Bastion v Gideon Investments Pty Ltd

Proposed order 2 32 It seems to me that, in light of Lockhart J's approach, it would be inappropriate for me to make proposed order 2 in the broad form set out in the originating process. To give a direction that the plaintiff would be justified in making an agreement to compromise his disputes with the joint liquidators of the One.Tel companies would be to make or condone a commercial judgment, to that extent supplanting the controller's own primary function. Considerations of a somewhat different kind would arise if the plaintiff had been a court-appointed receiver, or a receiver appointed under statutory provisions, rather than a receiver appointed under a private instrument: Glazier Holdings Pty Ltd v Australian Men's Health Pty Ltd (Young J, unreported, 30 April 1998); Mariconte v Batiste (2000) 48 NSWLR 724, 737-8. 33 A similar reluctance was shown by Hodgson J in the Vartex Petroleum case. There a receiver and manager sought directions that he would be justified in entering into, and entitled to enter into, an agreement for the sale of the whole of the assets of the borrower company to the mortgagee, Caltex. The application was opposed by a director of the company, who drew attention to an alternative transaction which, he submitted, the controller should have pursued. Hodgson J decided it would not be appropriate for him to give advice in the broad and comprehensive terms sought by the plaintiff. It is true that the order sought in that case went beyond proposed order 2 in the present case, because it would have directed that the plaintiff was not only justified but entitled to enter into the agreement. However, it does not seem to me that Hodgson J's decision was based on this distinction. His view was that the Court should not use s 424 to make an adjudication upon the reasonableness of the plaintiff's proposed conduct, having regard to the analogy with the trustee cases and his hesitation about some of the commercial aspects of the proposed agreement. 34 It is common practice for an application under s 63 to be made by a trustee without notice to any person. Nevertheless, the fact that there is no opponent to the application may be a relevant discretionary consideration. The fact that in the present case, unlike the Vartex Petroleum case, the plaintiff's evidence has not been contested, reinforces my reluctance to make proposed order 2. In Franbridge Pty Ltd v Societe and Generale Finance Corporation Pty Ltd (1994) 14 ACSR 304, the applicant sought orders under s 424, including an order to the effect that he had acted reasonably in respect of the sale of certain assets of the company, for the purposes of s 420A. Einfeld J declined to make that order. He pointed out that the case before him was effectively an ex parte application, in contrast with the Best & Less case where the Deputy Commissioner opposed the application. He said that in such circumstances the Court has difficulty in making positive findings because the material presented to it has not been tested. 35 He observed (at 308): "Not only historically have the courts not given advisory opinions, but they have always been reluctant, and have very rarely been prepared, to make declarations which have no practical effect at all in relation to the matters of disputation under consideration. Even accepting Lockhart J's invitation to interpret s 424 (1) liberally, it seems to me doubtful that the concept of: "… 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 …" embraces the idea that a declaration could be made in effectively ex parte proceedings, certainly without the opportunity of any adversarial testing of the assertions, that a sale to a particular purchaser and for particular terms was, as the application says: "one carried out in the terms of s 420A"." 36 In the circumstances of the present case, I am less concerned than Einfeld J was that the making of an order in terms of proposed order 2 would have no practical effect. There is a difference between a direction that the plaintiff would be justified in entering into an agreement, and a direction that an applicant's past conduct complied with a statutory standard of reasonableness. As his Honour observed (at 308), a declaration of the kind sought by the applicant before him would be fairly meaningless, because it would not protect him from an attack at a later time if evidence became available suggesting that the Court's opinion was based on an incorrect understanding of the facts. 37 In contrast, as Lockhart J pointed out in the Best & Less case (at 246), a direction that a controller is justified in taking proposed action has some utility. The section does not permit the Court to give directions as to the rights of persons who are not parties to the hearing of the application and indeed, there is some doubt as to whether directions of the Court given under a section of this kind can bind anyone, even a party to the application (Best & Less, at 246). However, the significance of the direction is that it provides a measure of protection to the controller, who may call the decision in aid if the reasonableness of his conduct is put in question and may rely upon it in seeking relief under s 1318 of the Corporations Act. 38 In summary, while I acknowledge that proposed order 2 would be useful to the plaintiff in the present case, I have decided not to make an order in those wide terms because it would involve the Court taking a view of the commercial desirability of the agreement in ex parte circumstances, where the plaintiff's evidence is necessarily untested. I should make it clear, however, that I have no reason to question the evidence put forward in the plaintiff's affidavit, which has been carefully and competently put together. 39 In my opinion, however, it would be appropriate for the Court to make an order of more limited scope. Senior counsel for the plaintiff submitted that his client's particular concern is that in the special circumstances of this case, it has not been possible for him to carry out the usual investigations and assessments that a receiver and manager would normally carry out. Here, as I have said, the plaintiff has been engaged for some time in a dispute with the joint liquidators as to the ownership of certain assets and as to access to documents and information. This has prevented the plaintiff from concluding his investigations as to the ownership of assets and their value, and as to his prospects of success in litigation, and as to the risk that the joint liquidators might succeed in challenging certain transactions as unfair preferences. 40 Senior counsel submitted that if the Court is not prepared to make proposed order 2 in the wide form expressed in the originating process, then his client would seek an order to the effect that he would be justified in making his decision as to entry into the Agreement on the basis of information obtained and inquiries made up to the present time. The point of such a direction would be to protect the plaintiff from a claim that his decision to enter into the Agreement upon the basis of the present state of inquiries would necessarily, or a priori, be lacking in good faith because he has not until now made all the inquiries usual for a receiver and manager to make before taking such a decision. 41 In my opinion it is appropriate to give a direction in these terms. To do so does not require the Court to participate in the plaintiff's commercial decision to enter into the Agreement. It does require the Court to form the view that it would not be reasonable to require the plaintiff to take further steps, by way of investigation and inquiry, to clarify the nature of the assets and liabilities of the One.Tel Network Group companies, the ownership of disputed assets, the prospect of the joint liquidators recovering any assets on unfair preference grounds, and the prospects of threatened litigation by Lucent Australia and the joint liquidators that might affect the assets of the One.Tel Network Group. In my opinion it is appropriate for the Court to form such a view, and make directions under s 424 accordingly, even in ex parte proceedings, in circumstances where there is evidence that the controller has unsuccessfully sought to obtain further information by taking legal proceedings and other reasonable steps. 42 Given that a direction of the kind in contemplation is an appropriate direction to give to a controller in the circumstances of the plaintiff, I have no hesitation in deciding that on the facts of this case, such a direction should be given. It is relevant to take into account that the obtaining of an appropriate direction from the Court is a condition precedent to the operation of the Agreement, that the joint liquidators have obtained the approval of the Court under s 477 (2A) and (2B) of relevant aspects of the Agreement, and that the agreement has been approved by the Committee of Inspection of the creditors of OTL, as well as the joint liquidators and Lucent.

Proposed order 1 43 I have decided to make proposed order 1, although for the sake of clarity I shall describe the order as a "direction" and confine it to lawfulness but not impropriety. 44 The use of s 424 to make a direction that it would not be "unlawful" to take action in stated circumstances, is supported by Re North City Developments Pty Ltd; ex parte Walker (1990) 20 NSWLR 286. In that case, the question for Waddell CJ in Eq was whether to give a direction, under s 324F of the Companies Code (the predecessor to s 424), to a receiver who proposed to enter into contracts by which he would incur debts on behalf of the company. The direction would be to the effect that if the receiver entered into the proposed transactions he would not incur liability under the insolvent trading provisions of the companies legislation of the time. It appears that there was no opponent to the application. 45 His Honour found as a matter of law that the receiver would not be taking part in the management of the company for the purposes of the insolvent trading provisions. Consequently, he would not incur liability under those provisions by entering into the transactions under contemplation. 46 As to whether it was appropriate to give a direction reflecting this conclusion, he said (at 290): "It is, of course, a basic principle of the general law that the court will not give what is purely an advisory opinion. The plaintiff relies upon s 324F as providing a statutory exception to this principle. [He set out the text of the section.] Bearing in mind the provisions made by s 324E [the predecessor of the present s 423] for supervision of receivers by the court and the Corporate Affairs Commission, it seems to me that a receiver is entitled to apply to the court for a direction as to whether or not he may lawfully take a course of action which he proposes to do." 47 Here the plaintiff seeks a direction with respect to the lawfulness of his proposed conduct, having regard to what draft order No 1 refers to as "the principle of mortgage law that the mortgagee cannot exercise a power of sale in favour of itself" (for convenience, I shall refer to this as "the mortgage principle"). The problem is that Lucent Australia is the chargee and mortgagee under the security instruments that I have described, as security agent for financiers, and under the Agreement benefits are conferred on Lucent Australia and other Lucent companies. 48 The mortgage principle was expressed by Lindley LJ, delivering the judgment of the Court of Appeal in Farrar v Farrar's Ltd (1888) 40 ChD 395. His Lordship said (409): "It is perfectly well settled that a mortgagee with a power of sale cannot sell to himself either alone or with others , nor to a trustee for himself (Downes v Grazebrook 3 Mer 200, Robertson v Norris 1 Giff 421), nor to anyone employed by him to conduct the sale (Whitcomb v Minchin 5 Madd 91). A sale by a person to himself is no sale at all, and a power of sale does not authorise the donee of the power to take the property subject to it at a price fixed by himself, even although such price be the full value of the property. Such a transaction is not an exercise of the power, and the interposition of a trustee, although it gets over the difficulty so far as form is concerned, does not affect the substance of the transaction." 49 Textbook writers appear to accept, without qualification, that Lindley LJ's statement is an accurate representation of the mortgage principle: Fisher & Lightwood's Law of Mortgage (9th ed by ELG Tyler, 1977), p 370-1; Fisher & Lightwood's Law of Mortgage (Australian ed by ELG Tyler, PW Young and CE Croft, 1995), p 468-9. 50 It appears to me that the propositions expressed by Lindley LJ are an amalgam based on two foundations. One is the "logical" difficulty that a person cannot sell to himself. The "logical" problem arises because a legal mortgage involves a conveyance of the title to the secured property to the mortgagee. As legal owner, the mortgagee could not at general law convey the legal title to himself, because it was already there. It may be (and it is inappropriate for me to decide the point in the present ex parte circumstances) that the "logical" difficulty has been removed by statutory provisions such as s 24 of the Conveyancing Act 1919 (NSW), according to which a person may assure property to himself or herself, or to himself or herself and others. 51 The second foundation for Lindley LJ's observations appears to be an absolute principle of equity that a mortgagee is not permitted to exercise the power of sale in favour of itself, regardless of how fair the price may be (and apparently, regardless of any other considerations such as the fully informed consent of the mortgagor). His Lordship appears to take the view that such a principle exists, because he contemplates that the prohibition applies to a sale to a trustee for the mortgagee, a situation in which (as he acknowledges) the "logical" difficulty does not arise. Presumably the absolute principle was generated by concern about the inherent unfairness of a mortgagee exercising a power of sale in its own favour. 52 The absolute equitable principle does not apply, in Lindley LJ's view, where the mortgagee exercises the power of sale in favour of a company in which he has a shareholding interest. Such a sale is not, in his Lordship's view, either in form or substance a sale by a person to himself, and "to hold that it is, would be to ignore the principle which lies at the root of the legal idea of the corporate body, and that idea is that the corporate body is distinct from the persons composing it" (at 409-410). Where the mortgagee has an interest in the corporate purchaser, the sale may be open to attack on various grounds relating to fraud or undervalue, and the purchasing company has the burden of proving its validity, but the sale is not invalidated, per se, by the rule which prevents the mortgagee from selling to itself. 53 It might seem odd that the mortgage principle applies to a sale to a trustee for the mortgagee, but not to a sale to a company in which the mortgagee is interested. In Farrar's case a solicitor who was one of the mortgagees had an interest, apparently only 10%, in the shares of the purchaser company. One might expect that if the mortgagee was the beneficial owner of all of the shares of the purchaser company, the mortgage principle would apply, on analogy with the case of a sale to a trustee for the mortgagee. However, it appears that the Privy Council thought otherwise in Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349. In that case the only shareholders in the purchaser company were the mortgagee, his wife and children. Their Lordships did not apply the strict mortgage principle, but rather the more fact-based proposition, previously enunciated by Lindley LJ, which cast the onus on the purchaser company to justify the transaction. They said (at 1355): "In the view of this Board on authority and on principle there is no hard and fast rule that the mortgagee must not sell to a company in which he is interested. The mortgagee and the company seeking to uphold the transaction must show that the sale was in good faith and that the mortgagee took reasonable precautions to obtain the best price reasonably obtainable at the time." 54 It seems to me that there is some real doubt whether the absolute equitable principle has survived into the 21st century, in light of the observations made by the Privy Council. There is an analogy between the law with respect to mortgages and the law of trusts, although the Privy Council and many other courts have warned that the mortgagee is not a trustee. According to Jacobs' Law of Trusts in Australia (6th ed, 1997) paragraph [1743], a trustee must not purchase the trust property (as distinct from purchasing the beneficiary's interest) either from himself or from his co-trustee or co-trustees, and if he does, the transaction may be set aside by the court without any evidence being adduced that the transaction was unfair or that the trustee took improper advantage of his position as trustee and even if the terms were fair and generous. But in England the Court of Appeal has rejected the concept of absolute voidability, as expressed by Jacobs, and has held that the court has a discretion not to set aside the impugned transaction if in all the circumstances the transaction seems fair: Holder v Holder [1968] 1Ch 353. 55 The approach of the Privy Council in Tse Kwong Lam is consistent with Holder v Holder and raises the question whether there is any need for the absolute equitable principle in the law of mortgages. If, therefore, the matter arose for decision in contested circumstances, a modern court may well hold that the validity of the exercise of a power of sale depends upon general principles applicable whether or not the purchaser is (or is related to) the mortgagee, although that circumstance may be relevant to the propriety of the transaction. 56 In the Vartex Petroleum case Hodgson J, having declined to give directions in the broad terms sought by the applicant, said: "However, there is one important aspect of the matter in relation to which it may be appropriate for me to give advice or give directions. There is of course a principle of mortgage law that the mortgagee cannot exercise a power of sale in favour of itself. (See Farrar v Farrar's Ltd (1888) 40 Ch D 395.) The question arises as to whether this principle applies so as to prevent a receiver appointed by the mortgagee from selling the mortgaged property to the mortgagee who appointed him. As a matter of principle, it seems to me it does not. The deed of charge in this case, like most such deeds, provides that the receiver on appointment is the agent of the mortgagor. The significance of that receives some discussion in Meagher, Gummow and Lehane's Equity, 2nd ed, paragraphs 2837-2840. The question of the receiver's duties is discussed in the following paragraphs, and also received quite extensive discussion in the decision of Needham J in Expo International Pty Ltd v Chant (1979) 2 NSWLR 820. … If that is the true position, namely that in circumstances such as the present, the mere fact that the proposed sale is from a receiver to the mortgagee who appointed him does not make that sale improper, then it seems to me that it will be appropriate to give a direction to that effect to the plaintiff in this case." 57 Hodgson J stood the matter over for a short time to give the opponent of the receiver the opportunity to make submissions in opposition to the propositions of law that he had stated, and said that in the absence of further argument, he would give a direction that the sale to Caltex arising from acceptance of its tender would not be improper merely because Caltex was the mortgagee who appointed the plaintiff as receiver and manager. The law report does not indicate whether the order was in fact made. 58 I take it that the basis for Hodgson J's view was that, as the receiver in the case before him would sell the property as agent for the mortgagor, the case did not present the "logical" difficulty of a mortgagee transferring property to itself, and the absolute equitable principle did not apply because the receiver was acting in the mortgagor's interest. That point of distinction is not available in the present case since, as I have said, after the companies went into liquidation on 24 July 2001 the plaintiff became the agent of the mortgagee rather than the mortgagors. 59 In the Franbridge case, Einfeld J was prepared to accept that the mortgage principle did not apply as an absolute principle to a receiver. He said (at 308): "I agree that it is not per se improper for a receiver to sell the business of one company to a related company where the related company is the mortgagee responsible for the receiver's appointment. For clearly there is no legal blockage to such a sale. The question is whether it meets the demands of equity, propriety and commercial morality and also whether it complies with s 420A (1)." 60 It is not clear from the report whether his Honour was referred to the relevant case law, and whether he was influenced by the fact that the receiver in the case before him was acting as agent for the mortgagor. 61 In my opinion, therefore, neither the Vartex Petroleum case nor the Franbridge case is of any direct assistance in the present circumstances. I must consider whether the "logical" difficulty or the absolute equitable principle has any application. 62 As to the "logical" difficulty (assuming it has not been removed by the Conveyancing Act), in the present case the plaintiff, when entering into the Agreement, is acting as the agent for his appointor, Lucent Australia. Part of the security held by Lucent Australia as security agent is the legal title to shares within the One.Tel Network Group, under the mortgages of shares, but the Agreement does not purport to sell any of those shares to a Lucent company, and so the "logical" difficulty does not arise at that point. The security under the deed of charge is equitable security over property including any interest the One.Tel Network Group companies may have in the spectrum licences. The "logical" difficulty does not arise when, by the Agreement, the plaintiff agrees to grant an option over the spectrum licences to the Lucent companies, since the chargee does not hold legal title to the licences as part of the security. 63 As to the absolute equitable principle, it is true that under the Agreement, the option to purchase the spectrum licences is granted to companies which include the direct chargee (Lucent Australia as security agent) and the beneficial chargee (Lucent Technologies Inc). However, the grant of the option is part of a larger compromise agreement involving the Lucent companies, the joint liquidators and the plaintiff. The purpose of the Agreement is to resolve various disputes in a manner which enables the plaintiff and the joint liquidators to bring to an efficient and cost-effective termination a significant portion of their respective responsibilities. The concern about the inherent unfairness of a mortgagee exercising a power of sale in its own favour, which appears to underlie Lindley LJ's remarks in the Farrar case, is simply not in evidence where the transaction in question results from a complex negotiation compromising many other claims. Whatever may be the precise scope of the absolute equitable principle, if it exists at all, my view is that the principle is not attracted here. 64 Proposed order 1 has been carefully drafted so as not to involve the Court in expressing an opinion on matters of fact about which there may be some contest. It does not, therefore, deal with the position of the plaintiff under the law concerning proper exercise of a mortgagee's power of sale, which depends upon considerations relating to good faith, proper procedure and fair price. Although the evidence does not suggest any impropriety in this case, I have not been asked to give a direction relating to the factual circumstances and proposed order 1 does not purport to do so. 65 In these circumstances, it seems to me that a direction in terms of proposed order 1 is justified. I hesitate to use the word "declare", which suggests a binding declaration of right rather than a direction having the more limited significance that I have described. I note that the word "declare" is used in some of the cases, no doubt in a special sense, but I have decided it would be better to use the word "direct", which is sanctioned by s 424 itself. While Hodgson J in Vartex Petroleum indicated a willingness to direct that the proposed sale was not "improper" by virtue of the mere fact that it was from a receiver to the mortgagee, I would prefer not to use the word "improper", which might suggest a conclusion with respect to the factual circumstances of the sale and the bona fides of the plaintiff. Proposed order 1 is intended to establish only that the mortgage principle does not apply, and the word "lawful" is more apt to convey that idea.

Conclusions 66 I shall make directions under s 424 of the Corporations Act in the following terms: 1. The Court directs that, notwithstanding the principle of mortgage law that the mortgagee cannot exercise a power of sale in favour of itself, it would not be unlawful for the plaintiff to enter into the Agreement (as defined in the Originating Process) solely by reason of the fact that Lucent is a party to and receives benefits under the Agreement. 2. The Court directs that the plaintiff would be justified in making his decision as to entry into the Agreement on the basis of information obtained and inquiries made up to the present time. **********

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