Citadel Financial Corporation Pty Limited v Elite Highrise Services Pty Limited

Judgment (ex tempore)

1. HIS HONOUR: Before the Court are two substantive proceedings. Proceedings 2013/372920 were initiated by the plaintiff Citadel Financial Corporation Pty Limited by summons in the Commercial List filed on 11 December 2013, by which it seeks orders that the first defendant Elite Highrise Services Pty Limited deliver up to Citadel certain scaffolding equipment said to have been sold by Citadel to Elite, to be in the possession of Elite, and alternatively judgment for the unpaid purchase price of approximately $1.8 million. Broadly, the Commercial List Statement filed in support of that summons alleges an oral agreement made in November 2013 for the sale by Citadel to Elite of scaffolding equipment for a price of $2.171 million upon terms which included the grant by Elite to Citadel of a security interest in the scaffolding equipment until the price was paid in full. The List Statement further alleges that the scaffolding equipment the subject of the agreement was delivered in about December 2012; that there ensued various discussions about the purchase price and some payments in reduction of it; and then that on or about 9 August 2013, Citadel issued to Elite a tax invoice in respect of the scaffolding equipment for the sum of $1.821 million (being the balance said to be outstanding) which invoice included a retention of title clause and additional clauses purporting to grant a security interest in the subject scaffolding. It is then alleged that the security interest was registered on the Personal Property Securities Register on 12 August 2013. Elite, disputes that it has received all of the scaffolding referred to in the statement of claim, although it admits that it has received some of it.
2. The second substantive proceeding before the Court was instituted by Skyline Apartments Pty Limited and Pacific Hoardings Pty Limited as plaintiffs by summons filed on 12 December 2014, seeking, in substance, an order that Elite deliver up 900 tonnes of scaffolding equipment supplied by Skyline and Pacific to Elite between August 2012 and February 2013, and alternatively damages corresponding to the value of that scaffolding. That summons was filed in circumstances where Skyline and Pacific had been joined as respondents to Citadel's motion to which I shall come, and had been before the Court on Citadel's motion substantially supporting the relief that Citadel had sought.
3. On 14 November 2014, Murray Roderick Godfrey and David Nicholas Iannuzzi were appointed receivers and managers of Elite Highrise Services Pty Limited by a secured creditor, CML Payroll Pty Limited. CML was, according to the PPSR, the third ranked secured creditor, the first ranked secured creditor being Skyline and Pacific, and the second being Citadel. According to the PPSR, Skyline and Pacific claim a security interest in collateral being 900 tonnes of scaffolding materials transferred to Elite between August 2012 and March 2013. That security interest was registered on 26 April 2013. Citadel claims a security interest in scaffolding equipment and all other goods supplied by the secured party. Its registration was effected on 12 August 2013. CML has three registrations: the first in respect of all present and after acquired property, registered on 1 April 2014; the second in respect of intangible property (account) registered on 1 October 2014; and the third in respect of all present and after acquired property, registered on 2 October 2014. Although it seems from the evidence that the interests claimed by Skyline and Pacific and by Citadel are in respect of purchase money, neither is registered as a PMSI. In the absence of such registration, those interests fall to be considered under the (Cth) Personal Property Securities Act 2009 as if they were not PMSIs; in other words, they are not entitled to the special protections afforded to a security interest that is registered as a PMSI.
4. On 2 December 2014, the receivers, who had retained auctioneers to sell all the scaffolding held by Elite, entered into an agreement with a purchaser to sell a substantial portion of that scaffolding. Broadly, according to a document prepared by the receiver, Elite appears to hold about 4,500 tonnes of scaffolding of which 2,600 are said to be installed on various sites and about 1,550 is located at its property at Kurnell. The sale was of 1,550 tonnes approximately, which suggests that it comprised virtually all of the scaffolding presently located on the Kurnell site.
5. By notice of motion filed on 3 December 2014, Citadel sought orders restraining the receivers from selling any further scaffolding, preserving the proceeds of sale of any scaffolding that had been sold, and prohibiting removal of any scaffolding equipment from the Kurnell site. When that motion first came before the Court the receivers consented to limited interim relief. Pacific and Skyline, who had been joined as fourth respondents to the motion, supported the application on the basis of their claimed security interest. In those circumstances, although I then expressed serious reservations as to Citadel's claimed security interest, the Court granted interim relief until today, restraining any further sale of scaffolding equipment, requiring the proceeds of any sale to be preserved, and prohibiting removal of any scaffolding equipment from the Kurnell property.
