Almona Pty Ltd v Parklea Corporation Pty Ltd

ex tempore Judgment

1. HER HONOUR: This is an application for directions under section 424 of the Corporations Act 2001 (Cth). The application is made by AMAL Security Services Pty Ltd in its capacity as trustee of the i-Prosperity (Rhodes) Security Trust. AMAL is presently mortgagee in possession of a development site in Rhodes, which it proposes to sell.
2. AMAL seeks a direction that entry into, and completion of, a contract for sale between AMAL and The Genesis Capital Holding Pty Ltd as trustee for The Genesis Unit Trust is not unlawful solely by the reason of the relationship between, on the one hand, Genesis and, on the other hand, any of AMAL, Evolution Trustees Limited as trustee for the Canada Bay Opportunities Fund or Metrics Credit Partners Pty Ltd (Metrics).
3. The reason the direction is sought is that, by reason of the complex structure by which the land is presently owned and financed, changes to those arrangements since AMAL went into possession of the land and the proposed financing arrangements for the incoming purchaser, there are interconnections between those who own the land, those who finance the current owner and those who will own and finance the land after the sale has been completed.
4. AMAL relied on the evidence of its solicitor, Caitlin Murray, a partner of MinterEllison, the Head of Fund Services at AMAL, John O'Connell and the managing partner of Metrics, Andrew Lockhart.

