In the matter of Camelia Grove Operations Pty Ltd, Public Lifestyle Management Pty Ltd and 146 Henderson Street Pty Ltd in its personal capacity and in its capacity as the Trustee for 146 Henderson Street Unit Trust (No 2) [2024] NSWSC 1383

In the matter of Camelia Grove Operations Pty Ltd, Public Lifestyle Management Pty Ltd and 146 Henderson Street Pty Ltd in its personal capacity and in its capacity as the Trustee for 146 Henderson Street Unit Trust (No 2) [2024] NSWSC 1383 - NSWSC 2024 case summary — Zoe

[5]

Use of the Terrace

Prior to the appointment of the Hotel Receivers and the Administrators, the rear of the Terrace was used as the Hotel's outdoor eating area and as the cool storage area for the Hotel's restaurant, and the front ground floor of the Terrace was used as the Hotel's bottle shop. The upstairs of the Terrace was not used for the operations of the Hotel.
The Hotel's bottle shop was operated under the liquor licence held by CGO, which extended over the area of both the Hotel and the Terrace.
As noted above, the sole director of the Companies and of 152 Henderson was Mr Adgemis. He informed the Hotel Receivers, following their appointment, that the Terrace is used as part of the Hotel, that no lease is in place and that no rent is paid.
It was common ground that the use of the Terrace was essential for the operation of the Hotel's business and contributed substantially to the Hotel's revenue.
On 18 September 2024, the Hotel Receivers sent a letter to Mr Adgemis as director of 152 Henderson, proposing that the Hotel and Terrace be marketed and sold together, and proposing that a market rental appraisal for the Terrace be undertaken. The letter also stated that: "We appreciate any agreement for the sale of the [Terrace] (and any formal agreement for a joint sale process of the [Terrace] and [the Hotel]) will also require the approval and consent of the secured creditors/mortgagors of the property".
Before any negotiation progressed on those matters with Mr Adgemis, Mr Lakomy was appointed as receiver and manager of 152 Henderson.
Following Mr Lakomy's appointment, there was an email exchange between the Hotel Receivers and Mr Lakomy regarding the rent for the Terrace. On 25 September 2024, Mr Lakomy indicated that he would obtain a market assessment of rent. On 2 October 2024, Mr Lakomy stated that: "Based on the rent assessment we want to be paid $1,500 per week". On 11 October 2024, the Hotel Receivers replied: "We agree to pay rent at $1,500 per week plus GST as per your request, commencing on the date which is one week after the VA appointment. Please provide an invoice reflecting this and we will attend to the payment of the rent up to date."
There was a dispute regarding whether there was a concluded agreement between Mr Lakomy and the Hotel Receivers regarding matters such as the identity of the lessee or the term of the lease. However, it is not necessary to resolve those matters, as the Plaintiffs accepted that, if there was a concluded agreement, it was a tenancy at will.
On 17 October 2024, the 152 Receivers were appointed, and a contractor, instructed by the 152 Receivers, attended the Hotel with instructions to board up access to the Terrace from the Hotel. The venue manager explained that there were currently customers dining in the outdoor dining area and the contractor said that he would return.
Later that day, correspondence was sent by the Hotel Receivers to the contractor, referring to s 440B(1) of the Act and its effect. On 18 October 2024, the Hotel Receivers' solicitors sent a letter to the 152 Receivers, again referring to the effect of s 440B of the Act, and also referring to the correspondence with Mr Lakomy regarding the payment of rent, and confirming that the Hotel Receivers would promptly pay any invoice for rent of the Terrace.
On 19 October 2024, at around 10:30am, the contractor again attended the Hotel, erected a metal fence between the Hotel and the bottle shop section of the Terrace, and placed a "Notice of Possession" on the fence and on the front door of the Terrace. The contractor also changed locks, such that access was prevented between the Hotel and the outdoor seating area of the Terrace.
On 21 October 2024, the Plaintiffs commenced this proceeding by way of an ex parte application for injunctive relief. Black J made orders restraining the Defendants until the date of the final hearing, from directly or indirectly impeding the access of the Plaintiffs to the Terrace (including the outdoor eating area, food storage and the ground floor bottle shop) and from taking possession of or otherwise recovering the Terrace. His Honour also made orders that the keys be provided to the Administrators for the locks to the Terrace and that the Notices of Possession and the wire fencing between the bottle shop and the Hotel be removed prior to 11am 23 October 2024. On the following day, his Honour continued those orders, and also made orders to prepare the matter for a final hearing and for the 152 Receivers to file any application for leave pursuant to s 440B of the Act, to be returnable at that hearing: In the matter of Camelia Grove Operations Pty Ltd, Public Lifestyle Management Pty Ltd and 146 Henderson Street Pty Ltd in its personal capacity and in its capacity as the trustee for 146 Henderson Street Unit Trust (all receivers and managers appointed) (all administrators appointed) [2024] NSWSC 1342.
On 24 October 2024, the 152 Receivers filed an Interlocutory Process. At the hearing, the 152 Receivers moved on prayer 1 of that Interlocutory Process, which sought that the Defendants be granted leave pursuant to s 440B(2)(b) of the Act to take possession of or otherwise recover the Terrace.

