Australian Broadcasting Corporation v O'Neill

Judgment 1By Originating Process filed on 17 October 2013, the Plaintiffs, Medical & Legal Assessments (NSW) Pty Limited (receiver and manager appointed) ("MLA") and Medical & Legal Imaging (NSW) Pty Limited (receiver and manager appointed) ("MLI") seek declarations that the appointment of the First and Second Defendants, Messrs Kassem and Tang, as receivers and managers of MLA and MLI are invalid. The receivers and managers were appointed by the Third Defendant, PCL Holdings Pty Limited ("PCLH"). The application is brought under s 418A(2) of the Corporations Act 2001 (Cth) which, relevantly, permits the Court on the application of a corporation to which a receiver is appointed to declare whether the purported appointment of a person as receiver of property of that corporation is valid. The Plaintiffs also seek other associated relief. 2By Interlocutory Process filed on the same date, the Plaintiffs seek an order restraining the receivers from exercising rights as receivers and managers pending the determination of the proceedings; orders that the receivers deliver up any books, records and equipment in their hands, and orders that the receivers and managers permit the Plaintiffs to re-enter their business premises and carry on their businesses on certain terms. The Plaintiffs do not offer to pay the monies claimed to be due by them to PCLH into Court as a term of that interlocutory relief. When the matter was heard before on 28 October, no undertaking as to damages was offered by the Plaintiffs in connection with the interlocutory relief sought. However, in supplementary written submissions served on 29 October 2013, the Plaintiffs indicated that they would provide the usual undertaking for damages if required. I will address that question further below. The receivers and managers did not seek to be heard in respect of the interlocutory application, which was opposed by PCLH. 3The principles applicable to an interlocutory injunction in this context are well established. The test is whether the Plaintiff has established a sufficiently seriously arguable case for a final injunction to justify the grant of interlocutory relief, having regard to the balance of convenience. The Plaintiff bears the onus of making out the case for interlocutory relief; a serious question to be tried must be established before a question of balance of convenience arises; and the two factors are inter-related, in that the strength of the Plaintiff's case for final relief may be relevant to determining the balance of convenience, and the preponderance of the balance of convenience may be relevant to an assessment of the strength of the case required to establish a serious question to be tried: Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57 at [65]-[72]. In Seeto v Bank of Western Australia Ltd [2010] NSWSC 922 at [34], Nicholas J noted that an injunction of the kind now sought is in the nature of an interlocutory mandatory injunction and that: "The first consideration is whether the plaintiffs have demonstrated that there is a serious question to be tried that there is, prima facie, a reasonably arguable case on both the facts and the law that the defendant was not entitled under the mortgage to appoint receivers to the properties (authorities omitted)." His Honour there noted that the balance of convenience was weighted in the defendant's favour, where the similar orders sought by the plaintiffs in that case would have "upset the status quo" and would have granted, at the interlocutory stage, what in substance would be a significant measure of final relief. The relevant evidence 4The Plaintiffs relied on an affidavit of Ms Jennifer Spence, who is the sole director of MLA and MLI and is a shareholder in Mickle Investments Pty Limited (in liq) ("Mickle") which owned the shares in MLA and MLI. Ms Spence's evidence was that MLA arranges expert legal and medical reports in respect of litigation in personal injury matters and MLI arranges diagnostic reports for those purposes. 5On 6 October 2006, Mickle borrowed an amount of $3,774,500 from Provident Capital Limited (in liq) ("PCL") (a different entity to PCLH) to repay loans previously made by another lender and gave mortgages over certain properties to PCL, including several properties owned by Mickle and a property owned by Ms Spence. 6On 20 December 2007, the original loan agreement was split into four loans, apparently relating to particular properties, although there is a dispute (which is not necessary to resolve for the purposes of this application) as to why that occurred. An amount of interest was prepaid in respect of the first interest period for the four loans. Only one of the loan agreements is in evidence and it provides for a first (prepaid) interest period of 101 days, an interest rate of 16.45% per annum and a discount rate of 10.45% per annum. 