Australian Securities and Investments Commission v Letten

Federal Court of Australia|2011-10-07|Before: Gordon J

ansport) Pty Ltd v Ebbage [1995] 1 Qd R 185 Moodemere Pty Ltd (in liquidation) v Waters [1988] VR 215 Nardell Coal Corp (in liq) v Hunter Valley Coal Processing Pty Ltd (2003) 178 FLR 400 O'Callaghan v Custom Credit Corporation Ltd (unreported, Supreme Court of Western Australia, 17 December 1997) O'Callaghan v Custom Credit Corporation Ltd [1999] WASCA 70 Philip Bernstein (Successors) Ltd v Lydiate Textiles Ltd [1962] CA Transcript 238 Powdrill v Watson; Talbot v Cadge; Talbot v Grundy [1995] 2 AC 394 Scottish Properties Ltd, Re (1977) 2 ACLR 264 Sheahan v Carrier Air Conditioning Pty Ltd & Campbell (1997) 189 CLR 407 Shirlaw v Taylor (1991) 31 FCR 222 Sipad Holdings ddpo v Popovic (1995) 19 ACSR 108 Sterling Industrial Facilities Ltd v Lydiate Textiles Ltd 106 SJ 669 Telecom v Russell Kumar & Sons (1992) 10 ACSR 24 Timbercorp Securities Ltd (in liq) v Plantation Land Ltd (2009) 72 ACSR 620 Titoki Farms Ltd v Lei Jay Catering Ltd (1987) 3 NZCLC 96-145 Toshoku Finance UK plc, In re [2002] 1 WLR 671 Universal Distributing Company Limited (in liquidation), In re (1933) 48 CLR 171 Whitton v ACN 003 266 886 Pty Ltd (1996) 42 NSWLR 123 Wily v Commonwealth of Australia (1996) 66 FCR 206 Wrexham, Mold & Connah's Quay Railway Company, In re [1900] 1 Ch 261 Wright v Kirby (1857) 53 ER 182

Date of hearing: 14 September 2011

Date of last submissions: 28 September 2011

Division: GENERAL DIVISION

Category: Catchwords

Number of paragraphs: 81

Counsel for the Plaintiff: Mr AP Trichardt

Solicitor for the Plaintiff: Australian Securities and Investments Commission

Counsel for the Receivers: Mr R Strong

Solicitor for the Receivers: Mallesons Stephen Jaques

Counsel for Mirvac Hotels Pty Ltd, a non-party: Mr J Moore

Solicitor for Mirvac Hotels Pty Ltd, a non-party: Corrs Chambers Westgarth

Solicitor for the Secured Lender, Westpac Banking Corporation: Allens Arthur Robinson

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 95 of 2010

BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

JUDGE: GORDON J DATE OF ORDER: 7 OCTOBER 2011 WHERE MADE: MELBOURNE

A. Receivers, Scheme, Reef House Resort Scheme and Secured Lender have the meanings ascribed to those terms in the Orders made in this proceeding on 25 February 2010; and B. Reef House Parties and Reef House Properties have the meanings ascribed to those terms in the Orders made in this proceeding on 4 June 2010.

The answers to the directions sought by the Receivers in the Interlocutory Process of 19 August 2011 are as follows: Question (1): Are the Receivers justified in refusing to pay to Mirvac Hotels Pty Ltd (Mirvac) the sum of $542,040 (the Termination Fee), being the Termination Fee claimed by Mirvac under the Hotel Management Agreement dated 27 April 1998 (HMA) between the seventh defendant, Firbank Arch Pty Ltd (Firbank Arch), and Mirvac, as an expense of the receivership of Firbank Arch? Answer: Yes. Question (2): If the direction in response to question (1) is "No", are the Receivers justified in paying the Termination Fee to Mirvac from the proceeds of sale of the Reef House Properties in priority to payment of the proceeds to the Secured Lender? Answer: Unnecessary to answer.
In relation to the costs of the Interlocutory Process of 19 August 2011, by 4:00pm on 13 October 2011, the plaintiff, the Receivers, Mirvac Hotels Pty Ltd and the Secured Lender: 2.1 file agreed orders; or 2.2 file and serve submissions, such submissions limited to two pages. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 95 of 2010

BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

JUDGE: GORDON J DATE: 7 OCTOBER 2011 PLACE: MELBOURNE

A INTRODUCTION 1 This is the latest in a series about unregistered managed investment schemes in which Mr Mark Ronald Letten (Mr Letten), the first defendant, was involved. The history of the proceedings were summarised in Australian Securities and Investments Commission v Letten (No 7) (2010) 80 ACSR 401 at [7]-[12]. 2 In these reasons for judgment: 1. Receivers, Scheme, Reef House Resort Scheme and Secured Lender have the meanings ascribed to those terms in the Orders made in this proceeding on 25 February 2010 (the Appointment Orders); and 2. Reef House Parties and Reef House Properties have the meanings ascribed to those terms in the Orders made in this proceeding on 4 June 2010 (the June Orders). 3 The Receivers seek the following directions in the receivership of one of the Schemes - the Reef House Resort Scheme: 1. Are the Receivers justified in refusing to pay to Mirvac Hotels Pty Ltd (Mirvac) the sum of $542,040 (the Termination Fee), being the Termination Fee claimed by Mirvac under the Hotel Management Agreement dated 27 April 1998 (HMA) between the seventh defendant, Firbank Arch Pty Ltd (Firbank Arch), and Mirvac, as an expense of the receivership of Firbank Arch? 2. If the direction in response to question (1) is "No", are the Receivers justified in paying the Termination Fee to Mirvac from the proceeds of sale of the Reef House Properties in priority to payment of the proceeds to the Secured Lender? For the reasons that follow, the answer to question (1) is yes and it is unnecessary to answer question (2). 4 The Court received submissions from the Receivers, Mirvac, the Westpac Banking Corporation (Westpac) (as the Secured Lender) and from the Australian Securities and Investments Commission (ASIC). Notice of this application for directions was also given to the guarantors of Firbank Arch's obligations to the Secured Lender. 5 In particular, Mirvac submitted that it was entitled to payment of the Termination Fee in priority to payment to the Secured Lender on six bases: 1. the Termination Fee was properly to be characterised as an expense of the receivership and payable out of the proceeds of the sale in priority to the payment to the Secured Lender because the Secured Lender would have been bound by a Deed of Consent, executed by Firbank Arch, Mirvac and the Bank of Melbourne (the BoM) in April 1998 (the Deed of Consent), to pay Mirvac the Termination Fee under the HMA had the Secured Lender appointed a receiver, terminated the HMA and sold the Reef House Resort (referred to as the Hotel in the HMA); 2. pursuant to s 419 of the Corporations Act 2001 (Cth) (the Act); 3. alternatively to 2, the Court should order as a term of the receivership that s 419 of the Act applies as if the Receiver had been appointed for the purposes of enforcing the Secured Lender's charge; 4. the Receivers contractually bound themselves to pay Mirvac; 5. the Receivers adopted the liability to pay Mirvac the Termination Fee; and 6. pursuant to the principles in Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (in liq) (No 3) (2008) 246 ALR 580 and other cases. The Receivers, supported by ASIC and the Secured Lender, submitted that the Receivers were justified in refusing to pay to Mirvac the Termination Fee and the answer to the first question should be "Yes". As is self evident from the answers to the directions sought by the Receivers, I have rejected Mirvac's submissions. These reasons for decision explain why that is so.