6. After those orders were made on 3 December, the matter returned to Court on at least two subsequent occasions, to correct and to make relatively minor variations to those orders. This was necessitated by the circumstance that, notwithstanding the order prohibiting removal of the scaffolding from the Kurnell property, the receivers had taken the view that the prohibition did not extend to such scaffolding as was the subject of the sale already negotiated, and permitted some of that scaffolding to be removed from the property by its purchaser on the morning of 4 December.
7. Essentially, the question before the Court concerns the competing priorities of the claimed security interests. I bear in mind that, this being an interlocutory application, essentially for extension of the interim relief previously granted, the applicants do not have to establish their case to the level that would be necessary on a final hearing, and the issue for the Court is whether there is a sufficiently serious question to be tried on the claim for a final injunction that the balance of convenience favours preserving the status quo than permitting the sale (not only the sale already negotiated, but of all the scaffolding) to proceed. Essentially, this means whether the risk of prejudice from granting of an injunction, if it turns out in the long run to have been wrongly granted, is greater than the risk of not doing so should it turn out in the long run that an injunction should have been granted. But one does not get to consider the balance of convenience unless there is a sufficiently seriously arguable claim for a final injunction, and the strength of such a claim bears on what is required to tilt the balance of convenience.
8. Although, particularly in Citadel's case, there is a live dispute as to what if any scaffolding was agreed to be sold, and how much has been delivered, Citadel's evidence, if ultimately accepted, would make out an oral agreement for sale of the scaffolding referred to in the statement of claim in the order of 1,659 tonnes. In any event, I proceed on the basis that Citadel has a seriously arguable claim to have sold and delivered to Elite the whole amount of scaffolding it claims. In the case of Skyline and Pacific there does not appear to be a serious dispute that there was an agreement to sell at least 900 tonnes of scaffolding, although there may be some disagreement as to how far beyond that it went; nor, having regard to the receivers' note of the scaffolding in Elite's possession, does there appear to be any serious doubt that Elite is in possession of at least 900 tonnes received from Skyline and Pacific. The real question on the present application is whether any of the plaintiffs has a seriously arguable claim to have a security interest having priority over CML's security interest.
9. For a security interest to have priority over another registered security interest, there must be a security agreement within Personal Property Securities Act, s 10. I accept that such an agreement need not, for the purposes of s 10, be in writing.
10. Secondly, the security interest must have attached to the collateral in accordance with PPSA, s 19. A security interest attaches when the grantor has rights in the collateral or the power to transfer rights in the collateral to the secured party and either gives value or does an act by which the interest arises. I accept that insofar as the scaffolding has been delivered to Elite, then it has acquired possessory and proprietary rights in it [see In the matter of Maiden Civil (P&E) Pty Ltd [2013] NSWSC 852 (at [73])]. And that value has been given for the security interest by delivery of the goods.
11. Thirdly, it is necessary that the security interest have been perfected, in accordance with PPSA, s 21. A security interest is perfected if it is attached to the collateral and is enforceable against a third party and a registration is effective with respect to the collateral: see s 21(1)(b), (2)(a). A security interest is enforceable against a third party in respect of particular collateral only if it is attached to the collateral and either (i) the secured party possesses the collateral, or (ii) the secured party has perfected the security interest by control, or (iii) the security agreement that provides for the security interest covers the collateral in accordance with subsection (2). The first and second of those do not apply, as the secured party does not possess the collateral, nor has taken control of it. Accordingly, Citadel must rely on subparagraph (iii). Subsection (2) provides that a security agreement covers collateral if it is evidenced by writing that is signed by the grantor, or if it is evidenced in writing that is adopted or accepted by the grantor by an act or omission that reasonably appears to be done with the intention of adopting or accepting the writing.
12. As I have said, the underlying security agreement relied on by Citadel and referred to in the List Statement is said to have been made in or about November 2012 and is alleged to have been oral. However, Citadel says that the requirements of s 20(2) are satisfied by the invoice that it issued, addressed to Elite, on 9 August 2013. That invoice specifies the particular collateral said to be the subject of the security interest and contains both a retention of title clause and a clause purporting to grant a security interest.
13. It is uncontroversial that the invoice has not been signed by or on behalf of Elite. However, Citadel asserts that it has been adopted or accepted by Elite by reason of a number of emails passing between Citadel and Elite in June 2013. The fundamental problem with that argument is that while those emails contain an assertion on behalf of Citadel of "our security over the equipment" and demand its return, and contain an acknowledgment on behalf of Elite that its shareholders "are happy to return the material so long as you repay the money already paid", those emails pre-date the invoice which they are said to acknowledge by several months.