7In her first affidavit, Ms Spence undertakes a detailed calculation of the amounts of interest due and payable in respect of the loans made by PCL to Mickle and contends that, at various times, interest was overpaid on the loans. Her affidavit recognises, however, that interest had been underpaid on two of the loans when the third interest payment was due on 20 May 2008; on two of the loans when the sixth interest payment was due on 20 August 2008; on one of the loans when the seventh interest payment was due on 20 September 2008; on two of the loans when the eighth interest payment was due on 20 October 2008 and on three of the four loans when the ninth interest payment was due on 20 November 2008. She contends that interest was overpaid on three loans with continuing balances from 20 November 2008 until May 2010. 8Ms Spence's evidence is that, in May 2010, Mr Michael O'Sullivan, who was the Managing Director of PCL and the principal of PCLH, represented that Mickle's loan payments to PCL were in arrears by a total of $141,763. Ms Spence's calculations suggest, and the Plaintiffs contend, that representation was incorrect. At the same time, PCLH made an offer of a loan facility to MLA and MLI of $300,000 with a 3 month term, an interest rate of 35% per quarter (ie 140% per annum) and a discount rate of 25% per quarter (ie 100% per annum) with all interest to be prepaid, a late payment fee of $10,000 and a rollover fee of $10,000, with that borrowing to be secured by a first registered charge over all assets of the borrowers. The loan offer contained additional provisions requiring all arrears owed by Mickle to PCL and PCLH and all fees to Brentnall NSW Pty Limited (at which PCLH had its registered office) to be paid. It will immediately be noted that the interest rates payable in respect of the loan by PCLH were significantly higher than those that had previously been charged by PCL, a matter to which I will return below. 9That offer was accepted by Ms Spence on behalf of MLA and MLI and her evidence is that the amount borrowed was dispersed by a payment of approximately $78,000 to MLA and the balance to repayment of the amounts claimed to be in arrears to PCL and PCLH and the payment of interest of $75,000 (being interest at 25% per quarter) as pre-paid interest and approximately $7,164 in disbursements. 10Ms Spence's affidavit also annexes an unexecuted Deed of Loan and Guarantee relating to the loan by PCLH which, confusingly, refers to the "discount rate" on the loan as 25% pa per quarter" although the higher interest rate remained the same at 35% per quarter. When the loan was rolled over on 30 August 2010, revised particulars again provided for the discount interest rate to be "25% pa per quarter". Ms Spence's affidavit sets out the payments subsequently made on the PCHL loan, which continued to be rolled over with very substantial late payment and rollover fees being charged over the period from May 2010. 11Ms Spence's evidence as to the alleged misrepresentation by Mr O'Sullivan that Mickle was in arrears to PCL (which MLA and MLI seek to attribute to PCLH) underpins the attack on the security given by MLA and MLI in respect of the loan by PCLH, which is alleged to have been induced by misleading and deceptive conduct. Ms Spence's evidence is that, if she had known that, as she contends, Mickle's loans were not in arrears at the time she was offered the loan by PCLH, she would not have permitted $122,712.94 to be paid to PCL from that loan or that MLA and MLI would have borrowed a lesser amount. Her evidence is that, if that had occurred, the loan would have been repaid at an earlier date and the interest due would be significantly less than was paid by MLA and MLI. Obviously enough, if a loan is made at a "discount" interest rate of 25% per quarter and a higher interest rate of 35% per quarter, with late payment fees and rollover fees of $10,000 potentially arising every 3 months, then a reduction in the principal borrowed might be expected to make a significant difference on the amount repayable within a relatively short period. 12Both Ms Spence and Mr Radin, the Chief Executive Officer of MLA and MLI, by his affidavit sworn 17 October 2013, also give evidence of the circumstances in which the receivers appointed by PCLH closed the business after their appointment. I will return to Ms Spence's evidence as to the balance of convenience below. 