B PROCEDURAL BACKGROUND 6 In the Appointment Orders, the Court ordered that: 1. pursuant to s 1323(1)(h)(ii) of the Act the Receivers be appointed to the property of, inter alia, Firbank Arch and the eighth defendant (Glenline) other than property that constituted property of a Scheme as defined in Annexure A to the Order; 2. the Reef House Resort Scheme (being a Scheme identified in Annexure A to the Appointment Orders) be wound up pursuant to s 601EE(1) of the Act; and 3. the Receivers be appointed as receivers and managers of the property of, inter alia, the Reef House Resort Scheme. 7 In the June Orders, the Court varied the Appointment Orders with respect to the Reef House Resort, Firbank Arch and Glenline so that the Receivers had the power to sell the Reef House Properties, save that the Receivers were not to enter into any contract of sale in respect of the Reef House Properties which was not conditional upon approval of the Court. The Court further ordered, by paragraphs 3 and 4 of the June Orders, that the Receivers were justified in: 1. paying all agent's reasonable fees and other reasonable expenses associated with the sale of the Reef House Properties; 2. paying the proceeds of the realisation of the Reef House Properties to the relevant Secured Lender, in reduction or extinguishment of the secured liabilities to the Secured Lender (without prejudice to the relevant defendants' rights to dispute any of the Secured Lender's claim), after deduction of the reasonable selling expenses of the Receivers and the reasonable fees and expenses of the Receivers in respect of getting in, preserving and realising the Reef House Properties (as agreed with the Secured Lender); and 3. paying the remaining proceeds of the realisation of the Reef House Properties (after payment of any Secured Lender), including any amounts deducted from the amount paid to any Secured Lender in accordance with paragraph 4(a) above, into the bank account established by the Receivers in relation to the Reef House Resort. 8 On 11 November 2010, the Court ordered, inter alia, that the Receivers were justified in paying the following amounts out of the proceeds of sale of each asset of the Schemes and the Corporate Defendants (the Pooling Orders), in the following order of priority: 1. "priority receivership costs", as fixed by the Court, to the Receivers. "Priority receivership costs" were defined in the Pooling Orders as: … the Receivers' fees, costs and expenses which: (i) relate to getting in, preserving or realising a relevant asset; or (ii) if a priority deed or other agreement is entered into by the Receivers with a relevant secured creditor, have priority under that deed or other agreement; as approved by the Court. 2. any liabilities which are secured by that asset to the relevant Secured Lender; 3. the amount of "trust creditor claims" in respect of the relevant Corporate Defendant (if any) in respect of which the relevant Corporate Defendant has a right of indemnity and lien, to the relevant Corporate Defendant. "Trust creditor claims" were defined as "in respect of an asset, … claims against the Corporate Defendant which is the trustee of that asset and in respect of which the Corporate Defendant has a right of indemnity and lien against the asset"; and 4. the balance (if any) into a bank account held in the name of the Receivers and designated as the "Common Fund" account. 9 On 17 December 2010, the Court ordered, inter alia, that the Receivers were justified in settling contracts of sale entered into by the Receivers on 16 November 2010 in relation to the Reef House Properties (the Sale Approval Orders).

C FACTS 10 At the time of the Appointment Orders (25 February 2010), the HMA was in force. Clause 15.8 of the HMA provided that the Owner (Firbank Arch) could terminate the HMA at any time without cause on giving Mirvac three month's notice in writing. However, exercise of that right came at a cost. Clause 15.4 of the HMA, entitled "Payment to Manager", relevantly provided: In the event of termination … the Owner must pay the Manager: … (c) … 4 times the Base Management Fee and Incentive Fee received by the Manager during the immediately preceding Operating Year. 11 During the term of the HMA, Firbank Arch was entitled to sell the Hotel but subject to two important obligations. First, Mirvac had a right of first refusal: cl 16.5. Secondly, any sale was on condition that Firbank Arch assigned all its interest in the HMA to the purchaser, the purchaser (or assignee) took over all the obligations of Firbank Arch and the purchaser (or assignee) executed an agreement with Mirvac whereby the purchaser (or assignee) would be bound to comply in all respects with the HMA: cl 16.4. 12 Clause 17 of the HMA was headed "Default". Under cl 17.1(c)(v) of the HMA, if a receiver and manager was appointed over all or part of Firbank Arch's assets or undertaking, it was an automatic default entitling Mirvac to terminate the HMA. Upon the appointment of the Receivers by the Court, Mirvac did not terminate the HMA. 13 On 26 February 2010 (the day after the Appointment Orders), the Receivers issued a Circular to Creditors. The circular informed creditors that the Receivers had assumed control of Firbank Arch's affairs and taken possession of its assets. Under the heading "Trading Considerations", the Receivers stated: As we intend to continue … operations for the time being, we would appreciate you making goods and services available to [Firbank Arch] on usual trading terms and conditions when so requested by my partner, or myself or my authorised representatives. In this regard, would you please adopt the following procedure with regard to the … account: • Close your present account as at the date of our appointment being 25 February 2010; and • Open a new account with the words "(Receivers and Managers Appointed)" immediately following the relevant Letten Company or Letten Scheme name, addressed to the Company's or Scheme's premises and charge future authorised orders to that account. Should further goods or services be required during the Receivership, we advise that an approved purchase order must be obtained and signed by the authorised representatives whose signatures are attached. During the period of the Receivership, any further credit properly incurred by the Group and authorised by us or our authorised representatives, will be an expense of the Receivership and payable in accordance with ordinary trading terms. Any goods or services supplied without an authorised purchase order will not be the liability of the Receivers and Managers. Further, we advise that the supply of goods and services prior to our appointment … will not be treated as an expense of the Receivership and will rank as an unsecured claim against the applicable Letten Company or Letten Scheme. … 14 On 9 March 2010, Mirvac representatives met Mr Templeton, one of the Receivers. On 12 March 2010, Mirvac wrote to Mr Templeton. The letter summarised the points discussed at the meeting which concerned the Reef House Resort as follows: • KPMG acknowledges that … [Mirvac] is the Manager … • [Mirvac] as at the 28 February are owed the following monies by category: … Sebel Reef House Salaries and Wages - $59,640.95 [Mirvac] Management Fees - $39,200.70 Mirvac Services - $27,661.99 Total owing - $126,503.64 • We request that these amounts are reimbursed to Mirvac … as they are payments made on behalf of the hotels for salaries, services and fees. • Mirvac … provide[s] the following services … and request that KPMG … and Firbank Pty Ltd (Receivers Appointed) issue or acknowledge in writing that these charges are accepted from the 26 February on an ongoing basis until KPMG finalise the plan to wind up the various schemes. [ITEMISED CHARGES SET OUT]. • These costs are indicative only, and in most cases are variable based on business volumes and the timing that particular promotions are conducted. … • Any additional expenses that [Mirvac] are planning as a Group, must be approved by KPMG prior to any commitments being made on behalf of [Reef House]. … The letter did not refer to the termination payment under cl 15.4 of the HMA: see [10] above. 15 On 6 April 2010, Mr Templeton sent a letter to Mr Andrew Turner of Mirvac which stated, amongst other things: … We refer to our meeting on 9 March 2010 ("Meeting") and your correspondence dated 12 March 2010 ("Letter"). The Letter requested us to respond on four topics: 1. An acknowledgement by us that Mirvac … is the manager of the Companies; 2. A request that amounts owed by the Companies as at 28 February 2010 to Mirvac be paid; 3. Our acceptance of itemised charges from 26 February 2010 until such time as the Receivership concludes; and … In the paragraphs below we set out our response to each of the questions: 1. We acknowledge the existence of Management Agreements between Mirvac and both Glenbelle and Firbank dated 28 June 2002 and 27 April 1998 respectively. … Given each of these agreements were (sic) executed prior to the appointment of the Receivers and Managers, we confirm these contracts have not been adopted by the Receivers and Managers and personal liability is excluded to the extent possible by law. … 3. …We also acknowledge that the Management Agreements … between Mirvac and the respective Companies allows for the payment of management and other fees. Although we have not formally adopted any of the Management Agreements, we do acknowledge their existence and will provide payment with respect to fees in which Mirvac would ordinarily be entitled to under those agreements that relate to the period from 25 February 2010 to the date of termination. We note that under no circumstances will the Receivers and Managers of the Companies be responsible for any termination fees should Mirvac elect to cancel any of the Management Agreements. We are committed to providing payment with respect to the provision of goods and services by Mirvac, … relating to the ongoing management of the Companies. We do, however, require that we understand, review and approve the different allocation methodologies or central services/charges which the Companies are being asked to incur prior to any liability being incurred. We acknowledge an indicative summary of monthly and other ad hoc charges in your Letter. We do not consent to an overall approval of these goods and services at Mirvac's discretion. We request that these services be approved by an authorised KPMG representative in advance in accordance with our Circular and previous discussions. For those goods and services already provided from the date of our appointment to the date of this letter, we request you provide us with a detailed summary for our consideration with the view to all necessary incurred costs being retrospectively approved and paid as an expense of the Receivership. For the avoidance of doubt, the provision of any goods or services not explicitly detailed in the respective Management Agreement, must be authorised in advance by an authorised KPMG representative. … (Emphasis added.) 16 Both the Receivers and Mirvac placed considerable reliance on the contents of the letter, albeit in support for diametrically opposed positions. Contrary to the submissions of Mirvac, neither the express terms nor the context in which the letter was sent support its submission that the Receivers had "adopted" the HMA. Indeed, in the letter the Receivers expressly stated that the HMA (as one of the agreements addressed in the letter) had not been adopted by them and that their personal liability was excluded to the extent possible by law. The Receivers acknowledged the existence of the HMA and stated that they would: … provide payment with respect to fees in which Mirvac would ordinarily be entitled to under those agreements that relate to the period from 25 February 2010 to the date of termination. (Emphasis added.) 17 However, that sentence does not support the contention that the Receivers personally adopted the HMA. First, the period covered is from 25 February 2010 to the date of termination of the receivership, not termination of the HMA. That is clear from the express language of the letter including the content of question 3 to which this paragraph was responding: see [15] above. Next, the payments to be met by the Receivers were those "Mirvac would ordinarily be entitled to under those agreements". I do not consider that the payment to Mirvac under cl 15.4 of the HMA is a payment to which Mirvac would ordinarily be entitled. The circumstances in which that was payable were anything but ordinary. That conclusion is fortified by the content of question 3 referring to "itemised charges" in Mirvac's letter of 12 March 2010 and the answer to that question, including the nature of those itemised charges: see [15] above. Put simply, a payment to Mirvac under cl 15.4 of the HMA was not an "itemised charge" and was not a "payment with respect to the provision of goods or services by Mirvac". 18 Also in answer to question 3, the 6 April 2010 letter from Mr Templeton went on to state that "under no circumstances [would] the Receivers and Managers … be responsible for any termination fees should Mirvac elect to cancel … the [HMA]". The Receivers accepted that this sentence was "odd". However, they submitted that it was not a reference to the payment under cl 15.4 because that payment was not described as a fee and the payment under cl 15.4 was not the payment of "management or other fees" which were being addressed in the letters of 12 March and 6 April 2010. Mirvac disputed this construction. Mirvac submitted that the only bases on which Mirvac could elect to cancel the HMA would give rise to a payment under cl 15.4 (for example, as a result of total write off of the Hotel within the meaning of cl 15.2). Accordingly, Mirvac submitted that the Receivers' failure to expressly exclude fees payable should the Receivers or Firbank Arch cancel the HMA, should be construed as the Receivers having agreed to pay such a fee. I reject that construction of the letter. Neither the sentence read alone or in the context of the letter as a whole supports the conclusion that the Receivers agreed to pay such a fee. 19 As noted above, in June 2010 the Court varied the Appointment Orders with respect to the Reef House Resort, Firbank Arch and Glenline so that the Receivers had the power to sell the Reef House Properties. Pursuant to that power of sale, the Receivers carried out the sale process referred to in those Orders, and in particular authorised Colliers International to issue an Information Memorandum. Mirvac continued to manage the resort under the HMA up to the time of the sale. The Receivers' agents marketed the Reef House Properties with the HMA in place and Mirvac's position as manager was highlighted prominently as a feature of the properties. 20 The Information Memorandum, prepared by Colliers International, sought expressions of interest for the Reef House Resort. The Information Memorandum recorded, as was the fact, that Mirvac had secured the management of the resort in 1988. The Information Memorandum described the Hotel as being "offered with the benefit of Mirvac … Management under the Sebel Brand …". The existence and essential terms of the HMA were listed. In relation to termination of the HMA, the Information Memorandum stated that "the current owner may terminate [the HMA] at any time without cause after giving [Mirvac] 3 months notice in writing". Prospective purchasers were advised that full details were available in the due diligence package. The HMA was part of the package. 21 On 4 August 2010, the Receivers wrote to Mirvac by email stating that: 1. they were obligated to obtain the best price possible in the circumstances from the sale of the Reef House Properties; 2. they did not have a preference as to whether the sale of the Reef House Properties occurred with or without the HMA being in place; and 3. if the best offer received was on the basis that the HMA was terminated, they would terminate the HMA. 22 That email responded to Mirvac's email to the Receivers dated 28 July 2010 in which Mirvac stated that it was currently obtaining legal advice and that: … we will not prejudice any of the rights which we have under the [HMA] as it relates to the First Right of Refusal or any of the other matters. … 23 In late October 2010, a prospective (and the ultimate) buyer of the Reef House Properties advised the Receivers that a condition of its purchase of the Reef House Properties was that they be sold with vacant possession. Ultimately, the Receivers determined that termination of the HMA was desirable because it was a precondition of the best and most advanced offer on the table for the purchase of the Reef House Properties. 24 Pursuant to the power of sale given to them by the June Orders, the Receivers entered into a Contract of Sale on 16 November 2010 (the Contract of Sale). The Contract of Sale provided that the buyer was to be responsible for the management of the Business from a date which was 93 days after the date of the entry into the Contract of Sale: cl 3.1 of the Contract of Sale. Accordingly, on 16 November 2010 the Receivers caused Firbank Arch to serve a notice of termination on Mirvac under cl 15.8 of the HMA. The Receivers were empowered to execute that notice in the name of and on behalf of Firbank Arch by ss 420(1) and 420(2)(k) of the Act. In the email accompanying that notice, the Receivers expressly stated: … The receivers and managers have the power to manage the companies and schemes. They act as agents of the companies and, to the extent permitted by law, exclude all personal liability. 25 Mirvac first advised the Receivers of their claim concerning the termination payment under cl 15.8 of the HMA by way of letter on 7 December 2010. The letter stated in part: We … refer to the [HMA] …, which pertains to the "Reef House Properties" referred to in the orders made by the court on 4 June 2010. We confirm that Firbank Arch Pty Ltd (Receivers and Managers Appointed) (the Company) has given a notice of termination pursuant to clause 15.8, and that therefore we request payment of: • the termination fee of $542,040 arising under clause 15.8 of the HMA; and • any other amounts payable to Mirvac Hotels Pty Ltd as manager under the HMA, from you as receivers and managers of the Company. Amongst other things, we contend as follows: 1. You as receivers and managers have adopted the HMA by reason of your conduct of the receivership and the recent notice of termination under clause 15.8 of the HMA. 2. Alternatively, the termination fee and any other amounts payable under the HMA constitute expenses of the receivership … in that you have in effect undertaken the sale of the "Reef House Properties" for the purpose of enforcing a charge. 3. Alternatively, even if you have not adopted the HMA, the termination fee: (a) is a "reasonable expense associated with the sale of [the] Reef House Properties" … ; and/or (b) falls with the definition of the "reasonable selling expenses of the Receivers and the reasonable fees and expenses of the Receivers in respect of getting in, preserving and realising the Reef House Properties (as agreed with the Secured Lender)", which must be deducted from "the proceeds of the realisation of the Reef House Properties" prior to payment to the "Secured Lender" … … In short, but for the termination of the HMA, you would not have been able to sell the "Reef House Properties" free of Mirvac's management rights, and you would not have obtained the resulting sale price. Accordingly, the termination fee is a necessary and reasonable expense of realisation and must be paid in priority to the secured creditor. Therefore as receivers you are required to pay the termination fee to us as a cost of realisation and before payments to the secured creditor. 26 On 20 January 2011, the Receivers' solicitors sought clarification of a number of issues raised in Mirvac's 7 December letter including requesting that Mirvac provide a detailed legal basis for its claims. 27 On 28 January 2011, Mirvac's solicitors asserted that Mirvac was entitled to be paid the Termination Fee and further that: 1. the Receivers were personally liable as receivers and managers for all amounts payable to Mirvac under the HMA; 2. the Receivers had acted in a manner so as to adopt the HMA; 3. the Receivers' appointment and continued possession of the property was for the purpose of enforcing the charge held by the Secured Lender over the assets of Firbank Arch and accordingly the Receivers were personally liable; and 4. alternatively, Mirvac should be paid the Termination Fee in priority to the Secured Lender, as an expense of the realisation of the Reef House Properties. As is apparent, there was no suggestion that there was a contract between Mirvac and the Receivers. 28 The HMA terminated on 16 February 2011. 29 On 18 February 2011, the Receivers' solicitors responded to Mirvac's letter of 28 January 2011. The letter stated that (1) the Receivers did not consider that they had ever adopted the HMA, either expressly or impliedly, (2) at all material times the Receivers had expressly disclaimed personal liability for the HMA and (3) the Receivers were not appointed for the purpose of enforcing a charge, rather they were appointed by the Court for a broader purpose namely, to wind up the unregistered managed investments schemes and realise the assets for the benefit of the stakeholders. The letter went on to state that the liability was more properly characterised as a "trust creditor claim" which ranked after the claim of any secured lender. 30 Pursuant to the Sale Approval Orders, the Receivers settled the Contract of Sale on 21 April 2011.

(a) Introductory matters 31 Before considering each of Mirvac's identified bases for payment of the Termination Fee in priority to the Secured Lender (see [5] above), it is necessary to keep a number of facts and matters at the forefront of consideration of the issues raised in this proceeding. 32 First, the Receivers were Court-appointed: para 3 of the Appointment Orders. The Receivers are therefore treated as an officer of the Court from the date of appointment: Duffy v Super Centre Development Corporation Ltd [1967] 1 NSWR 382 at 383. By reason of their appointment, the Receivers took possession of the Reef House Properties on identified bases: para 5 of the Appointment Orders. That appointment was made subject to the rights of prior interests including that of the Secured Lender: para 21 of the Appointment Orders. 33 Secondly, property does not vest in the receiver, either in law or in equity, by virtue of the appointment: Re Scottish Properties Ltd (1977) 2 ACLR 264 at 271, affirmed in Sheahan v Carrier Air Conditioning Pty Ltd & Campbell (1997) 189 CLR 407 at 450-451; Wily v Commonwealth of Australia (1996) 66 FCR 206 at 218-219; Telecom v Russell Kumar & Sons (1992) 10 ACSR 24 at 29. 34 Thirdly, a receiver does not become liable on contracts made by the company prior to his or her appointment, unless the receiver acts to assume liability. Unless the receiver does something to demonstrate that he or she assumes personal responsibility, the receiver is free to complete a contract entered into by the company before the appointment without becoming personally liable on the contract: Nardell Coal Corp (in liq) v Hunter Valley Coal Processing Pty Ltd (2003) 178 FLR 400 at [66]-[69]; Re Diesels & Components Pty Ltd [1985] 2 Qd R 456; Cater-King Pty Ltd v Westpac Banking Corp [1990] WAR 225 and Re British Investments and Development Company Pty Ltd (1979) CLC 40-522; cf s 419A of the Act.

(b) Mirvac's six bases for entitlement to payment of the Termination Fee in priority to payment to the Secured Lender

(1) The HMA, the Deed of Consent and the events of 2010 35 Under cl 16.8 of the HMA, entitled "Mortgage by Owner", Firbank Arch was entitled to mortgage the Hotel or any part provided that: … any person to whom a mortgage … or charges (sic) [is] granted undertakes with [Mirvac] that if it appoints … a receiver or a receiver and manager under its security or enters into possession or exercises any power of sale of the Hotel that it and any … receiver or a receiver and manager appointed by it will be bound by the terms and conditions of [the HMA] and in particular the provisions relating to sale contained in Clause 16.4. 36 Prior to the execution of the HMA, the BoM was the mortgagee of the Hotel and the chargee of Firbank Arch under a fixed and floating charge dated 15 April 1994. As noted above, a Deed of Consent to Firbank Arch entering the HMA was executed by Firbank Arch, Mirvac and the BoM: see [5] above. Clauses 1 and 3 of the Deed of Consent provided: 1. [Firbank Arch] must not mortgage or encumber the Hotel unless the mortgagee or encumbrancee enters into a deed pursuant to which the mortgagee or encumbrancee is bound to observe the obligations of [Firbank Arch] set out in Clause 16.8 of the [HMA]. 2. The Mortgagee consents to [Firbank Arch] entering into the [HMA] with [Mirvac] subject to [Firbank Arch] and [Mirvac] acknowledging that: … (v) in the event that the Mortgagee takes possession of the Hotel or a Receiver or Receiver and Manager is appointed to [Firbank Arch] the period in Clause 17.4 of the [HMA] of 3 months be reduced to 30 days. 3. If the Mortgagee appoints a … receiver or receiver and manager over any or all of the assets of [Firbank Arch], or if the Mortgagee, or any other mortgagee takes action for a default under the Mortgage, the Mortgagee is to procure that the [HMA] except as varied by this deed remains in force and effect in accordance with and subject to its terms as varied. … (Emphasis added.) 37 It is common ground that the first limb of cl 3 of the Deed did not apply because the Court, not the Secured Lender, appointed a receiver and manager over the assets of Firbank Arch: see [6] and [32] above. 38 Notwithstanding the inapplicability of the first limb, Mirvac submitted that it was still entitled to payment of the Termination Fee on two separate bases. First, Mirvac submitted that the Secured Lender, as mortgagee, had "take[n] action for a default under the Mortgage" under the second limb of cl 3 of the Deed and, secondly, that the terms of the Deed, as well as the events of 2010, rendered it equitable that the Termination Fee be regarded as, or as if it was, an expense of the receivership. In support of the second submission, Mirvac referred to In re Toshoku Finance UK plc [2002] 1 WLR 671 at [25]-[29]. I will deal with each in turn.

(i) Existence of event of default? 39 First, the existence of an event of default. Mirvac identified a number of matters which were said to constitute an event of default: 1. Firbank Arch had breached the Act; 2. Firbank Arch was insolvent because its liabilities exceeded its assets; and 3. Firbank Arch was in breach of the loan to value ratio (LVR) requirements in the Firbank Arch Facility Agreement. 40 I reject each of those contentions. First, the evidence established that prior to the appointment of the Receivers there was no monetary default by Firbank Arch. The required interest payments and quarterly capital reductions had been made. Second, there was no evidence to suggest, let alone establish, that prior to the appointment of the Receivers Firbank Arch was in breach of the LVR requirements in the Firbank Arch Facility Agreement. Under the terms of that facility, the next revaluation of the secured property was scheduled to take place in June 2011, some 16 months after the appointment of the Receivers. 41 Third, the original pre-receivership facility provided to Firbank Arch was a Commercial Bill Line (the Bill Line Facility). That facility was to expire on 30 September 2010. At the date of appointment of the Receivers, a commercial bill with a face value of $9,794,000 was on issue. The existing bill was a 28 day bill with a maturity date of 26 February 2010 (the Existing Bill). Under the terms of the Bill Line Facility, if at any time Westpac cancelled the limit of the facility, Westpac had the right to require Firbank Arch to pay the face amount of all outstanding bills under the facility even if that had not yet matured. The appointment of the Receivers constituted an event of default entitling Westpac to cancel the Bill Line Facility. Westpac did not exercise that right. In fact, on 26 February 2010 (the day after the Court appointed the Receivers), Firbank Arch drewdown a further bill to meet the payment on the Existing Bill (the New Bill). The New Bill matured on 31 March 2010 in accordance with its terms and the face value of that bill became due for payment to Westpac. Westpac did not permit Firbank Arch to draw further bills and the New Bill remained unpaid and its face value owing to Westpac. 42 In any event, Mirvac accepts, as it must, that an event of default did not automatically trigger an acceleration of the entire debt owed by Firbank Arch to Westpac: see cl 10 of the Westpac Charge (No. 005895540) and cl 12(1) of the Westpac Mortgage (No. 601008924). In other words, Westpac had an option to accelerate and make immediately due and payable to it the entire amount of the debt the subject of the Bill Line Facility. However, there was no evidence to suggest that Westpac exercised that option. No notices declaring monies due and payable were served on Firbank Arch by Westpac either before or after maturity of the Existing Bill or the New Bill. On the contrary. At all times, it simply reserved its rights as the Secured Lender. Mirvac's submission is based on no more than an assertion that "Westpac must have taken some action". That assertion is rejected. It fails factually because it is not proved. It also fails legally because, as just noted, a default did not automatically trigger an acceleration of the entire debt owed by Firbank Arch to Westpac: see cl 10 of the Westpac Charge and cl 12(1) of the Westpac Mortgage. For the same reasons, the matters listed in paragraphs [39(1)] and [39(2)] are rejected. 43 Finally, and no less importantly, the appointment of the Receivers by the Court constituted an event of default under the Westpac Mortgage and the Westpac Charge entitling Westpac to appoint its own Receiver. However, Westpac did not appoint the Receivers, the Court did. There was no evidence to suggest (let alone establish) that Westpac took an "action for a default under the Mortgage" prior to the appointment of the Receivers by the Court.

(ii) Taken action for a default under the mortgage? 44 Next Mirvac submitted that the Secured Lender, as mortgagee, had "take[n] action for a default under the Mortgage" under the second limb of cl 3 of the Deed and Mirvac was therefore entitled to payment of the Termination Fee. "Mortgage" was defined in Recital C of the Deed of Consent as the BoM Mortgage and Charge together (now known as the Westpac Mortgage and the Westpac Charge). Mirvac submitted that the "action for a default under the Mortgage" was constituted by "the exercise by the Secured Lender of an option to accelerate, and make immediately due and payable to it, the entire amount of the debt the subject of the original Firbank Arch facilities". 45 It fails for the reasons stated at [42] above. There was no event of default and, no less importantly, an event of default did not automatically accelerate the debt. Westpac had an option to accelerate and make immediately due and payable to it the entire amount of the debt the subject of the Bill Line Facility. Westpac did not exercise that option. On the contrary. It simply reserved its rights as the Secured Lender. That reservation of rights did not constitute "action for default under the Mortgage". Mirvac's submission was based on no more than an assertion or conjecture that "Westpac must have taken some action". It is rejected. It fails factually and legally.

(iii) Other matters 46 Much of Mirvac's submissions were directed at the contention that the Court should cure a "contractual shortcoming" in the Deed of Consent, namely that cl 3 of the Deed did not include the appointment of a Court-appointed receiver, and that the "commercial outcome" should reflect the position as if Westpac had appointed the receiver. There are two complete answers to those contentions. First, parties are bound by the bargain that they make (see by way of example, Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd (2008) 257 ALR 292 at [108] citing Philip Bernstein (Successors) Ltd v Lydiate Textiles Ltd [1962] CA Transcript 238, sub nom Sterling Industrial Facilities Ltd v Lydiate Textiles Ltd 106 SJ 669) and, secondly, Westpac did not appoint the receiver, the Court did: see [6] and [32] above. The Court cannot and, in my view, should not rewrite the bargain struck by the parties or rewrite history.

(iv) Toshoku 47 Now the second basis. Mirvac submitted that the Termination Fee should be regarded as an expense of the receivership even though it arises out of a pre-receivership contract (the HMA) because it "would be just and equitable, in the circumstances, … to treat the [fee] as if it were an expense of the [receivership]": Toshoku at 679F. 48 In Toshoku, the statute provided that in a voluntary winding up "all expenses properly incurred in the winding up, including the remuneration of the liquidator, [were] payable out of the company's assets in priority to all other claims": at 674A. The issue was whether liability to taxation was to be treated as a "liquidation expense". At the centre of the dispute was whether that question was to be determined by the definition of the word "expense" in r 4.218(1) of the Insolvency Rules 1986 (UK) or by reference to some "judge-made test" of "fairness" like that adopted by Nicholls LJ in In re Atlantic Computer Systems plc [1992] Ch 505 at 520: Toshoku at 675H. Lord Hoffmann determined that the question was "a matter of statutory construction", that "the language of the rule [was] mandatory", and that the word "expense" referred only to the those listed under r 4.218(1) of the Insolvency Rules 1986 (UK): Toshoku at 676C-G; see also Toshoku at 677D that the "heads of expenses in r 4.218(1) are not subject to any implied qualification". For present purposes, it is sufficient to note that the question was determined by reference to the definition of "expense" in r 4.218(1)(a) of the Insolvency Rules 1986 (UK), which referred to "expenses properly chargeable or incurred by the official receiver or the liquidator in preserving, realising or getting in any of the assets of the company". 49 Notwithstanding the conclusion he reached, Lord Hoffmann examined the history and scope of the "liquidation expenses" principle adopted by Nicholls LJ in Atlantic Computer Systems at 677F. Lord Hoffmann concluded (at 680) that although originally based upon a statutory discretion to allow execution against the company's assets, the principle which had evolved from In re Exhall Coal Mining Co Ltd (1864) 4 De GJ & S 377 and Re Lundy Granite Co (1870-71) LR 6 Ch App 462 was one: … which permits, on equitable grounds, the concept that a liability incurred as an expense of the liquidation to be expanded to include liabilities incurred before the liquidation in respect of property afterwards retained by the liquidator for the benefit of the insolvent estate. … its effect could be to promote a creditor from merely having a claim in the liquidation to having a prior right to payment in full. … See also Toshoku at 681 and the authorities cited and Timbercorp Securities Ltd (in liq) v Plantation Land Ltd (2009) 72 ACSR 620 at [20]. 50 What then is the scope of this principle? In Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration) [2010] Ch 455 at [5]-[7], it was described as follows: [Toshoku,] though a case on corporation tax, considered what is referred to sometimes as the salvage principle, sometimes as the Lundy Granite principle … and sometimes as the liquidation expenses principle … Under that principle, liquidators are held liable to pay rent as a liquidation expense where the liquidators make use of or retain, for the benefit of the liquidation, possession of leasehold premises. … although the rule emerged historically in the context of the exercise of a discretion (whether or not to allow forfeiture proceedings to be brought or distress to be levied) it has evolved into a principle which, as [Lord Hoffmann] put it in para 38, "does not involve an exercise of discretion any more than the application of any other legal principle to the particular facts of the case". 51 Although Lord Hoffmann did not limit the principle to any particular type of pre-liquidation agreement, the paradigm example was a lease. Lord Hoffmann (at 679) commented that: … debts arising out of pre-liquidation contracts such as leases, whether they accrue before or after the liquidation, can and prima facie should be proved in the liquidation. In this respect they are crucially different from normal liquidation expenses, which are incurred after the liquidation date and cannot be proved for. … A reason, or at any rate a rationalisation, was put forward by Lindley LJ, giving the judgment of the Court of Appeal in Re Oak Pitts Colliery Co (1882) 21 Ch D 322, 330: When the liquidator retains the property for the purpose of advantageously disposing of it, or when he continues to use it, the rent of it ought to be regarded as a debt contracted for the purpose of winding up the company, and ought to be paid in full like any other debt or expense properly incurred by the liquidator for the same purpose … My Lords, it is important to notice Lindley LJ was not saying that the liability to pay rent had been incurred as an expense of the winding up. It plainly had not. The liability had been incurred by the company before the winding up for the whole term of the lease. Lindley LJ was saying that it would be just and equitable, in the circumstances to which he refers, to treat the rent liability as if it were an expense of the winding up and to accord it the same priority. The conditions under which a pre-liquidation creditor would be allowed to be paid in full were cautiously stated. Lindley LJ said, at p 329, that the landlord "must show why he should have such an advantage over the other creditors". It was not sufficient that the liquidator retained possession for the benefit of the estate if it was also for the benefit of the landlord. Not offering to surrender or simply doing nothing was not regarded as retaining possession for the benefit of the estate. 52 The decision in Toshoku may therefore be summarised as follows: 1. The essential finding was that r 4.218(1), which applies to liquidations, is to be construed to include debts which, under the Lundy Granite (or "liquidation expenses") principle (see [51] above), are deemed to be expenses of the liquidation: at 682. 2. The effect of the Lundy Granite principle is that whereas an expense incurred after the commencement of liquidation needs no additional equitable reason why it should be paid, and "may simply be liabilities which, as liquidator, he has to pay", an expense incurred prior to liquidation must have been incurred "for the benefit of the insolvent estate": at 680. 3. Debts such as rent under a lease will ordinarily fall within para (a) of r 4.218(1) and will be payable mandatorily, but the principle might possibly enlarge the scope of other paragraphs as well: at 682; see also Goldacre at [7]-[8]. 53 At its core, the principle in Toshoku is a principle which governs the interpretation of "expenses" under the Insolvency Rules 1986 (UK). It is of limited (if any) assistance in the present case. 54 ASIC submitted that the principle in Toshoku does not apply in a receivership. In support of this argument, ASIC referred to s 556(1) of the Act, the closest Australian statutory equivalent to r 4.218(1) of the Insolvency Rules 1986 (UK), which refers to a "relevant authority", defined in subs (2) to include a liquidator and an administrator, but not a receiver. Therefore, ASIC submitted, the basis for the application of the Toshoku principle is absent. The English Courts have extended the principle to administrations. In Bloom v Pensions Regulator [2011] Bus LR 766 (at [68]; citing Exeter City Council v Bairstow [2007] Bus LR 813), the Court stated that "[t]he Toshoku analysis has been applied to companies in administration, mainly because of the creation after that decision of a similar expenses regime for such companies": see also Goldacre. For present purposes, it is unnecessary to resolve whether there is a basis or bases for limiting the principle in Toshoku to liquidations and / or administrations. 55 It is unnecessary to resolve the issue because even if the principle was capable of applying, the facts of the present case militate against a finding that there is some underlying equitable reason why the Termination Fee should be regarded as an expense of the receivership. Specifically: 1. at no point in time did the Receivers personally adopt the HMA. Indeed, at all times the Receivers expressly disclaimed that they had adopted the HMA and disclaimed personal liability under the HMA: see [13]-[18] above; 2. the bases on which the Secured Lender was to be responsible for, or subject to, the obligations under the HMA were limited. The Secured Lender needed to appoint a receiver (or receiver and manager) over Firbank Arch's assets, or the Secured Lender (or any other mortgagee) needed to take action for a default under the Mortgage, neither of which occurred: see [35]-[45] above.

(v) Conclusion 56 For those reasons, I reject the first of the bases on which Mirvac submitted that the Termination Fee was payable by the Receivers to Mirvac in priority to the Secured Lender.

(2) Section 419 of the Act 57 Section 419(1) of the Act provides: A receiver, or any other authorised person, who, whether as agent for the corporation concerned or not, enters into possession or assumes control of any property of a corporation for the purpose of enforcing any charge is, notwithstanding any agreement to the contrary, but without prejudice to the person's rights against the corporation or any other person, liable for debts incurred by the person in the course of the receivership, possession or control for services rendered, goods purchased or property hired, leased, used or occupied. (Emphasis added.) Section 419(1) is in Pt 5.2 of the Act, which, unless the contrary intention appears, applies to receivers howsoever appointed: s 417 of the Act. 58 Read with s 417 of the Act, s 419 applies to any receiver who enters into possession or assumes control of company property for the purpose of enforcing a charge. Does a Court-appointed receiver enter into possession or assume control of company property for the purpose of enforcing a charge? It is rare that a receiver is appointed by the Court to enforce a charge. It may occur in circumstances where there is some deficiency in the charge. However, generally speaking the function of a Court-appointed receiver is to preserve the assets of the company and its potential to earn future profits. In Duffy v Super Centre Development Corporation Ltd at 383-384, Street J observed that: There is some contrast to be borne in mind between the function of a privately appointed receiver and the function of a Court appointed receiver … To some extent the privately appointed receiver, particularly in current commercial practice, makes an effort to restore the financial prosperity of the company whose affairs he has been appointed to administer by a debenture holder. A Court appointed receiver does not fill the same position. He is not so much what might be described as a company doctor, but rather his function is that of a company caretaker. His function is not so much to restore profitability. It is rather to preserve those assets of the company upon which its fortunes may be dependent, and to preserve its potentiality for earning profits in the future. (Emphasis added.) 59 In the present case, the Receivers were appointed to, among other things, identify, collect and secure the property of an unregistered managed investment scheme, provide a Disclosure Report to the Court, and wind up that scheme: para 5 of the Appointment Orders. That appointment was and remains consistent with the traditional function of a Court-appointed receiver earlier described and is distinct from the narrower and more specific purpose of enforcing a charge. 60 Despite the terms of the Receivers' appointment, Mirvac submitted that the phrase "for the purpose of enforcing a charge" in s 419 of the Act should be read broadly to encompass a receiver appointed for a purpose which has the effect of enforcing a charge. I reject that submission. First, it is contrary to the express words of the section. Second, there is no reason to read into the section a broader application than that provided for in the text. The personal liability of Court-appointed receivers has long been established at law: see Burt, Boulton and Hayward v Bull [1895] 1 QB 276 at 280-281. Section 419(1) of the Act was enacted to address a specific mischief which was not adequately addressed by the general law: see AGL Victoria Pty Ltd v Lockwood (2003) 10 VR 596 at 606 ('The mischief identified in the parliamentary debates as that which the provision was to overcome, was that of a receiver "buying goods without paying for them and, on their being sold, giving the proceeds to the debenture holder, the original seller not being paid"' (Hansard, 13 November 1934, p 1996)). That is not this case. 61 Third, insofar as s 419(1) of the Act does not apply to a Court-appointed receiver, it is not a 'lone horse' within Pt 5.2 of the Act. Sections 424 and 425 of the Act, for example, each apply only to a receiver appointed "under a power contained in an instrument". 62 Mirvac referred to Powdrill v Watson; Talbot v Cadge; Talbot v Grundy [1995] 2 AC 394 in support of its contention that s 419 applies equally to privately and court-appointed receivers. In that case, in the context of Insolvency Act 1986 (UK), Lord Browne-Wilkinson stated at 443 that: First, the mischief sought to be remedied by the introduction of the concept of "adopting" contracts of employment was the decision in Nicoll v. Cutts [1985] B.C.L.C. 322. Second, that decision related only to liability to pay the employees' wages falling due, but not paid, during the receivership: it was not concerned with other liabilities arising before or after the receivership. Third, the amendments made to the Insolvency Bill to meet that mischief related to administrators appointed by the court as well as to receivers: it would be strange if Parliament intended to produce different results in the two cases … (Emphasis added.) That part of the speech of Lord Browne-Wilkinson does not assist Mirvac's case. It was made in the context of provisions for liability for adopting contracts of employment; the provisions did not address the question of liability for debts incurred for the purpose of enforcing a charge. As noted earlier, I accept that s 419(1) may apply, in appropriate circumstances, to Court-appointed receivers, namely where a receiver is appointed by the Court to enforce a charge (see [60] above). That is what s 419 expressly provides. That, however, was not what occurred here. 63 What then is the consequence? As Byrne J stated in AGL v Lockwood at 607, s 419 "operates only where the debt is one arising from a transaction of a kind specified in the subsection; for other transactions the common law rule will apply". At law, a Court-appointed receiver contracts with third parties as principal and incurs personal liability (subject to a right of indemnity out of the assets in respect of liabilities properly incurred): Burt, Boulton & Hayward at 280-281. This is similar to a privately-appointed receiver under s 419(1) of the Act. However, whereas s 419(1) of the Act applies "notwithstanding any agreement to the contrary", a Court-appointed receiver is at liberty to 'contract out' of his or her personal liability: Burt, Boulton & Hayward at 280. Any change in that policy is a matter for Parliament. 64 Mirvac could not point to any authority in support of the proposition that s 419 extended to Court-appointed receivers in circumstances such as, or analogous to, the present case. For example, this is not a case of a pre-existing liability which did not accrue until an identified event: cf Powdrill v Watson at 447B. It was, at best, a contingent liability that may never have accrued. Finally, Sipad Holdings ddpo v Popovic (1995) 19 ACSR 108 does not support Mirvac's contentions. The circumstances of that case did not require the Court to consider the application of s 419 to circumstances such as, or analogous to, the present case. 65 Moreover, Mirvac's contention that the liability under cl 15.8 of the HMA to Mirvac was "incurred" by the Receivers under s 419 when the Receivers acted to terminate the HMA is rejected. Section 419 did not apply to the Receivers and, no less importantly, the liability under cl 15.8 was not "incurred" by them. It was incurred by Firbank Arch: cf McMahon's (Transport) Pty Ltd v Ebbage [1995] 1 Qd R 185 and Whitton v ACN 003 266 886 Pty Ltd (1996) 42 NSWLR 123. 66 Accordingly, I reject the second basis on which Mirvac submitted that the Termination Fee was payable by the Receivers to Mirvac.

(3) Alternatively to 2, the Court should order as a term of the receivership that s 419 of the Act applies as if the receiver had been appointed for the purposes of enforcing the Secured Lender's charge 67 Alternatively, Mirvac submitted that if s 419 of the Act did not apply to Court-appointed receivers, an order should be made that has the same effect to avoid the Secured Lender receiving a windfall. That submission is rejected. It is too broad. As explained in (2) above, in particular circumstances s 419 does apply to Court-appointed receivers. However, it does not apply to the circumstances of this case. 68 Secondly, the Receivers were appointed on 25 February 2010 on specified terms and conditions: see the Appointment Orders. Those terms were varied to address particular situations. So, for example, on 4 June 2010 the appointment was varied to give the Receivers the power of sale, again on stipulated terms and conditions. The Receivers did not refer to any authority in support of the proposition that the Court should or could now order the appointment of the Receivers subject to s 419 of the Act. 69 I accept that s 57 of the Federal Court of Australia Act 1976 (Cth) gives the Court jurisdiction to impose terms and conditions on the appointment of Court-appointed receivers. However, in the present case, the appointment of the Receivers was not subject to the same liabilities and rights prescribed in s 419. Their appointment was subject to the law: see [32] above. There is no basis for now appointing the Receivers subject to the same liabilities and rights prescribed in s 419: see also [46] above.

(4) New Contract between Mirvac and Receivers 70 There was no evidence to support the contention that there was a new contract between Mirvac and the Receivers whether as alleged or at all: see [13]-[29] above.

(5) "Adoption" 71 Mirvac submitted that "adoption" means undertaking a personal liability: O'Callaghan v Custom Credit Corporation Ltd (unreported, Supreme Court of Western Australia, 17 December 1997) and, on appeal, [1999] WASCA 70 and Associated Newspapers Ltd v Grinston (1949) 66 WN (NSW) 211 at 212. Moreover, adoption can occur other than via novation of a contract: Titoki Farms Ltd v Lei Jay Catering Ltd (1987) 3 NZCLC 96-145. 72 In the present case, there was nothing to suggest that the Receivers had personally "adopted" the HMA. On the contrary, the Receivers had expressly disavowed personal responsibility: see [13]-[18] above.

(6) GDK Financial Solutions and other cases 73 Mirvac then submitted that the principles in GDK Financial Solutions, In re Wrexham, Mold & Connah's Quay Railway Company [1900] 1 Ch 261 and Moodemere Pty Ltd (in liquidation) v Waters [1988] VR 215 provided a separate basis for the Court to find that payment under cl 15.8 of the HMA should be paid in priority to the Secured Lender. For the reasons that follow, I reject that submission. 74 In GDK Financial Solutions, Finkelstein J identified "several circumstances in which a receiver's costs will stand ahead of the claims of a secured creditor": at [10]. I will deal with each circumstance in turn. 75 First, a receiver is entitled to be paid out of the proceeds of sale of mortgaged property the cost of any work that directly benefits the mortgagee. Thus, where a receiver incurs expenses in the care, preservation and sale of mortgaged property, the receiver is entitled to those costs out of the sale proceeds: GDK Financial Solutions at [10]; In re Universal Distributing Company Limited (in liquidation) (1933) 48 CLR 171 at 174; see also Shirlaw v Taylor (1991) 31 FCR 222 at 228 and Moodemere at 229. 76 The expenses contemplated in those cases, being expenses incurred during the conduct of the receivership, are of a fundamentally different nature to the Termination Fee, a contractual fee negotiated and expressed in a pre-appointment contract. While I accept that the catalyst for termination of the HMA was the contract of sale, any liability to pay the Termination Fee derived from a pre-appointment contract, not from caring for, preserving and realising the Reef House Properties. 77 Second, a receiver is entitled to priority over a prior encumbrancer where the prior encumbrancer is a party to the action in which the receiver is appointed and consents to the appointment and to the receiver's administration of the charged property: GDK Financial Solutions at [11]. Here, the Secured Lender was not a party to the proceedings in which the Receivers were appointed: Australian Securities and Investments Commission v Letten [2010] FCA 140. 78 Third, the rights of a prior encumbrancer may be postponed in favour of a receiver where the prior encumbrancer is guilty of "unconscientious" conduct: GDK Financial Solutions at [12]. There is nothing to suggest that the Secured Lender has engaged in "unconscientious" conduct. 79 Fourth, costs incurred for the benefit of all persons having an interest in an asset (usually a fund that is subject to various claims) must be borne by the fund: GDK Financial Solutions at [13]-[15] citing Ford v Earl of Chesterfield (No 3) (1856) 52 ER 924; Wright v Kirby (1857) 53 ER 182 at 184; Batten, Proffitt & Scott v Dartmouth Harbour Cmrs (1890) 45 Ch D 612 at 618-9; Wrexham, Mold & Connah's Railway Co at 271-2 and Re A Boynton Ltd; Hoffman v A Boyton Ltd [1910] 1 Ch 519 at 525. This is commonly described as the rule in Ford. In general terms, it permits a party to recover its costs from a fund in priority where, but for that party's actions, the fund from the sale of the assets would not have been established. So, for example, it extends to actions taken by a junior secured creditor or a subsequent mortgagee where the actions taken by the party benefitted the first ranking secured creditor: Batten. As is apparent, the rule in Ford does not assist Mirvac. It has not taken any action, or incurred any cost, of benefit to the fund as a whole.

E CONCLUSION AND ORDERS 80 For those reasons, the answers to the directions sought by the Receivers are as follows: 1. Are the Receivers justified in refusing to pay to Mirvac Hotels Pty Ltd (Mirvac) the sum of $542,040 (the Termination Fee), being the Termination Fee claimed by Mirvac under the Hotel Management Agreement dated 27 April 1998 (HMA) between the seventh defendant, Firbank Arch Pty Ltd (Firbank Arch), and Mirvac, as an expense of the receivership of Firbank Arch? Answer: Yes 2. If the direction in response to question (1) is "No", are the Receivers justified in paying the Termination Fee to Mirvac from the proceeds of sale of the Reef House Properties in priority to payment of the proceeds to the Secured Lender? Answer: Unnecessary to answer. 81 In relation to the question of costs, if the parties are able to agree on appropriate costs orders, then such orders should be filed and served by 4:00pm on 13 October 2011. However, if the parties are unable to agree on appropriate costs orders, then by 4:00pm on 13 October 2011, ASIC, the Receivers, Mirvac and the Secured Lender should file and serve submissions on the question of costs, such submissions limited to two pages. I certify that the preceding eighty-one (81) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.

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