[6]

Application of s 440B

Section 440B of the Act provides as follows: Restrictions on exercise of third party property rights General rule (1) During the administration of a company, the restrictions set out in the table at the end of this section apply in relation to the exercise of the rights of a person (the third party) in property of the company, or other property used or occupied by, or in the possession of, the company, as set out in the table. Note: The property of the company includes any PPSA retention of title property of the company (see section 435B). Exception--consent of administrator or leave of court (2) The restrictions set out in the table at the end of this section do not apply in relation to the exercise of a third party's rights in property if the rights are exercised: (a) with the administrator's written consent; or (b) with the leave of the Court. Possessory security interests--continued possession (3) If a company's property is subject to a possessory security interest, and the property is in the lawful possession of the secured party, the secured party may continue to possess the property during the administration of the company. Restrictions on exercise of third party rights Item If the third party is … then … 1 a secured party in relation to property of the company, and is not otherwise covered by this table the third party cannot enforce the security interest. 2 a secured party in relation to a possessory security interest in the property of the company the third party cannot sell the property, or otherwise enforce the security interest. the following restrictions apply: 3 a lessor of property used or occupied by, or in the possession of, the company, including a secured party (a PPSA secured party) in relation to a PPSA security interest in goods arising out of a lease of the goods (a) distress for rent must not be carried out against the property; (b) the third party cannot take possession of the property or otherwise recover it; (c) if the third party is a PPSA secured party--the third party cannot otherwise enforce the security interest. the following restrictions apply: 4 an owner (other than a lessor) of property used or occupied by, or in the possession of, the company, including a secured party (a PPSA secured party) in relation to a PPSA security interest in the property (a) the third party cannot take possession of the property or otherwise recover it; (b) if the third party is a PPSA secured party--the third party cannot otherwise enforce the security interest.

[7]