Directions under section 424

1. Before turning to the detail of this transaction, it is timely to review the principles concerning directions under section 424, which are outlined in AMAL's submissions. Section 424(1) of the Corporations Act provides: Controller may apply to Court (1) A controller of property of a corporation may apply to the Court for directions in relation to any matter arising in connection with the performance or exercise of any of the controller's functions and powers as controller. A controller of property includes a mortgagee in possession: section 9, Corporations Act; Austin & Black's Annotations to the Corporations Act at [1.9].
2. The power to give directions under section 424 is a broad one, intended to facilitate the work of controllers and should be interpreted as widely as possible to give effect to that intention: In the matter of Direct Acceptance Corporation Ltd (Receiver Appointed) (in Liquidation) [2019] NSWSC 395; (2019) 136 ACSR 245 per Ward CJ in Eq at [35], citing Korda v Silkchime Pty Ltd [2010] WASC 155; (2010) 243 FLR 269 at [30], In the matter of Mirabela Nickel Ltd (receivers and managers appointed) (in liq); ex parte Madden [2018] WASC 335 at [86] and In the matter of Odessa Promotions Pty Ltd (in liq) (1979) CLC 40-523.
3. A controller is entitled to apply to the Court for directions as to whether he or she may lawfully take a proposed course of action: In the matter of North City Developments Pty Ltd; Ex Parte Walker (1990) 20 NSWLR 286 at 290; In the matter of CopperCo Ltd; Ex Parte Doran [2009] WASC 170 at [30]. The nature and scope of available directions was summarised by Vaughan J in Mirabela Nickel at [89]: (footnotes omitted) … (1) The directions that may be provided are a form of personal guidance or advice; they articulate the approach the controller is justified in taking having regard to the known circumstances and relevant legal principles. (2) The power is to give 'directions' in relation to the matters identified in s 424(1). The relevant matters are described in broad and general terms, especially given the words 'in connection with'. So too the words 'in relation to' are of 'the widest import'. Thus the permissible subject matter of a direction will include the actions of the controller but is not confined to such actions. It will include where: …the controller has to consider the appropriate action to take in undertaking functions or exercising powers and a third party is claiming that a right, interest or entitlement of the third party must be acknowledged or respected in exercising those functions or powers… (3) The circumstance that the controller is a privately appointed receiver and manager is not relevant to the question whether to make directions. That said, receivers should not be unduly nervous and come to court where advice is not needed. (4) There must be an issue calling for the exercise of legal judgment, ie a legal issue of substance or procedure or an issue of power, propriety or reasonableness. It must be more than a business or commercial decision. However, the fact that a legal question may have significant commercial consequences does not make the giving of directions inappropriate. The court does not give advice as to how the controller should act but rather whether there is legal justification to so act. (5) Once the jurisdictional requirement is satisfied the court has a discretion whether to provide advice of the kind contemplated by the statutory provision. (6) The making of directions is not an adjudication. It will not be determinative of parties' rights. The court is not determining the rights of persons and has no power to provide directions that would have that consequence. …
4. It may be particularly appropriate for directions to be sought where a controller intends to sell property to a 'close associate'. While there is no breach of duty per se by a controller selling to a related entity of itself or its appointor, it is important that the sale is "a truly independent bargain" between the parties: Almona Pty Ltd v Parklea Corporation Pty Ltd [2021] NSWCA 171 per Basten JA at [108]-[110]; Bathurst CJ at [54]. If such a transaction is sought to be impugned, a heavy onus lies on the mortgagee to show that it acted properly, in good faith and used its best endeavours to obtain the best price reasonably obtainable for the mortgaged property: Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 at 1355; Almona Pty Ltd v Parklea Corporation Pty Ltd [2019] NSWSC 1868 at [457]; Benzlaw & Associates Pty Ltd v Medi-Aid Centre Foundation Ltd [2007] QSC 233 at [147]; Australian & New Zealand Banking Group Ltd v Bangadilly Pastoral Co Pty Ltd (1978) 139 CLR 195 at 228-229; [1978] HCA 21; In the matter of One.Tel Networks Holdings Pty Ltd [2001] NSWSC 1065; (2001) 40 ACSR 83 per Austin J at [50]-[53].
5. There have been a number of cases where a controller has sought directions from the Court with respect to a sale to an associate or an entity that may be seen as having some connection with itself. As Young J explained in White v Huxtable [2006] FCA 559; (2006) 232 ALR 388, "The cases make it clear, however, that it may be appropriate to make a direction to the effect that a particular transaction is not unlawful solely because the counter-party to the transaction is a company associated with the entity which appointed the receivers and managers": at [36].
6. Finally, it is important to note that directions sought under section 424 do not involve the Court placing its imprimatur on a particular transaction, but are simply to say that a particular transaction is not unlawful solely because of the associations that may exist: Deputy Commissioner of Taxation v Best and Less (Wollongong) Pty Ltd (1992) 7 ACSR 245 at 247; Franbridge Pty Ltd v Societé & Generale Finance Corporation Pty Ltd (1994) 14 ACSR 304; In the matter of Actwane Pty Ltd [2002] NSWSC 572; (2002) 42 ACSR 307 at [13]; White v Huxtable at [35]; In the matter of Grand Orchid 21 Pty Ltd [2020] FCA 35 per Stewart J at [7]-[8].

Connection between vendor and purchaser

1. Turning firstly to the relationships between the current owner of the land and the incoming purchaser, the registered proprietor of the land is i-Prosperity Waterside Rhodes Pty Ltd (Controller Appointed) as trustee for the i-Prosperity Waterside Rhodes Unit Trust. Xiaolu (Belinda) Li is a director of that company. David Hetao Gong is a shareholder.
2. The registered proprietor forms part of the i-Prosperity group of companies, many of which are in external administration. The registered proprietor is not itself in external administration, save to the extent that AMAL is now mortgagee in possession of the land.
3. Through a trust structure, the details of which it is not presently necessary to set out, a company associated with Mr Gong, Sino Rhodes Pty Ltd, holds a 49.5% interest in the i-Prosperity Waterside Rhodes Unit Trust. Further, a company associated with Ms Li, 80 Hou Pty Ltd, has a 17.13% interest in the trust.
4. The purchaser under the contract for sale of land is Genesis. Mr Gong's wife, Xueyan (Daisy) Li is the director and secretary of Genesis. The shareholders of Genesis are Mr Gong's company, Sino PT Pty Ltd, and Belinda Li's company, Forte LXL Family Pty Ltd. These companies hold comparable units in The Genesis Unit Trust.
5. Thus, persons associated with the proposed purchaser also presently have an interest, through a trust structure, in the registered proprietor of the land.

