Action Cycles Pty Ltd (recs & mgrs apptd) & Ors v Ross & Ors [2011] VSCA 411

Court of Appeal (Vic)|2011-12-01|Before: Ferguson J, Mr J, Nettle JA

PRACTICE AND PROCEDURE - Stay pending appeal - Interlocutory appeal - Application for stay of order dissolving interlocutory injunction to restrain receivers from selling mortgaged properties pending hearing and determination of action - Serious question to be tried - Interest - Dispute as to applicable interest rate - Dispute as to date interest payments due for payment - Balance of convenience - Whether material change in circumstances so exceptional as to warrant discharge of injunction - Delay - Whether delay coming to trial caused by respondent - Injunction granted.

2 The dispute relates to a loan of some $1.5 million made by the third respondent, Gippsreal, as lender, to the first applicant, Action Cycles Pty Ltd. Action Cycles signed the loan agreement on or about 3 February 2010. It was for a term of one year. Settlement of the loan occurred on 27 April 2010. Interest was entirely prepaid in advance until 27 April 2011. The security for the loan was a fixed and floating charge over the assets and undertaking of Action Cycles; a mortgage of a development property owned by Action Cycles at 3435 Stradbroke Avenue, Cowes (the Cowes property); and personal guarantees by the second and third applicants, Mr and Mrs Gellie.

3 In about April 2011, the loan was renewed for a further year but at that time with interest payable quarterly. Gippsreal allege that interest payments under the renewed loan are due on the 20th day of the relevant month whereas the applicants maintain that interest payments under the loan are due on the 27th day of the relevant month.

4 When the applicants did not make a quarterly interest payment which the respondents allege was due by 20 July 2011, on 21 July 2011 Gippsreal appointed the first and second respondents (the receivers) as receivers and managers over the assets of Action Cycles, including a business involved in the sale of bicycles and the associated equipment and the Cowes property. On the same day, Gippsreal issued default notices specifying that Action Cycles had defaulted by failing to make the quarterly interest payment by 20 July 2011 and giving seven days notice to remedy the default.

5 On 26 July 2011 Action Cycles paid Gippsreal the sum of $41,796.46, but there remains a dispute as to whether that covered the amount of the arrears then due.

6 The applicants commenced the proceeding against the respondents by way of originating process dated 22 August 2011. By the originating process, they sought inter alia an interlocutory injunction to restrain the respondents from selling the Cowes property and Action Cycles' cycling business and three further properties located in Beaumaris, Victoria, owned by Mr and Ms Gellie (the Beaumaris properties) which had been mortgaged or purportedly mortgaged to Gippsreal as further security for the loan.

7 The application for interlocutory injunction was heard and determined by a judge of the Commercial and Equity Division on 25 August 2011. Upon the applicants giving the usual undertaking as to damages, her Honour granted an injunction restraining the respondents from selling or taking any steps to sell the Cowes property or the Beaumaris properties or Action Cycles' business, on condition that the applicants make certain specified payments to Gippsreal (representing the quarterly interest payments said to be due at a default rate of 18.75 per cent). Her Honour also listed the matter for trial on 7 November 2011 and, to that end, made orders and directions for the applicants to serve an amended statement of claim by 3 October 2011 and the respondents to serve their defences by 10 October 2011.

8 In breach of the judge's orders, the third respondent did not deliver its defence by 10 October 2011 with the result that discovery was delayed and the matter could not proceed to trial on 7 November 2011. By consent, therefore, the time for the delivery of the defence was varied to 7 November 2011 but, in further breach of the judge's order, the third respondent failed to deliver its defence by that day. Instead, on 7 November 2011, the respondents applied to have the injunction discharged, arguing that, because the trial could not begin on 7 November 2011, there had been a material change in circumstances which was so exceptional as to warrant the discharge of the injunction.[1]

9 Apparently the judge was persuaded by the argument. Her Honour accepted that the third respondent's failure to deliver its defence within time was due more to the complexities of the proceeding than to any fault on the part of the respondents and, in any event, that the respondents had not been responsible for any more than one month of the delay until May 2012 when the proceeding could be refixed for trial.