13By a further affidavit dated 23 October 2013, Ms Spence gives evidence of a conversation prior to the splitting of the original loan by PCL into four loans in which she contends she was advised of a 21 day grace period in which interest could be paid after the due date before the higher rate applied, and that advice seems to have been confirmed by an email from PCL dated 19 September 2007 which is in evidence. Ms Spence also refers to a further email dated 30 November 2007 from PCL which suggests that, despite an agreement that the discount rate would be charged for a period, the higher rate was charged by PCL. Ms Spence also contends that PCL often did not issue loan statements that she requested, and she became concerned about discrepancies in the loan statements when she was provided with those statements on sale of the relevant properties. She claims to have raised these matters in 2010, and that they were referred to the receivers of PCL when they were appointed in August 2010 but not resolved. Ms Spence also undertakes an alternative interest calculation if the higher interest rate applied from March 2010 when Mickle was placed in liquidation. 14PCLH relies on affidavits of Mr Michael O'Sullivan dated 28 October 2013 and an affidavit of its solicitor, Mr Anderson, dated 25 October 2013. Mr O'Sullivan was previously the Managing Director of PCL and remains a director of PCLH. Mr O'Sullivan refers to interest statements issued by PCL to Mickle which he says he obtained from the former solicitor for PCL and submits (in paragraphs that were admitted as submissions and not as proof of the asserted facts) that: (a) Three of the loans by PCL to Mickle were in default from the initial 101 day period for which interest was to be prepaid and the assumptions made by Ms Spence in undertaking her calculations of interest were incorrect because she assumes that the prepaid interest had been paid in full by Mickle. The loan statements to which Mr O'Sullivan refers record interest charges by PCL during the period in which interest was to have been prepaid. Mr O'Sullivan does not, however, provide any explanation as to the basis of those interest charges because he says he did not have access to PCL's file. That leaves open two possibilities, namely that the interest was properly charged because it had not been prepaid in full, or that it was improperly charged, and provides no basis for any inference that the loans were in default from the time they were made. (b) Mr O'Sullivan points out, with greater force, that Ms Spence's affidavit indicates interest on one loan made by PCL to Mickle was in arrears (as noted above) from August 2008 and interest on that and other loans was in arrears thereafter. He points out that clause 14.1 of the relevant loan agreements (read with the definition of "related agreement" in clause 1.2) had the effect that the higher rate of interest was payable on all loans if any payment due by Mickle was not paid on time. That submission seems to me to have substantial force, and substantially undermines Ms Spence's calculations where interest on several loans was apparently in arrears over the period. (c) Mr O'Sullivan also notes that the loan agreement provided that unpaid interest may be added to the balance owing by Mickle and that Ms Spence had not taken that into account in her calculations. However, as Mr Anderson, who appeared for PCLH, conceded in submissions, there was no evidence that PCL had exercised its discretion conferred under clause 4.6 of the loan deed to take that course and it does not seem to me that that matter falsifies Ms Spence's calculations. 15Mr O'Sullivan also challenges Ms Spence's calculation of the amount due to PCLH as at August 2010, on the basis that it did not take account of late fees, rollover fees and the higher interest rate, and on the basis of an assumption made in that calculation that the lower interest was 25% per annum calculated quarterly rather than 25% per quarter. MCA and MCI rely on the fact that, as noted above, notwithstanding that the loan offer and acceptance specified a lower rate of 25% per quarter, several subsequent documents issued by PCLH to Mickle refer to a discount interest rate of "25% pa per quarter". It seems to me that there is at best, a barely arguable case that interest was to be calculated at 25% per annum calculated quarterly, given the terms of the letter of offer and acceptance and the absence of any evidence to suggest that PCLH agreed to lower its lower interest rate, notwithstanding that MLA and MLI had failed to repay the principal when it was due at the first three monthly repayment date. 16Mr O'Sullivan also takes issue with evidence given by Mr Radin as to the reason why the loan was split into four loans, and in particular with any suggestion that the loan was split to allow late payment of interest on one loan not to trigger the higher interest rate on other loans. That suggestion is, as he notes, inconsistent with the provision treating late payment of any amount due to PCL as giving rise to a default under each loan. As I noted above, it is not necessary to resolve this dispute for the purposes of this application. 