Connection between lender and purchaser

1. Mr Gong has, over time, become associated with the lender for the development and land.
2. Initially, the registered proprietor borrowed money from Perpetual Corporate Trust Ltd as custodian for the Metrics Credit Partners Secured Private Debt Fund. In 2019, the lender and registered proprietor executed a syndicated facility agreement, for which the land was security. Under the facility agreement, Metrics was appointed as agent for the financiers, while AMAL was appointed as security trustee.
3. In addition, a security trust deed was executed appointing AMAL as security trustee for the securities granted to secure the obligations of the registered proprietor under the facility agreement. A mortgage was registered over the land by AMAL as first registered mortgagee.
4. Under a suite of transaction and security documents, Mr Gong and Belinda Li also gave guarantees for the facility. Belinda Li's company, 80 Hou, is also a subordinated creditor ranking behind AMAL's security. Other parties have, or have asserted, an interest in the land but there is no suggestion that any such interests have priority over AMAL as first registered mortgagee.
5. In addition to the finance provided in respect of this site, Metrics has earlier advanced funding for three projects associated with Belinda Li and her company, Forte LXL Family, between April 2018 and June 2019. These facilities have been repaid in full. Metrics does not appear to have had any further dealings with Ms Li since June 2019, until recent events to which I will shortly return.
6. Metrics has not had any previous financing arrangements with Mr Gong or his companies, although Mr Gong had previously requested finance in relation to a separate property development, which did not proceed.
7. The registered proprietor fell into default under the facility agreement in September 2020. A notice of default was issued. On 2 October 2020, Metrics (being appointed under the facility agreement as the agent for the financiers) issued a request to potential selling agents for proposals in respect of the land. A number of proposals were received, including an unsolicited proposal.
8. On 8 October 2020, AMAL issued a notice under section 57(2)(b) of the Real Property Act 1900 (NSW), which expired before the default was remedied. On 16 October 2020, AMAL served demands on the registered proprietor and guarantors and entered into possession of the land as mortgagee. There is no dispute that AMAL was entitled to take possession. On 21 October 2020, AMAL obtained a valuation of the land.
9. In February 2021, through a series of arrangements which I will now describe, Mr Gong effectively became the lender, taking over from Perpetual. On 12 January 2021, The Canada Bay Opportunities Fund was established. Mr Gong is the sole member of that fund. Evolution was appointed as trustee of the fund.
10. On 13 January 2021, Metrics became the investment manager for the Canada Bay Opportunities Fund. On 28 January 2021, a side letter was executed between Metrics, Mr Gong and Evolution, setting out the investment approach for the fund.
11. On 29 January 2021, a substitution agreement was executed, as a consequence of which Evolution replaced Perpetual as financier under the facility agreement with the registered proprietor. The funds were advanced by Mr Gong and by Metrics, through one of its investment funds, by way of a loan to Evolution guaranteed by Mr Gong. That is how Mr Gong and entities associated with him became the lender to the registered proprietor. Essentially, he is the beneficial owner of the asset constituted by the loan to the registered proprietor, that is secured by the mortgage over the land.