14. What s 20(2) requires, in respect of the evidence by writing of the security agreement, is that the writing be adopted or accepted by the grantor, not that the security agreement be adopted or accepted by the grantor. I cannot see, despite the valiant endeavours of Mr Coleman SC to establish or persuade me to the contrary, how an exchange of emails two months before the relevant writing can amount to an adoption or acceptance of the writing in question. Accordingly, I cannot see how the invoice satisfies s 20(2).
15. Citadel also argued that the exchange of emails of 12 June, either alone or together with the subsequent invoice, amounted to an acknowledgment or acceptance in writing, but conceded that the emails without the invoice did not contain a description of the particular collateral as required by s 20(2)(b)(i). As that would then necessarily require that the emails be read with the invoice, and as there is no acknowledgment of the invoice, I do not see how on that basis it can be said that there has been compliance with s 20(2). In my view it is not seriously arguable that Citadel has a security interest entitled to priority over that of CML.
16. I have not overlooked the argument that retention of the scaffolding after receipt of the invoice was a relevant acknowledgement or adopting but I do not see how such retention acknowledges or adopts the writing in an invoice created months after the sale and delivery of the subject matter.
17. I turn then to the claim of Pacific and Skyline. On 14 August 2012, solicitors acting for Elite forwarded to solicitors acting for Pacific a draft asset sale agreement which identified the parties as Pacific and AB Highrise. There then ensued an amount of correspondence, and delivery of scaffolding, but no written agreement was ever executed. The receipt of scaffolding by Elite is evidenced by a number of what are described as "count cards" specifying the particular scaffolding of which delivery was taken. After an amount of disputation, the solicitors for Skyline and Pacific wrote to the solicitors who then acted for Elite on 13 February 2013. In the course of that letter they said: We also place you on notice that that we have detailed records of all scaffold material removed by your client from the Lisarow yard and Pacific Group projects. Your client is to immediately cease dealing with the said materials (estimated at 1,100 tons). Should your client refuse to pay for the scaffold materials already in its possession, our client will demand the return of the materials and intends to enter your client's projects to remove the materials if necessary.
18. On 6 March 2013, solicitors for Skyline wrote to solicitors acting for Elite relevantly asserting that: A. There is no enforceable agreement between our respective clients as to the sale of the Pacific scaffolding hire business (the business); … C. Your clients have recorded 1,180 tonnes of scaffolding materials by way of Hillsley Hire yard 'count cards' for materials either transferred by our clients or dismantled and removed by your clients from Pacific projects; … G. The 900 tonnes of scaffolding materials in your clients possession (1,180 less 280) beginning August 2012 has given rise to hire costs of $423,000.00 to date and hire continues to accrue pending any agreement to purchase the business; … The letter continued: However, in an attempt to settle this matter and avoid the costs of litigation whereby our clients will seek to recover the materials in your client possession (or equivalent $ value) and the parties resolve any off-settings claims for labours and material hire, we are instructed make the following 'without prejudice' settlement offer (offer): 1. Your clients to pay the sum of $1,000,000.00 (inc GST) for the purchase of 1,500 tonnes of scaffold materials and the Pacific contracts on foot (currently 7 projects at various stages); 2. A payment of $250,000.00 to our clients upon the executed of an agreement; 3. The balance of $750,000 payable over a period of 8 months secured by unencumbered property; 4. The value of hire accruing on Pacific projects will be retained by Pacific up until signing an agreement, all hire thereafter will be for the benefit of Elite; and 5. A further 320 tonnes (approximately) will be transferred to your clients following the signing of an agreement. The offer is open for acceptance by your clients until close of business on Friday 8 March 2013, following which the offer will be withdrawn and proceedings commenced in the Supreme Court of NSW seeking declaratory relief pursuant to the ownership of materials in your clients possession, an account for profit on the novated contracts and refund of monies already paid to your clients. Should your clients accept this offer, the parties to make all reasonable endeavours to execute an agreement within 7 days
19. That offer was not accepted. But on 28 March 2013, Elite's solicitors responded, referring to the email of 6 March and setting out what they understood to be "the agreement recently reached". On 5 April 2013, Skyline and Pacific's solicitors replied, referring to the email of 28 March and, after clarifying a number of matters proposing (without prejudice) a settlement offer, which included the following terms: 1. Consideration in the sum of $700,000 incl GST payable for the purchase of 1,500 tonnes of scaffold materials; 2. A deposit of $250,000 is payable by close of business on 10 April 2013; 3. The balance of $450,000 is payable by way of 5 equal monthly instalments of $90,000 commencing 1 May 2013 and ending 1 September 2013. 4. Our clients will retain title to the scaffold materials pending full payment of the consideration; and 5. The balance of the scaffold materials to be delivered to Elite will follow the Turbo Scaffolding debt having been satisfied (300 tonnes) and materials becoming available from Pacific projects, however, all materials will be delivered prior to the final payment due on 1 September 2013.
