These proceedings concern premises at Campbell Parade, Bondi at which a bar known as Bar 34 is operated (the "premises").
On 1 September 2013, the registered proprietors of the premises (the "Kocics") entered into a five year lease of part of the premises with Louvre Group Pty Limited.
On 4 February 2015, that lease was transferred to the first defendant ("BHAUS"). At the time of the transfer the director of BHAUS was Mr Alan Cunningham. The sole shareholder in BHAUS was Spirit Pacific Pty Limited, of which the sole director, secretary and shareholder was Mr Cunningham. The evidence discloses that Spirit Pacific Pty Limited has since been deregistered, although nothing turns on that.
In connection with the transfer of the lease of the premises to BHAUS, the plaintiff ("Celestial") entered into a loan agreement with BHAUS on 4 February 2014 whereby Celestial advanced to BHAUS the sum of $144,000 for a period of six months (the "Loan Agreement"). Interest was to be paid monthly.
In addition to the Loan Agreement, Celestial secured its interest by a General Security Agreement of the same date with BHAUS ("the GSA"). On 4 February 2014, under the GSA, BHAUS granted a fixed and floating charge over its property to Celestial.
BHAUS went into default under the Loan Agreement. It did not make all of the interest repayments and it did not repay the principal.
Unbeknown to Celestial, on 30 June 2015 Mr Cunningham caused BHAUS to surrender its lease over the premises. By a new lease dated 8 July 2015 (being for a period of five years commencing on 1 July 2015) the Kocics leased the premises to the second defendant ("34 Bondi"). Mr Cunningham is a director and shareholder (albeit not the only one) of 34 Bondi.
The GSA included the following provisions, all of which Celestial submitted had been engaged in the present case:
5. Events of Default
If any one or more of the following occur, an Event of Default will have occurred.
(a) (cross default) There is material default by the Grantor in the performance of any term, agreement, or condition contained in or implied by this document or Loan Agreement. …
(c) (cessation of business) The Grantor ceases or threatens to cease to carry on its business or a material part of its business or disposes of or threatens to dispose of substantially all of its assets. …
(n) (loss of control) If any of the Secured Property is taken out of the effective management and control of the Grantor (except upon a permitted dealing with that property).
Celestial Finance Australia Pty Limited v BHAUS Pty Limited & Anor [2015] NSWSC 1509 | Case summary | Zoe
The case which Celestial seeks to make is that, there having been an event of default under the Loan Agreement and the GSA, it had a security interest in the assets and undertaking of BHAUS, including the lease and BHAUS' other property. The assets and undertaking of BHAUS were transferred to 34 Bondi (which entered into a new lease for the premises) in circumstances where 34 Bondi (through Mr Cunningham) was on notice that what was being done was in breach of Celestial's rights and interest in the assets and undertaking of BHAUS.
Although there is as yet no pleading before the Court, counsel for Celestial submits that there is a serious question to be tried that, by reference to principles of resulting and constructive trust and knowing assistance in and knowing receipt of trust property as set out in Barnes v Addy (1874) LR 9 Ch App 244, 34 Bondi holds the assets and undertaking which comprise Bar 34 (including the new lease) on trust for either Celestial or BHAUS.
In answer to the contention that there is a serious question to be tried on that point, the solicitor for BHAUS and 34 Bondi made four submissions. I will deal with each in turn.
First, he submitted that there was in fact no debt owing from BHAUS to Celestial. The difficulty with that submission is that, other than tendering a bank undertaking which shed no light on the issue, no evidence was proffered on the part of BHAUS and 34 Bondi in support of that proposition. A great deal was said from the bar table on behalf of the defendants to the effect that no money was owing or had indeed ever been advanced by Celestial to BHAUS. In the absence of evidence, the Court cannot act upon that submission. Nevertheless, taking what was said from the bar table at face value, it reinforces the conclusion that the Court has reached that there is a serious question to be tried in relation to the issues between these parties.
