease could have been executed under the reasonable belief that the bank had given its consent. 33 I accept, of course, that much of the material to which I have referred relates to Llerevni, and that it is the lessee from Llerevni, Hotel Sands, that is asserting consent or estoppel. It is, however, to be noted that the principals of the two companies are father and son and that there is a substantial amount of evidence to suggest that the transaction in relation to the accommodation business was not an arms'-length transaction. For example, the financial report of Hotel Sands for the year ended 30 June 2009 discloses that it had paid no rent at all for the previous financial year, although it had operated the business for some six or seven months of that year. Further, although that report does record the payment of rent for the financial year to which it relates, that was a rental of $300,000, not $120,000. Other accounting records show that the rent was "paid" by journal entry on 30 June 2009: hardly something indicative of arms'-length dealing. Further, for the following financial year (i.e., the current one), those detailed financial records disclose that only three instalments of rent, each of $10,000, have been paid: again, by journal entry. 34 Whilst I do not find, as Mr Henskens submitted, that the transaction is a sham, I am not prepared to find that it is an arms'-length transaction. That is perhaps something of a digression; but it seems to me that the closeness of the relationship between Llerevni and Hotel Sands and their principals provides some reason for thinking that what was known to one, might be known to both. 35 The final way in which the case was put was based on the proposition that in any event the bank was bound to consent. If it was bound to do anything, it was bound to cooperate to achieve registration of the lease (by a date which was effectively impossible to achieve at the date Llerevni appears to have executed the standstill agreement) provided that the bank did not consider that to do so would have an adverse impact on its proper interests. It is clear that the bank thinks that this may be the case. In my view, it is open to the bank to come to that conclusion. For example, if the lease is executed and registered, the bank will be stuck with a lease for three years with three further options for renewal, each of three years, at a rental of $120,000 per anum. There is some evidence, in a valuation that was procured for the purpose of apportioning the consideration for the sale to ALH between Llerevni and Hotel Sands, that a market rent might be as much as $553,000 per annum. If that is the case - and I note that the document in question was one put forward by Hotel Sands in its own evidence - the lease that has been signed could be seen to be uncommercial in the extreme. If the rent being received by Llerevni is not the full market value of the property, then it is obvious that leases for periods totalling 12 years will have an adverse effect on the realisable value of the property in the hands of the bank as mortgagee. 36 Thus, I conclude, the only basis on which Hotel Sands has made out an entitlement to relief is that first considered: the fact that the defendants, acting as agent of Llerevni, could not do that which Llerevni itself could not do. 37 It may be correct to say that the bank could rectify this position in the near future by going into possession itself, either directly or by appointing the defendants to receive the rents and profits of the property. If it did so, then its exercise of a right under the mortgage would undoubtedly enable it to obtain vacant possession as against the unregistered lessee Hotel Sands. But in circumstances where the bank has chosen to act the way it did, and whether for it to act in other ways would mean that it attracted, among other things, legal obligations relating to its occupation and use of the mortgaged property, I do not think that relief should be refused simply on the grounds that the bank might take some further action. 38 Mr Henskens submitted that the effect of leaving Hotel Sands in occupation might be that the receivers lost the benefit of the sale to ALH. In circumstances where, as he pointed out, the net assets of Hotel Sands as at 30 June 2009 were of the order of $80,000, he submitted that it was not good for the obvious damage that the defendants might suffer if they lost the benefit of the sale. I accept that this is so, but the strength of the undertaking as to damages is but one thing to consider in the matrix in deciding whether or not to grant relief. As Gummow and Hayne JJ said in Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57 at 84 [72], there are particular considerations which require to be attended to where the grant or refusal of an interlocutory injunction would in effect dispose of the action in favour of the successful party. Their Honours referred to the judgment of McLelland J in Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533. As his Honour pointed out at 535, the Court's obligation was to do what was best calculated to do justice between the parties in the circumstances of the particular case, until the uncertain entitlement to final relief could be resolved. The Court should bear in mind the consequences of granting or withholding relief. In those circumstances, as Gummow and Hayne JJ pointed out, an assessment of the strength of the case required to justify the grant of relief necessarily depended, among other things, on the consequences of refusing relief. It seems to me to follow almost axiomatically from that that where the consequences of refusing relief are very severe, and where the case for relief is strong, the fact that the undertaking as to damages, if called upon, may be insufficient, is a factor of less significance than otherwise it might be. The lack of likelihood of the undertaking's being called on diminishes the impact of its insufficiency if called on. 39 For those reasons, I conclude that Hotel Sands is entitled to a measure of interlocutory relief. It should not, however, be granted in terms of prayer 7 of the summons, as Mr Dubler claimed. That is because to grant relief in those terms may well prevent the bank from taking other action properly open to it, if on a review of the situation it decides to take some other step in aid of its undoubted legal rights under its mortgage. 40 For those reasons, I order that, upon the plaintiff by senior counsel giving to the Court the usual undertaking as to damages, the defendants and each of them be restrained from by themselves, their servants or agents or otherwise acting upon or seeking to exercise any right arising from their notice to the plaintiff dated 16 April 2010:

(1) I order that the injunction continue until the further order of the Court. (2) I reserve liberty to apply on 24 hours' notice. (3) I order that the costs of the application be costs in the proceedings. (4) I direct the parties to bring in short minutes of order by a time which I will fix in discussions with counsel for the further conduct of these proceedings. (5) I order that the exhibits be retained, although exhibit DX6 may be released into the custody of Mr Henskens and his instructing solicitor for the purpose of photocopying returned on the usual undertaking as to safe custody.

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