20. Bank account details for payment of deposit were provided.
21. On or about 15 April 2014, admittedly a few days late, Elite provided a cheque, albeit drawn on Highrise Pty Ltd, payable to Skyline for $250,000. Admittedly that cheque was subsequently dishonoured, although a payment of $100,000 was subsequently made.
22. It seems to me that from the chain of correspondence and documents to which I have referred, although there is at times confusion between the parties (in that reference is sometimes made to Elite Group as distinct from Elite Highrise), it is seriously arguable that the intention was that Elite Highrise be the purchaser and the party giving security if it were to purchase the scaffolding equipment. And, although the cheque was drawn on another company, the context in which it was provided makes it seriously arguable that, and notwithstanding it was a few days late, that it was an act in purported acceptance of the offer contained in the 5 April letter to which I have referred. In that way, it constituted an acknowledgment or adoption of the writing contained in the 5 April letter. That letter, read with the chain of correspondence that preceded it, also identified the 900 tonnes of scaffolding equipment sold by Skyline and Pacific to Elite.
23. Accordingly, in my view, although the matter is not by any means beyond argument, it is very seriously arguable that Skyline and Pacific have a security interest enforceable against third parties effected by registration and entitled to priority over CML's security interest.
24. That then requires consideration of the balance of convenience. If an injunction is wrongly declined, Skyline and Pacific's security interest in the scaffolding will be effectively destroyed. While they will retain a right against the proceeds of sale, there is evidence to support the view that the sale may not be at the value such scaffolding would ordinarily demand in the market, but at a lower value. Accordingly, wrongly refusing an injunction would risk significant financial harm to the interests of Skyline and Pacific.
25. Against that, the receivers would lose the sale they have negotiated. But given the apparent demand for scaffolding and interest in acquiring it that emerges from the evidence, it seems unlikely that it would not be possible to find another purchaser. So far as the risk that the receivers might be exposed to personal liability for damages for breach of contract with the purchaser, that is a risk that receivers assume by entering into a sale at a time when higher security interests were notified on the PPSR and, indeed, at a time when the receivers had apparently given Citadel an assurance that they would not sell the property before 4 December. It is true that holding costs will be incurred, but that will be covered by the plaintiff's undertaking as to damages.
26. Accordingly, it seems to me that on the balance of convenience there is less risk of prejudice in wrongly granting an injunction than in wrongly refusing one. Accordingly, I propose to restrain the sale or completion of the sale by the receivers or Elite of the 900 tonnes of scaffolding sold by Skyline and/or Pacific to Elite. That means that the receivers will be at liberty to deal with scaffolding other than that received from Pacific and/or Skyline. The evidence suggests that the scaffolding supplied by Pacific and Skyline is identifiable by its colour and the marks it bears of its manufacturer, Turbo. The receivers will assume significant risk if they deal with scaffolding which is capable of identification as the scaffolding supplied by Pacific and/or Skyline.
27. It follows that the orders made to date should be discharged and in lieu thereof, subject to anything that the parties may wish to say about the precise terms of the orders, the court orders that the injunction granted on 3 December 2014 and subsequently varied in proceedings 2013/372920 be discharged. The plaintiff's interlocutory application has failed, the plaintiff pay the defendants' costs of the application.
28. In proceedings 2014/365875, upon the plaintiffs by their solicitor giving to the court the usual undertaking as to damages, the court orders that: 1. until the hearing or further order the defendants be restrained from by themselves their servants or agents: 1. selling any further scaffolding equipment referred to in the Schedule; 2. removing or permitting to be removed from the premises at 238-258 Captain Cook Drive, Kurnell in the State of New South Wales any of the scaffolding equipment described in the Schedule. 1. The plaintiff's costs of the motion be the plaintiff's costs in the proceedings.

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