The second submission related to the fact that the Loan Agreement and the GSA were not stamped. That point was taken both at the level of evidence and, as I understood it, going to the substantive effect of the documents. In relation to their admission into evidence, counsel for Celestial on behalf of his client offered an undertaking directed to satisfying the requirements of s 304(2) of the Duties Act 1997 (NSW) (the "Act") to the effect that the documents would be submitted for stamping and proof thereof provided to the Court within seven days. On the basis of that undertaking, I admitted the two agreements into evidence.
In connection with the substantive effect of the documents, it was submitted that even if they were stamped it would not give them retrospective effect. While this question is not free from doubt, I respectfully adopt and follow the conclusion on this question recently set out by Robb J in Photios v Cussen and Senatore (in their capacity as joint administrators of Beachworth Land Estates Pty Limited) (administrators appointed) [2015] NSWSC 336 at [150]. In that judgment his Honour expressed his agreement with the view reached by Katzmann J in Arnautovic & Sutherland trading as Jirsch Sutherland & Co v Cvitanovic [2011] FCA 809, (2011) 199 FCR 1 that upon the requisite duty being paid, the unenforceability of unstamped charges pursuant to s 211 of the Act was cured retrospectively. It follows, in my view, that upon the payment of any applicable duty the Loan Agreement, and perhaps more importantly for present purposes, the GSA, would be enforceable retrospectively to the time of their execution. Even if I were wrong about this conclusion, insofar as there was room for debate on this question by reason of the absence of appellate authority, there would nevertheless be a serious question to be tried on the point if the defendants chose to agitate it at any final hearing.
The third submission was that damages were an adequate remedy. Counsel for Celestial submitted that there was a unique aspect to this arrangement insofar as it concerned a particular sort of business namely a bar, in a particularly desirable location and that that was sufficient to answer the suggestion that the damages would be an adequate remedy. It seems to me that since Celestial's claim is in rem, that submission should be accepted. I am satisfied that damages would not be an adequate remedy in this case having regard to the interest being asserted.
The fourth submission put on behalf of the defendants was directed to the balance of convenience in answer to the Court's question as to what prejudice they would suffer if the orders sought were made. It was submitted that if the Kocics as lessors became aware of the interest that was being asserted, in particular in relation to the new lease, this could cause them to terminate the new lease. The difficulty with that submission is that the defendants' solicitor was unable to point the Court to any provision in the new lease that would justify the lawful termination of the new lease in the circumstances of this case. While the lease contained the usual provisions against mortgaging or otherwise dealing with the lessee's interest without the consent of the landlord, that provision does not, in my view, operate where equitable interests of the kind asserted by Celestial are concerned. In particular, insofar as remedial equitable remedies are sought, those are not interests created by the agreement of the parties but are imposed by the Court. In those circumstances, I do not see how the usual clause against mortgaging or dealing with the lessee's interest would be infringed in the circumstances of this case. In considering this argument, the Court has, of course, assumed that the Kocics, should they become aware of this litigation, will act entirely and only in accordance with their rights and obligations under the new lease.
It follows that the Court does not accept any of the defendants' submissions as to why interlocutory relief should not be granted. The only matter which I should record is that among the relief that is sought was an order that 34 Bondi continue to operate the business of the bar. For the well-known reasons applying to mandatory injunctions, the Court would not exercise its discretion to order a party to continue to operate a business except in the most unusual circumstances. At least on the evidence that has been adduced today there are no such circumstances to warrant an extraordinary order of that kind being made. Celestial will be adequately protected by orders in the usual negative form preventing 34 Bondi from dealing with the new lease or (other than in the ordinary course of business) the assets and undertaking of the business.
With the exception of the proposed mandatory injunction, the Court will grant the interlocutory relief sought by Celestial.
[2]
Amendments
14 October 2015 - Amendment to last sentence of paragraph 17
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Decision last updated: 14 October 2015