The Terrace is not property of any of the Companies. The issue which arises for determination is whether the Terrace is, within the meaning of s 440B(1), property which is "used or occupied by, or in the possession of" the Companies.
If the Terrace meets this description, then 152 Henderson, as the owner of the Terrace, falls within item 4 of the table at the end of s 440B, and therefore is unable, during the period of the administration of the relevant company and without the consent of the Administrators or the leave of the Court, to take possession of the Terrace or otherwise recover it.
As noted above, it is common ground that parts of the Terrace, comprising the ground floor and outdoor area, have been used in the Hotel's operations, including for the Hotel's bottle shop, outdoor dining area and cool storage area.
However, the Defendants submitted that it had not been established specifically which of the three Companies had used those parts of the Terrace for the Hotel's business.
In this regard, the Defendants referred to the Administrators' report to creditors dated 11 October 2024. Under a section headed "Function of the Companies", this report stated as follows: "Function of the Companies PLM PLM acted as the head office and employed all staff within the Group. PLM's role within the Group was to act as the trading entity for all open venues, which included receipting of income, maintenance of supplier accounts and conducting payroll. 146 146 acts as the Trustee for property known as the Camelia Grove Hotel. The Hotel operated under PLM; however, we understand that 146 did not conduct any business activity on behalf of PLM. CGO CGO holds the liquor licence for the Camelia Grove Hotel and does not conduct any business activity. Our investigations have determined that the liquor licence is valid."
I accept that it is unlikely that 146 Henderson, as an entity established for the purpose of holding the land at 146-150 Henderson Street on trust, and as an entity which did not conduct any business, used the Terrace.
However, the position is different with respect to PLM and CGO.
PLM is the entity which employed all of the staff at the Hotel and which was the trading entity for all venues within the Group, including the Hotel. The staff employed by PLM must have included any staff in the bottle shop and any staff serving drinks in the outdoor area.
Accordingly, PLM, as the trading entity for the Hotel, appears to have been operating the bottle shop from the Terrace and serving alcohol in the outdoor area of the Terrace, under the liquor licence held by CGO, which extended over the area of both the Hotel and the Terrace. Further, PLM as trading entity was using the cold storage facilities located at the rear of the Terrace and the outdoor area of the Terrace for the provision of dining services at the Hotel. By reason of those matters, each of PLM and CGO was using parts of the Terrace.
Consistently with this, a policy of products and public liability insurance has been taken out which covers the premises at each of 146-150 and 152 Henderson Street, which names each of CGO and PLM as an Insured, and which describes the business of those entities as "Operator of Camelia Grove Hotel business, trading".
I do not consider it necessary to determine, as between PLM and CGO, precisely which use of which part of the Terrace is ascribed to which specific entity. Mr Clubb, who is one of the Administrators, gave unchallenged evidence that the Companies are the only entities that he is aware of who could possibly be responsible for operating the Hotel (whether solely or jointly) and consequently using and occupying the Terrace.
In circumstances where it is common ground that the Terrace has been and is being used as part of the Hotel's business, where the Companies are the only entities that could have been doing so, and where the roles of the Companies are as described in the Administrators' report, I am satisfied that the Terrace is property that is used by, or occupied by, or in the possession of CGO and PLM.
It follows that, by operation of s 440B, 152 Henderson as owner of the Terrace is unable, during the period of administration of CGO and PLM, and without the consent of the Administrators or the leave of the Court, to take possession of or otherwise recover the Terrace.
It also follows that the Defendants acted in breach of s 440B when, without consent or leave, they took such steps on 19 October 2024.

[8]