17PCLH's solicitor, Mr Anderson, in turn gives evidence that he has requested MLA and MLI to produce a substantial range of documents which he contends are relevant to their claims, although no Notice to Produce was served in that regard. It does not seem to me that the Plaintiffs were under any obligation to produce those documents in an application of this kind, brought on an urgent basis, particularly where no Notice to Produce had been served and where their business computers and any documents held in their business premises were now in the possession of the receivers appointed by PCLH. Whether a seriously arguable case for misleading and deceptive conduct is established 18Mr Drew, who appears for MLA and MLI, contends that they have established a seriously arguably case that the representations made by Mr O'Sullivan (which, as noted above, they contend are to be attributed to PCLH) that the Mickle loans were in arrears were misleading because, at the relevant time, those loans were not in arrears and interest had been overpaid by a substantial amount; and that, but for that representation, monies would not have been paid to PCL or a lesser amount would have been borrowed by MLA and MLI from PCLH and the loan from PCLH would have been fully repaid no later than 2011. 19Mr Anderson, who appears for PCLH, contested the proposition that a seriously arguable case was established in wide-ranging oral submissions. First, Mr Anderson contended that Ms Spence's calculations did not establish a seriously arguable case by reason of the criticisms made of them in Mr O'Sullivan's evidence, to which I have referred above. It seems to me that Ms Spence's calculations do not properly take account of the fact that interest on several of the loans was in arrears over part of the relevant period, and that the contractual provisions treated a failure to pay in respect of one loan as a default for the purposes of all loans, supporting a charge of interest at the higher rate. I recognise that the evidence of Ms Spence and Mr Radin seeks to address this issue, by referring to conversations in which the loans were split, on their account, in order to avoid the higher interest rate being payable if one loan went into default. However, that evidence is denied by Mr O'Sullivan and is inconsistent with the terms of the only loan agreement in evidence. It is not possible to anticipate the outcome of this question at the final hearing in an application of this kind. 20Second, Mr Anderson contended that the Plaintiffs did not lead the fullest and best evidence available to them in respect of the application. I have addressed the Plaintiffs' failure to produce the documents requested by PCLH above, and I do not accept that criticism in the context of an interlocutory application made in circumstances that receivers appointed by PCLH had assumed control of the Plaintiffs' business premises and computers. I also do not consider that the Plaintiffs were required to delay this application, for example, to seek to negotiate production of documents by either the receivers appointed to PCL or the receivers recently appointed to PCLH, where PCLH could itself seek access to such documents and in fact led evidence of the relevant loan statements. I also do not consider that the position is analogous to that in Ozden v Commonwealth Bank of Australia [2013] VSCA 195, on which Mr Anderson relied, which deals with a failure to bring facts known to the Applicants in a stay application to the Court's attention, rather than with the question of production of voluminous quantities of documents held by third parties in an interlocutory application. 21Mr Anderson also contended that the Plaintiffs had failed to complain as to the calculation of interest at an earlier date. However, this proposition needs to be qualified by Ms Spence's evidence, which may or may not be accepted at a final hearing, as to her difficulty in obtaining statements and the complaints made prior to the appointment of receivers to PCL. 22I am not presently satisfied, taking into account the matters relevant to the balance of convenience to which I will refer below, that the Plaintiffs' claim for misleading and deceptive conduct in respect of the entry into the loan agreement with PCLH would support interlocutory relief. Whether a serious case is established on other grounds 23During the course of the hearing, I raised with the parties' legal representatives whether a higher interest rate of 140% per annum and a "discounted" interest rate of 100% per annum were to be regarded as unremarkable. Mr Anderson contended that was the case in the absence of statutory regulation of interest rates. I also drew the parties' attention to the decision in Free Wesleyan Church of Tonga in Australia Inc (admin apptd); Phoenix Lacquers & Paints Pty Ltd v Free Wesleyan Church of Tonga in Australia Inc (admin apptd) [2012] NSWSC 214; (2012) 87 ACSR 658 where the Court had considered, but had not found it necessary to decide, whether interest rates of that level could potentially contravene the prohibition on statutory unconscionability in s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) in an appropriate case. 24Mr Drew sought the opportunity to