The sale process

1. Returning to the selling process, having considered the various proposals provided by potential selling agents, Matrix Property Group was appointed as selling agent in March 2021. Some delay had occurred between requesting the proposals in October 2020 and selection of the selling agent. This was due to the COVID-19 pandemic and the change in financier just described.
2. Matrix was selected after consideration of the proposals received from various sales agents, having regard to its experience selling other development sites in the same precinct, its experience conducting sales on behalf of mortgagees in possession, and because Matrix's proposed fees were the lowest of the four proposals received. Matrix was also independent from AMAL, Evolution, Metrics, the registered proprietor, Genesis and other entities with an interest in the land. Matrix had no prior dealings with any of them.
3. AMAL accepted Matrix's advice that the best way to achieve the highest sale price for the land was to seek expressions of interest. On 1 April 2021, the first phase of marketing began. A marketing board was erected at the site. Online marketing was placed on various commercial property websites. Advertisements were placed in The Sydney Morning Herald and Australian Financial Review. Matrix sent direct email advertisements to its distribution list. An information memorandum was provided on request. Expressions of interest were called for, and received, by 30 April 2021.
4. Mr Gong was interested in buying the land. Once this became clear, information barriers were put in place to ensure that confidential or sensitive information about the sale process was not provided to Mr Gong or his associates, even though he was entitled to receive information in relation to enforcement and the mortgagee sale process, as the new lender. No disclosures were made to Mr Gong or any of his affiliates regarding the sale process other than matters of public record. Details of the valuations and expressions of interest by other potential purchasers were quarantined from, and not provided to, Mr Gong or his associates.
5. Mr Lockhart of Metrics has disclosed all communications which he had with Mr Gong, his wife and Belinda Li in the two months before the sales campaign began and since. Nothing confidential was disclosed to these potential purchasers. At one point, Belinda Li did request a copy of the valuation which had been obtained by AMAL, but that request was declined.
6. Mr Gong and Belinda Li did approach Metrics to arrange a loan, so that a new entity controlled by Mr Gong and Belinda Li could make an offer to purchase the land. In that context, Mr Lockhart met with them to progress a term sheet, which was signed in June 2021. Mr Lockhart has disclosed the extent of his communications with Mr Gong and Belinda Li in relation to the proposed finance. There is nothing untoward in these communications.
7. On 22 April 2021, Genesis was incorporated. As already mentioned, the shareholders of the company are companies owned by Mr Gong and Belinda Li. The expression of interest period closed on 30 April 2021. Genesis submitted an expression of interest, as did other interested purchasers.
8. In early May 2021, AMAL became aware of a recent planning development. A Gateway Determination had been made by the New South Wales Department of Planning, Industry and Environment such that it did not support an amendment to the Local Environmental Plan, to increase the height and floor space ratio for the proposed development on the site. This important piece of information was communicated to interested purchasers. The marketing material was updated. The expression of interest period was extended to 3 June 2021 to allow interested purchasers to consider the material and revise their offers, if need be.
9. AMAL also sought an updated valuation, a draft of which was provided on 14 May 2021 and signed on 8 June 2021. I have reviewed both the original and updated valuations. In addition to obtaining an updated valuation, AMAL also requested an expert peer review of the updated valuation. The peer review reported on 10 June 2021, advising that the valuation was within an acceptable range.
10. A second phase of marketing was undertaken from 28 May 2021 to 3 June 2021. A total of eight offers were received including an offer from Genesis. After negotiations, Genesis provided an increased offer on 17 June 2021.