Application for Leave

The issue which next arises is whether leave should be granted to the 152 Receivers to take possession of or otherwise recover the Terrace.
In considering this issue, the Court should have regard to the object of Part 5.3A as set out in s 435A of the Act: Re Java 452 Pty Ltd (admin apptd); ex parte Permanent Trustee Australia Ltd v Stout [1999] VSC 252 at [38] (Byrne J):
Section 435A provides as follows: Object of Part The object of this Part, and Schedule 2 to the extent that it relates to this Part, is to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b) if it is not possible for the company or its business to continue in existence--results in a better return for the company's creditors and members than would result from an immediate winding up of the company. Note: Schedule 2 contains additional rules about companies under external administration.
In Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883 at [18]-[19], Barrett J said that s 435A of the Act was the "starting point" for a consideration of the proper purposes of the provisions of Pt 5.3, describing this section as providing a "broad statement only", and continuing as follows: "Examination of Pt 5.3A as a whole shows that there are several purposes which together contribute to the widely stated object. The provisions imposing the various moratoriums show that there is a purpose of allowing time for unpressured but reasonably prompt consideration of possible reconstruction possibilities. The provisions as to creditors' meetings and creditor decision making, including those concerning deeds of company arrangement, show that there is a purpose of allowing reconstruction possibilities to be pursued in such a way that, if creditors so desire, a legacy of debt may be left behind and winding up, which would normally be the product of an intolerable debt burden, may be avoided. Implicit in that, of course, is the proposition that the company will thereby be permitted to return to the mainstream of commercial life. Another purpose is that, if the company is not capable of returning to the mainstream of commercial life, there will be some better outcome for creditors than that available in an immediate winding up. The importance of keeping that purpose in mind, in a case such as the present, was emphasised by Sundberg J in Dallinger v Halcha Holdings Pty Ltd (1995) 18 ACSR 835."
The Defendants submitted, and the Plaintiffs did not dispute, that the following principles are applicable in an application for leave under s 440B: 1. "where it is shown that the taking of possession will not in any practical way affect the availability of the options which the creditors must consider or the decision on those options", it "may be appropriate" to grant leave: Re Java 452 at [40]. 2. "Leave may be granted if the statutory restraint imposed on the [third party] will occasion the [third party] loss or detriment (financial or otherwise) of a relevant kind. The loss or detriment may be regarded as relevant to a grant of leave where the Court considers it is greater than any benefit or advantage that might enure to the creditors by reason of the statutory restraint": Canberra International Airport Pty Ltd v Ansett Australia Pty Ltd [2002] FCA 329 at [24] (Kenny J), CMC (Australia) Pty Ltd v Sarantinos [2013] NSWSC 873 at [32] (Brereton J); and 3. the "outcome of a grant of leave may depend on the history of the administration, the conduct of the parties, and whether terms may practically be imposed on a grant or refusal of leave to protect competing interests": Canberra International Airport at [24].
The party seeking leave bears "the burden of showing that the taking of possession would not in any practical way affect the availability of the options which the creditors must consider or the decision on those options, or that the prejudice to [that party] from not granting leave would outweigh that to the unsecured creditors from allowing possession to be taken": CMC (Australia) at [32].
In the light of those principles, the Defendants, in their submissions, advanced four matters as supporting the grant of leave.

[9]

Impact on trading

First, the Defendants submitted that, while Mr Clubb gave evidence that the Hotel was trading "profitably", the Plaintiffs could have, but had not, led specific evidence of how much profit is actually being generated by trading on during the administrations. It followed that there was no basis to conclude that any profit generated by trading the Hotel during the period of the administration will make any difference to the overall net asset position of the Companies, which are all insolvent.
I accept that, although there is evidence of the weekly revenue of the Hotel, there is no evidence of the profit being earned on that revenue. However, the primary purpose of the ongoing trading during the administration is not to generate a few weeks' profits, but to enable the business to be sold as a going concern.
A sale process has already commenced. Expressions of Interest are due by 14 November 2024, and the Hotel Receivers anticipate entering into binding contracts shortly thereafter.
To adopt the words of Ms Vouris (who is one of the 152 Receivers and who swore an affidavit in support of the leave application), the Terrace is "an essential part of the hotel operations conducted by the plaintiffs, and contribute[s] substantial revenue to the hotel". This is common ground.
Given that is so, it follows that the use of the Terrace is essential to the conduct of the Hotel's business while the sale process is ongoing. In particular, if the Terrace is unable to be used in the Hotel's operations, there will be an adverse and material impact on the trading of the Hotel. Mr Clubb gave unchallenged evidence that: "Most materially, losing access to the storage and cool rooms would severely restrict the ability to sell food from the premises, losing access to the beer garden restricts seating options for patrons and losing the front bottle shop also removes potential revenue as well as the option to use that space for overflow seating and functions"
There is accordingly a real risk that this would impact the ability to sell the Hotel as a going concern.
The Defendants submitted that this was of limited significance because the secured creditor is owed more than $100m and therefore all funds from any sale of the Hotel will go to the secured creditor. However, there is not a sufficient basis to conclude that this is the case, given that the security extends across a number of the Public Hospitality Group's properties, and it is not known how much might be realised from all secured assets relative to quantum of the secured funds. In the absence of such information, and as a general proposition, selling each individual secured asset at the highest available price would appear to be in the interests of all creditors, as it increases the prospect of a return to all creditors.
In that regard, Mr Clubb gave unchallenged evidence that "maintaining the status quo enables the [Hotel Receivers] to explore the possibility for the Terrace to also be sold as part of the broader sale of the Hotel in order to help maximise the sale price".