make further submissions as to that matter and, in supplementary written submissions, MLA and MLI has indicated that it also seeks to maintain a claim for statutory unconscionability in the circumstances of the relevant loan by PCLH. PCLH in turn provided further written submissions that travelled well beyond the leave granted for such submissions, as well as addressing this issue. I have not had regard to those matters contained in those submissions which PCLH did not have leave to make. Had PCLH wished to make written submissions in respect of the matters which it had addressed only by oral submissions at the hearing, then it should have done so prior to or at the hearing and not by further submissions without leave as to matters that had already been canvassed at the hearing. 25Section 12CB of the Australian Securities and Investments Commission Act, as amended by the Competition and Consumer Legislation Amendment Act 2011 (Cth), specifically permits the Court to have regard to conduct and circumstances before its commencement and provides that: "(1) A person must not, in trade or commerce, in connection with: (a) the supply or possible supply of financial services to a person (other than a listed public company); or (b) the acquisition or possible acquisition of financial services from a person (other than a listed public company); engage in conduct that is, in all the circumstances, unconscionable. (2) This section does not apply to conduct that is engaged in only because the person engaging in the conduct: (a) institutes legal proceedings in relation to the supply or possible supply, or in relation to the acquisition or possible acquisition; or (b) refers to arbitration a dispute or claim in relation to the supply or possible supply, or in relation to the acquisition or possible acquisition. (3) For the purpose of determining whether a person has contravened subsection (1): (a) the court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention; and (b) the court may have regard to conduct engaged in, or circumstances existing, before the commencement of this section. (4) It is the intention of the Parliament that: (a) this section is not limited by the unwritten law of the States and Territories relating to unconscionable conduct; and (b) this section is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour; and (c) in considering whether conduct to which a contract relates is unconscionable, a court's consideration of the contract may include consideration of: (i) the terms of the contract; and (ii) the manner in which and the extent to which the contract is carried out; and is not limited to consideration of the circumstances relating to formation of the contract. (5) In this section: listed public company has the same meaning as it has in the Income Tax Assessment Act 1997." 26The concept of unconscionability adopted in the amended section is not limited to general law unconscionability and the Court may have regard to the terms of the contract and not only the circumstances relating to its formation. In Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389 at [293], Allsop P (with whom Bathurst CJ and Campbell JA agreed) noted that conduct could contravene the predecessor of that section where it demonstrated a high degree of moral obloquy on the part of the person said to have acted unconscionably; where it was irreconcilable with what is right or reasonable; that factors similar to those arising under the Contracts Review Act were relevant; and that such conduct requires at least "some degree of moral tainting in the transaction of a kind that permits the opprobrium of unconscionability to characterise the conduct of the party." 27The Plaintiffs contend, and it seems to me clearly to be seriously arguable, that the PCLH loan falls within the scope of s 12CB of the Australian Securities and Investments Commission Act in that the concept of "financial service" includes the provision of a service in relation to a "financial product" (s 12BAB), the term "financial product" includes, for the purposes of the Australian Securities and Investments Commission Act, a "credit facility" within the meaning of the regulations (s 12BAA) and the term "credit facility" is defined in the ASIC Regulations as including the provision of credit for a period and any form of financial accommodation. PCLH accepts that s 12CB of the Australian Securities and Investments Commission Act is capable of applying to the loans which are the subject of these proceedings. 28The Plaintiffs contend that the interest rate payable under the PCLH loan, whether at the discounted interest rate of 25% per quarter (for which PCLH contends) or the higher interest rate of 35% per quarter is excessive, harsh and unconscionable within the meaning of s 12CB of the Australian Securities and Investments Commission Act. The Plaintiffs also rely, in support of the allegation of unconscionability, on: