Camden Nurseries Pty Ltd v Aussie Growers

Whether the September 2017 Agreement is a sham

1. The first matter to be addressed is whether the September 2017 Agreement was intended to have legal effect in accordance with its terms. The plaintiffs and the fourth defendant contended that it was not and was, accordingly, a sham. The third and sixth defendants contended that the September 2017 Agreement was intended to operate in accordance with its terms and was a bar to the orders sought by the plaintiffs.
2. The approach to be taken to determine whether a transaction is a "sham" is well established. In Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471; [2004] HCA 55, the High Court (Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ) said at [46]: "'Sham' is an expression which has a well-understood legal meaning. It refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences."
3. Thus the test for whether a transaction is a "sham" is whether there was a common intention among the participants to the transaction to give to others the appearance of creating legal rights and obligations different from the actual legal rights and obligations which they intended to create: Snook v London & West Riding Investments Ltd [1967] 2 QB 786 at 802 (Diplock LJ) and Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 at 453-454 (Lockhart J, Foster J agreeing); 467-468 (Beaumont J, Foster J agreeing).
4. In the present case, the third defendant had significant financial problems. Her share in the Property was encumbered and Mr Palmer owned the other share because of her son's bankruptcy. She wanted to develop the Property and obtain a substantial profit but knew that she would lose the chance of doing so if the Property was sold either by Mr Palmer or by the plaintiffs after an application under s 66G of the Conveyancing Act 1919 (NSW). The only way she could buy time was to work out a way of owning the Property with someone who had the wherewithal to keep creditors at bay. However, if the sixth defendant had approached Mr Palmer to purchase his share, the third defendant would still have been subject to the risk that the plaintiff would sell the Property in the exercise of its power of sale under the Mortgage (following a s 66G order).
5. I am satisfied on the basis of the evidence of Mr Marjan and the surrounding circumstances, that Ms Cassar agreed with Mr Marjan that a company which he controlled would be incorporated (the sixth defendant) and that she and that company would together own the Property. The common intention of the third and sixth defendant was that they would, together own the Property and develop it to their mutual benefit and profit. I am satisfied that there was no intention that the third defendant's share in the Property would ever be transferred to the sixth defendant.
6. The narrative set out above reveals significant material from which it can be concluded that the third and sixth defendants intended that their dealings should have an operation entirely different from and inconsistent with that which would flow from the terms of the September 2017 Agreement. I regard the following matters as significant, in themselves and taken together.
7. The instructions given to Mr Pearson by Mr Marjan, which accorded with his discussions with the third defendant (and her husband), did not involve a transfer of the third defendant's interest to the sixth defendant. Rather, they involved the co-ownership of the Property by the third and sixth defendant, which could only, in the circumstances, have been achieved by the transfer of Mr Cassar's interest (then vested in the fourth defendant as his trustee) to the sixth defendant. A transfer of the third defendant's share in the Property to Mr Marjan's company would have been entirely inconsistent with the common arrangement. I also regard it as significant that Mr Pearson assured Mr Marjan in his email of 6 September 2017 that he appreciated that "there is a high degree of trust involved in this transaction" and would "do everything possible to ensure that it is put into effect in accordance with your instructions in a way that keeps your interests secure". Mr Pearson was, relevantly, the agent of both the third and the sixth defendants and his statement to that effect was, in my view, highly incriminating.
8. I regard the reference to the "high degree of trust" as indicating that Mr Pearson realised that it involved a high degree of trust for Mr Marjan to commit his company to buying real property at an exorbitant price from the third defendant when his true intention was to become co-owner with her of the whole of the Property. This context also explains why Mr Marjan expressed the purpose of the caveat in his affidavit as being "to secure the released deposit" (see [9] of his affidavit extracted above), as distinct from to secure performance of the September 2017 Agreement, since he had actually paid the $500,000 and appreciated that he needed security for it given the third defendant's financial difficulties.