Choosing the purchaser

1. On 21 June 2021, AMAL compared each of the offers received from interested purchasers, including price, any pre-conditions and the proposed time for completion. Mr O'Connell of AMAL formed the view that Genesis' offer was the best offer available. I have reviewed Mr O'Connell's work and cannot fault his logic.
2. On 22 June 2021, a deed of release was executed by Mr Gong, whereby Mr Gong released Metric and Evolution from an obligation to provide information to which he was otherwise entitled, and irrevocably directed them not to do so. This and the information barriers already described were designed to ensure that Mr Gong did not receive information not provided to other potential interested purchasers, to which he might otherwise have been entitled as lender, so as to ensure a level playing field for all interested purchasers.
3. On 25 June 2021, a contract for the sale of land was exchanged. Genesis paid a 5% deposit. Completion of the contract is conditional upon approval being given by this Court.
4. The contract was varied on 6 August 2021. These proceedings were commenced on 10 August 2021, and promptly brought to hearing. As the plaintiff's solicitor explains, the reason for expedition is that interest on the loan is presently accruing at some 17% per annum. The purchasers are keen to complete. AMAL is keen not to lose the purchasers. The plaintiff's solicitor is keen for the contract to complete to avoid further disputation, repay AMAL and leave the largest possible surplus for others who may have an interest in the land.
5. Mr O'Connell of AMAL has given full disclosure of the extent of AMAL's relationships with anyone in this process. So far as he is aware, AMAL does not have any relationship with the purchaser.
6. Mr Lockhart of Metrics has given full disclosure of his previous and current dealings with Mr Gong and Belinda Li. In particular, Metrics has a connection with the Canada Bay Opportunities Fund as investment manager and a connection with Genesis as a proposed lender. I am satisfied that he has not disclosed any confidential information to either of them in relation to the sale of the land, including in the context of arranging a loan to enable them to make an offer on the site.
7. Notice of this application has been provided to all interested parties, who have been served with the originating process and affidavits. One response of substance has been received, which I have read. It does not give me any reason to depart from the course which I propose to take.

Conclusion

1. Given the interconnections described, it is appropriate that the controller seeks the directions from the Court in this matter. AMAL seeks a limited form of guidance on the appropriateness of the sale to the purchaser, consistent with the approach in the case law already described.
2. I am satisfied based on the evidence that it is appropriate to give the direction sought. Despite the involvement of Mr Gong with the lender to the registered proprietor, having an interest in the land through various trusts, and having an interest in the proposed purchaser of the land, the sale to the purchaser is not unlawful by reason of that matter.
3. There is no prohibition on a mortgagee selling to an associate of itself, as long as the sale is "a truly independent bargain". Here, there is no connection between AMAL as mortgagee in possession and the purchaser. There is an obvious connection, through Mr Gong, between the lender and purchaser. But there is nothing in the course of the sale process that would suggest that the power of sale was exercised otherwise than in good faith and that reasonable steps were taken to obtain a fair price.
4. I am satisfied that, notwithstanding the relations that exist, an independent selling agent has been retained after a selection process. That selling agent has conducted a thorough, independent and public sale process. Eight offers have been received and carefully analysed by AMAL. The decision-making process has been thorough. The best and most compelling offer has been accepted. I find no reason to criticise anything that has been done. The proposed sale is not unlawful by reason only of the relationship between seller and purchaser: Grand Orchid at [26].
5. To the extent that Metrics is proposed to be a lender to Genesis as part of its purchase of the land, this does not provide any reason to think that the sale is not at arm's length and an independent bargain. Metrics is not a lender to the registered proprietor but an agent and investment manager of the lender. Nor would there be any prohibition, even if Metrics was the lender on both sides of the transaction. As White JA observed in Almona (dissenting in the result, but not on this issue), "The mere fact that a mortgagee finances a purchaser … is not sufficient to demonstrate that the sale was made in fraud of the power …": at [306].
6. For those reasons, I make the following orders: 1. Pursuant to section 424(1) of the Corporations Act 2001 (Cth), give the following direction: Entry into and completion of the contract for sale of land dated 25 June 2021 (as varied on 6 August 2021) between the Plaintiff and The Genesis Capital Holding Pty Ltd as trustee for The Genesis Unit Trust (Genesis), is not unlawful solely by reason of the relationship between, on the one hand, Genesis and, on the other hand, any of the Plaintiff, Evolution Trustees Limited as trustee for the Canada Bay Opportunities Fund and Metrics Credit Partners Pty Ltd. 1. Order that Confidential Exhibit JO-2, Confidential Exhibit JO-4 and Confidential Exhibit AL-1 be returned to the Plaintiff.

Amendments 13 September 2021 - [31], [32] - corrected to Mr Lockhart [40] - typographical error DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 13 September 2021