10 Her Honour was persuaded, too, that the balance of convenience had thus swung firmly in favour of the respondents: first, upon the basis that, unless the mortgage premises were sold during the coming summer holiday period, they might not realise optimum value and thus enough to cover the amount of the mortgage debt alleged to be due; and, secondly, because, although the applicants had established that there was a serious question to be tried, there was no reason to suppose that, if they were successful, damages would not provide them with an adequate remedy.

11 The test for stay is clear. It is dependent upon the applicant establishing exceptional circumstances.[2] In this case the applicants rely on the circumstance that unless a stay is granted, their appeal will be rendered nugatory and, as they contend, the judgment below is attended by manifest error.

12 It is conceded, as it must be, that, unless a stay is granted, the appeal will be rendered nugatory. But the respondents contend that the applicants' prospects of success on appeal are so slight as to render the application untenable.

13 In my view, it is reasonably arguable that the judge's determination is attended by sufficient doubt to warrant the relief which is sought.

14 To begin with, it seems to me seriously to be arguable that the respondents are substantially to blame for the delay of the trial until May 2012. Complex though the issues may be, they are common enough in commercial litigation of this kind, and certainly such as to which competent counsel should be able to obtain instructions and plead well within a week or so if not overnight.

15 Secondly, although it remains to be decided, there are distinct indications in the correspondence which passed between solicitors when the third respondent first failed to deliver its defence within time, that the third respondent was either consciously going slow or approaching its responsibility with a degree of insouciance which should be regarded as intolerable. It goes without saying that a litigant, especially a money lending litigant like the third respondent, should not be permitted to profit or gather advantage by dint of its own disobedience of the Court's directions, even if the delay which might thereby be caused is in part the consequence of the limited resources available to the Court.

16 Thirdly, apart from the fact that the applicants purchased the mortgaged premises during an Easter vacation, which the judge appears to have thought significant, and an ipse dixit in one of the valuations in evidence to the effect that the coming Christmas period would be an optimum time at which to sell, there was no evidence that the mortgaged premises (which is development land, not a beach house) would be likely to realise a greater price during the summer holidays than in the autumn immediately after trial.

17 Fourthly, when the injunction was first granted, it was upon the applicants giving the usual undertaking as to damages and, as the evidence stands, there is nothing to suggest that they lack the wherewithal to make good on their undertaking. In those circumstances, there is little reason to suppose that delay in the sale of the mortgaged premises would expose the respondents to an appreciable risk of loss.

18 Fifthly, as further security for the respondents in the event that they are successful, the judge conditioned the injunction on the applicants paying interest until the hearing and determination of the action, at the claimed penal interest rate of 18.75 per cent, notwithstanding that the applicants dispute that they are in default of the mortgage and that there ever was any agreement reached as to the penal rate. They contend that the applicable rate of interest is the ordinary rate of interest of 10.75 per cent.

19 As a result, the applicants have been required to pay an additional $90,000 in interest in advance of the trial, even though it remains to be decided whether such a penalty is due; and, as the evidence stands, they are continuing to pay interest at that rate. There was, therefore, very little, if any, basis for the judge's assumption that, unless the mortgaged premises were sold immediately or at least during the coming summer holiday, default costs would keep rising to the point where proceeds from a subsequent realisation of the mortgaged premises would be insufficient to cover the amount which is due.

20 In the course of oral argument before this Court this morning, the respondents contended that they were entitled to advance a further or alternative argument not in terms put or considered below, that there was not a serious question to be tried as to whether the respondents were entitled to enforce the security. They contended that, although it may be that the applicants dispute the entitlement of the respondents to rely upon Action Cycles' cessation of business as an event of default, the applicants have not put in issue the respondents' entitlement to rely upon the applicants' failure to pay two months' rent, since paid, and alleged failure to pay an insurance obligation claimed by the landlord of Action Cycles' premises, which the applicants dispute. It mattered not, it was contended, that those alleged events of default had not been identified and were not relied upon at the time of the respondents purporting to enforce the security. It was sufficient, it was said, that those events occurred and could be called in aid after the event as a justification of the respondents' entitlement to enforce the security. The respondents relied upon the principles of ex post facto rationalisation of contractual rescission which were essayed by Dixon J in Shepherd v Felt and Textiles of Australia Ltd[3] and by Brooking J in Nund v McWaters.[4]

21 Further, it was contended, because there was no dispute as to the entitlement of the respondents to rely upon those events as events of default, and because there was no attack made upon the essential validity of the security, the case did not come within any of the established exceptions to the rule in Inglis v Commonwealth Trading Bank of Australia[5] and so, therefore, injunction would not go to restrain enforcement unless the applicants paid into Court the whole of the secured debt alleged by the respondents to be due.

22 I reject that argument for three reasons. First, it was always to be expected that the applicants would put in issue the respondents' entitlement to rely upon the latterly asserted events of default, just as the applicants put in issue from the outset the respondents' entitlement to rely upon the event of default on which the respondents first purported to rely. And the applicants have now done so in their reply in defence to counterclaim which it is said will be filed this day.

23 Secondly, the rule in Inglis' case allows in terms that, where a mortgage debt is disputed, injunction may go to restrain enforcement pending the trial of the action, and here it is disputed that anything is at present due. The applicants' case is that the respondents are precluded from contending that there has been an event of default and thus are precluded from denying that all sums for which applicants are liable under the mortgage have thus far been paid in time.

24 Thirdly, even if some part of the mortgage debt is immediately due, which remains to be established, the cases show that, where there is a serious challenge to the amount of the debt and the entitlement of the mortgagee to enforce the security, the Court should endeavour to mould an order (as the judge endeavoured below when first she granted the injunction) so as to ensure adequate protection to the mortgagee and otherwise to do justice between the parties during the period pending final hearing.[6]

25 Counsel for the respondents contended that, even if that be so, the amount alleged at present to be due is some $2.065 million and, on a conservative estimate of the value of the Cowes property at around $1.72 million, there is a potential shortfall of around $300,000. In those circumstances, it was submitted, authority and principle combined to require as a condition of injunctive relief that any undertaking as to damages be adequately secured. And in turn it followed, it was submitted, that the applicants should be required as a condition of reinvigorating the injunctive relief which they seek, that they pay into court a sum of, say, $400,000 to abide the trial of the proceeding or, alternatively, provide additional security in the same amount.

26 I do not accept that contention either. An applicant for injunctive relief ought not be required to provide security for an undertaking as to damages unless it is apparent that the applicant may lack the resources with which to make good the undertaking. Here the undisputed evidence before the judge below was that, in addition to the Cowes property, the applicants have net assets of value exceeding $5 million. Even allowing that some of those assets are personal chattels, about the value of which one might take leave to doubt in the present economic climate, there appears to be an abundance of resources.

27 Counsel for the respondents contended that, as secured creditors, the respondents should not be left in any worse position than if they were free immediately to enforce their security, and that required no less than at least an additional $400,000 be provided by way of security.

28 In my view the answer to that is that the respondents or at least the third respondent already claims to have security by way of second mortgage over the Beaumaris properties and, according to the evidence, the net equity in those exceeds $5 million.

29 Counsel for the respondents contended that those additional securities ought not be taken into account because the applicants dispute their validity. But I reject that contention too. If the respondents are correct about the amount which is due, and about their entitlement to enforce the securities, it must be because the applicants are wrong in their contentions about what is due and about the validity of the securities. On the other hand, if the applicants are found to be correct in their claims, it will mean that the amount which is due is within or very close to the value of the principal security and that the respondents are not yet entitled to enforce it. More succinctly, if the respondents are correct in their claims, they will have any amount of security from which to recover what is due and if they are wrong in their claims, they will not have need of or any entitlement to additional security.

30 Finally, it appears to me seriously to be arguable that the judge erred in her assessment of the balance of convenience and the accuracy of damages. For at least, as at present advised, I think that in a matter such as this the proper test as to the balance of convenience is not so much whether damages would provide the applicants with an adequate remedy but rather whether it is just in all the circumstances that the applicants should be confined to their remedy in damages.[7]

31 In circumstances where it has been found that the applicants' cause of action raises a serious question to be tried; where the delay in the matter coming to trial is at least arguably the product of the third respondent's recalcitrance; where the applicants have been subjected to the provision of an undertaking as to damages and paid more than $90,000 which they contend is not due; and it is apparent that pro tem the respondents are adequately secured, I do not consider that it is just that

the applicants be confined to a remedy in damages. Apart from anything else, the assessment and proof of the full extent of loss occasioned by any unwarranted enforcement of the mortgage is likely to prove complex and expensive, if not to a large extent intractable.

32 So to say is not to deny the possibility that there might yet be a sufficient change in circumstances to warrant the discharge of the injunction. If, for example, the applicants were to fail to meet their continuing obligations to make payments in accordance with the judge's orders, or if evidence (of a kind which satisfies the requirements for fresh evidence for the purpose of appeal) were to emerge that the applicants lack the wherewithal to satisfy their undertaking, or if the principal and other undisputed amounts of the loan were not repaid timeously, there might then be basis for the respondents to apply again to have the injunction dissolved or, more appropriately, to apply to this court to have the stay of dissolution annulled. But pending any developments of that kind, I would grant the stay which is sought.

33 That said, it seems to me that, because in this case we are concerned with an appeal against the judge's dissolution of stay rather than with the trial of the action, it would be more convenient and more efficacious to treat the application for stay of dissolution of injunction as one for injunction pending appeal and to grant an injunction mutatis mutandis on the terms ordered by the judge but limited in time until the hearing and determination of the appeal or further order.

35 The orders that the Court proposes are as follows:

That there be an undertaking given by the applicant, the usual undertaking as to damages.
That until the hearing and determination of the appeal or further order, the respondents and each of them be restrained from selling or taking any step to sell the business or assets of the first applicant or the land comprised in Certificates of Title Vol. 10951 Folio 628, Vol. 10871 Folio 945, Vol. 10871 Folio 946, Vol. 10871 Folio 949 or Vol. 04254 Folio 726 owned by the applicants or some of them on condition that the applicants pay the sum of $70,262.50 to the third respondent by 4 pm on 20 January 2012 being interest at the alleged higher rate as claimed by the third respondent in respect of the second quarterly interest payment due in January 2012.

3. That the costs of the application be costs in the appeal.

37 We shall make a further order that the appeal be referred to Efthim AsJ for a mediation to take place at his Honour's earliest convenience and that the solicitor for the applicants, after consultation with other parties, deliver to him a copy of our orders, all the pleadings and other relevant information and take and do all such steps and documents and things as may be necessary to achieve the mediation and his Honour to report back once it has been completed.

39 Upon the applicants by their counsel giving the usual undertaking as to damages, the Court orders as follows:

1 Until the hearing and determination of the appeal or further order, the respondents and each of them be restrained from selling or taking any step to sell the business or assets of the first applicant or the land comprised in Certificate of Title Vol. 10951 Folio 628, on condition that the applicants pay the sum of $70,262.50 to the third respondent by 4 pm on 20 January 2012, being interest at the alleged higher rate as claimed by the third respondent in respect of the second quarterly interest payment due in January 2012.

2. The appeal shall be referred to Efthim AsJ for mediation to take place at his Honour's earliest convenience.

3. Subject to the terms of the order, the solicitor for the applicants shall, after consultation with all other parties, deliver to his Honour a copy of this order, all pleadings, including requests for further and better particulars, a copy of all other relevant information and take and do all such steps as may be necessary to ensure that the mediation commences as soon as practicable.

4. The mediation shall be attended by those persons who have the ultimate responsibility for deciding whether to settle the dispute and the terms of any settlement with lawyers who have ultimate responsibility to advise the parties in relation to the dispute and its settlement.

5. Upon completion of the mediation, Efthim AsJ shall report back to the Court as to the outcome of the mediation.

6. The costs of this application shall be costs in the appeal.

[1] See and compare Paras v Public Service Body Head of the Department of Infrastructure (No 2) [2006] FCA 652; Brimaud v Honeysett Instant Print Pty Ltd (1988) 217 ALR 44.

[2] Cellante v G Kallis Investments Pty Ltd [1991] VicRp 99; [1991] 2 VR 653; Break Fast Investments Pty Ltd v PCH Melbourne Ltd [2007] VSCA 118, [6].

[6] Glandore Pty Ltd v Elders Finance and Investment Company Limited [1984] FCA 407; [1984] 4 FCR 130, 135; AED Oil Ltd v Puffin FPSO Ltd [2011] VSC 60, [54].

[7] State Transport Authority v Apex Quarries Ltd [1988] VicRp 26; [1988] VR 187, 193; Evans Marshall & Co Ltd v Bertola SA [1973] 1 WLR 349, 379; Meagher, Gummow and Lehane's equity: doctrines and remedies, 4th Ed, [20,030].

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Judgment (54 paragraphs)

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