9. The purchase price for the third defendant's share was, on all the evidence, exorbitant. Even on the basis of the valuation of $5.3m, which Mr Marjan had apparently sighted but which was not in evidence, the third defendant's half share would not be worth $3.5m. While Mr Marjan hoped to make money out of developing the Property, he knew of the third defendant's financial problems. There was no apparent reason for him to pay a price which was so substantially above the market price of the Property. I infer that there were at least two reasons for the specification of such high price for a half share in the Property. First, the contract on its face purported to be an agreement to transfer the whole of the Property. The value of the whole of the Property was in the order of $3.5m (having been valued as at 31 March 2017 at $3.75m and by the trustee at up to $2.5m). The September 2017 Agreement was to be used to obtain finance and therefore there was an imperative that it appear to be a commercial, arms-length dealing. Further, the price was one which, had it been associated with a genuine transaction, would have inclined the plaintiffs and the fourth defendant to forbear from challenging it since it would have been in their interests to allow it to be completed.
10. It is also of importance that neither Mr Marjan (nor Mr Pearson) communicated at all with the fourth defendant, who had title to the other half of the Property.
11. The September 2017 Agreement provided for a settlement date within six weeks of the contract date. Mr Marjan did not even submit a loan application to the NAB for the funds for the purchase until after the sixth defendant had been joined to the proceedings, which was a month after the settlement date nominated in the agreement.
12. Moreover, I am not satisfied that the NAB was told that the sixth defendant proposed to buy the third defendant's share in the Property, as opposed to the whole Property. The appearance of the September 2017 Agreement was misleading in that it implied that the third defendant owned and would transfer the Property. She did not, as the title search reveals, have title to the Property, but only to her undivided share as tenant in common with Mr Palmer. It appears that the NAB understood the transaction to be that the third and sixth defendants would together refinance the whole of the Property. The NAB's understanding accorded with the true agreement and was inconsistent with the September 2017 Agreement. There is no indication that the September 2017 Agreement was ever stamped.
13. There was obvious urgency in the execution of the September 2017 Agreement. Both the third defendant and Mr Marjan (who was relevantly the mind of the sixth defendant) knew of the third defendant's financial problems and the risk that the Property might be sold by either the plaintiffs as equitable mortgagees or the fourth defendant (following an application by either of them for an order under s 66G of the Conveyancing Act). They appreciated that either of these possibilities would have the effect of thwarting their common intention to develop the Property as co-owners for mutual profit. The sixth defendant was plainly not a bona fide purchaser for value without notice.
14. Mr Pearson, who acted for both the third and sixth defendants on the September 2017 Agreement, had acted for the third defendant on the Mortgage and can be taken to have appreciated that the September 2017 Agreement contravened cl 6 of the Mortgage. Mr Pearson knew from his conversation with Mr Bailey on 21 April 2017 that the fourth defendant proposed to sell the Property. He also knew that the plaintiffs had commenced the proceedings and were seeking an order for sale. Had the plaintiffs become aware that the September 2017 Agreement was to be executed, they could have moved to restrain it on the basis that its execution by the third defendant was a breach of her obligation under cl 6 of the Mortgage. By seeking to rely on the September 2017 Agreement in these proceedings to prevent orders for sale and possession of the Property, the third defendant was apparently attempting to profit from her own breach.
15. I also regard it as significant that neither the third defendant nor Mr Pearson gave evidence. They were both persons whom the third and sixth defendants could have been expected to call to rebut the inference that the September 2017 Agreement did not reflect the parties' true agreement. In these circumstances I draw the inference that their evidence could not have assisted the cases of the third and sixth defendants: Jones v Dunkel (1959) 101 CLR 298.
16. I note that there was a considerable impediment to Mr Pearson giving evidence in these proceedings and remaining on the record for the third and sixth defendants (leaving aside any question of conflict between the positions of the third and sixth defendants and indeed, Mr Cassar, for whom it appears Mr Pearson also acted): rule 27.2 of the Legal Profession Uniform Law Australian Solicitors' Conduct Rules 2015 (NSW) and Barrak Corporation Pty Ltd v The Kara Group of Companies Pty Ltd [2014] NSWCA 395 at [47]-[49] (Adamson J, Barrett JA and Sackville AJA agreeing). This impediment does not prevent the inference being drawn in circumstances where Mr Pearson acted for both parties on what I have found to be the actual transaction while at the same time preparing the documentation (which was inconsistent with the actual transaction) which became the September 2017 Agreement and arranging for its execution.
17. In conclusion I am satisfied that the September 2017 Agreement is a sham in that it did not reflect the true agreement between the parties and was not intended to operate in accordance with its terms. Accordingly, it was incapable of creating an interest in the Property and therefore did not confer a caveatable interest on the sixth defendant. In these circumstances, the plaintiffs are entitled to an order that the sixth defendant withdraw the caveat.

Whether the plaintiffs are otherwise entitled to the orders sought

1. The plaintiffs have established their entitlement to exercise the power of sale over the third defendant's interest in the Property as well as their entitlement to possession of the Property, subject to the consent of the fourth defendant, which I note has been given. Their entitlement arises from the Mortgage and is not, for the reasons given above, subject to the September 2017 Agreement.
2. I am satisfied that the plaintiffs have complied with the appropriate procedure for the enforcement of equitable mortgages outlined by Campbell J in King Investment Solutions v Hussain [2005] NSWSC 1076. All relevant parties have been joined, including the fourth defendant as the registered proprietor of the third defendant's tenant in common and the fifth defendant as first registered mortgagee. There is evidence of the value of the Property as at 31 March 2017 and evidence of the debt secured by the Mortgage.
3. I am satisfied that, in addition to declarations regarding the entitlement of the plaintiffs and the fourth defendant to exercise their respective powers of sale of the Property, it is both necessary and appropriate to make an order for possession and for a writ of possession to be issued forthwith to permit the sale of the Property to occur as soon as reasonably possible. Vacant possession is a normal incident of sale and is therefore associated with the power of sale conferred on all mortgagees by s 109(1)(a) of the Conveyancing Act: Harden Shire Council v Richardson [2012] NSWSC 622; (2012) 188 LGERA 200 at [167] and [194]-[196] (Johnson J), which was followed in Baker-Crooks v Separovich [2017] NSWSC 708 at [24]-[25] (Davies J). The plaintiffs, as mortgagees for sale, owe a duty to take reasonable care to ensure that the Property is sold at the market value: Commercial and General Acceptance Ltd v Nixon (1981) 152 CLR 491 at 495 (Gibbs CJ); [1981] HCA 70. The fourth defendant, as trustee in bankruptcy, also owes duties with respect to the sale of the Property. These respective duties can best be discharged if the plaintiffs and the fourth defendant have vacant possession of the Property.
4. I am informed that the Property is vacant rural land on which there is a disused house which is not fit for occupation. In these circumstances I am satisfied that it was not necessary for any notice to be given to any occupier since there is none.

Costs

1. The position of the plaintiffs on costs is protected by cl 9(iii) of the Mortgage which requires the third defendant to pay costs associated with the enforcement of the Mortgage, which are secured by the Mortgage over the Property. Nonetheless it is appropriate to order the third defendant to pay the plaintiffs' costs on the basis of ordinary principles that costs follow the event: Uniform Civil Procedure Rules 2005 (NSW), r 42.1.
2. The position of the fourth defendant is different, since his costs are not protected by the Mortgage. Mr Cominos, who appeared on behalf of the fourth defendant, contended that it was appropriate that the third defendant pay the fourth defendant's costs of the proceedings. Mr Palmer was joined to the proceedings as a necessary party since he holds a share in the Property as tenant in common. He co-operated with the plaintiffs throughout and supported the relief claimed. I am satisfied that it is appropriate that the third defendant be liable for the fourth defendant's costs.
3. I note that the plaintiffs have sought an order that the costs be "fixed by the Court" which I take to be a reference to the power of this Court to specify a gross sum in respect of costs pursuant to s 98(4) of the Civil Procedure Act 2005 (NSW). The present case seems to me to be an appropriate one for such an order. I have made provision in the orders set out below for such an application to be made, if any party wishes costs to be specified rather than assessed.

Orders

1. For the reasons given above, I make the following declarations, orders, notations and directions: 1. Declare that the interest of the third defendant in the land at Folio Identifier 36/215521 (the Property) is subject to an unregistered mortgage in favour of the plaintiffs securing the sum of $444,950.18 plus interest from 20 September 2017 pursuant to s 101 of the Civil Procedure Act 2005 (NSW). 2. Declare that the plaintiffs are entitled to exercise their power of sale of the third defendant's share of the Property. 3. Declare that the plaintiffs are, together with the fourth defendant and subject to his consent, entitled to possession of the Property. 4. Note that the fourth defendant consents to the plaintiffs having possession of the Property in conjunction with him. 5. Order that possession of the Property be granted to the plaintiffs in conjunction with the fourth defendant. 6. Grant leave to the plaintiffs and the fourth defendant to issue a writ of possession forthwith to enforce the judgment of the Court. 7. Order the sixth defendant, pursuant to s 74MA(2)(b) of the Real Property Act 1900 (NSW), to withdraw caveat No. AM755148 from the Property within seven days hereof. 8. Order the third defendant to pay the plaintiffs' costs of obtaining these orders. 9. Order the sixth defendant to pay the plaintiffs' costs of obtaining these orders, such costs to be limited to costs incurred from 1 December 2017. 10. Order the third defendant to pay the fourth defendant's costs of the proceedings. 11. Grant liberty to the party to apply for an order pursuant to s 98(4) of the Civil Procedure Act 2005 (NSW) that the costs referred to in orders (8), (9) and/or (10) be specified in a gross sum, any such application to be made in writing to my Associate together with any evidence in support by 29 January 2018. 12. Liberty to apply on 2 days' notice.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 15 December 2017