[10]

Involvement of Defendants in strategy for realising freehold or leasehold value of Terrace

Secondly, the Defendants indicated that they were not saying that they "oppose the sale of the [Terrace] as part of the larger sale of the Hotel as a whole", but submitted that any such "sale should take pace in a way that permits the defendants to be involved in setting the appropriate realisation strategy for the [Terrace] so that 152 Henderson is properly compensated for its rental or freehold value".
The Defendants do not require possession in order to be involved in the realisation strategy for the Terrace.
As matters currently stand, no sale of the Terrace can occur, and no lease over any part of the Terrace can be granted, without the agreement of the Defendants.
The Information Memorandum which has been issued in relation to the sale of the Hotel describes the premises being sold as 146-150 Henderson Street and states as follows: "We note that the neighbouring terrace has been converted to offer an outdoor dining area, a wine bar and bottle shop as part of the Hotel operation. This area sits on a separate title and does not form part of this sale. This area is currently subject to lease negotiations and further information will be provided in due course."
On 22 October 2024, the 152 Receivers sought to schedule a meeting with the Hotel Receivers to discuss the quantum of rent for the Terrace and the process for selling the Hotel and the Terrace together, with an appropriate apportionment of any sale proceeds. The Hotel Receivers accepted this invitation. However, the 152 Receivers did not attend the scheduled meeting, sending along a senior associate who indicated that he could not conduct the meeting in their absence. Mr Strawbridge deposed that the Hotel Receivers remain willing to engage in negotiations with the 152 Receivers, with a view to agreeing commercial terms regarding the sale of the Hotel and the Terrace.
In terms of being compensated for the use of the premises, the Hotel Receivers have sought to pay the amount of rent that was agreed in email correspondence with Mr Lakomy, being $1,500 per week.
One point of common ground is that, for long as the Hotel business continues to use parts of the Terrace, rent should be paid to 152 Henderson, and that the rent should be a market rent.
In that regard, the evidence before the Court establishes that the rent agreed with Mr Lakomy was a market rent. It was offered by Mr Lakomy based on a market rent assessment which he had obtained in around late September 2024, and is slightly less than an independent market rent assessment which was obtained by the Hotel Receivers in early October 2024 (of approximately $1,700 per week).
In disputing that $1,500 per week represented a market rent for the parts of the Terrace used by the Hotel, the 152 Receivers relied on a valuation from more than two years ago, which was provided on the basis of an assumption that certain renovations were completed, resulting in four separate accommodation rooms on the first floor of the Terrace. Those renovations have not taken place. In those circumstances, the Plaintiffs submitted, and I accept, that this valuation is of little weight.
The Defendants sought further time to put on other evidence of market rent. This application was made in a context where Black J ordered the Defendants to file and serve their evidence on the Interlocutory Process by 24 October 2024, and their evidence on the Originating Process by 25 October 2024. His Honour ordered that no evidence was to be "relied on if not filed and served by that time without leave". The Defendants were aware that there was as issue in the proceedings as to whether a weekly rent of $1,500 per week represented a market rent, and were aware of the evidence upon which the Plaintiffs were relying in respect of that issue. The Defendants chose to put on evidence of the 2022 valuation and to make submissions on the issue of market rent on the basis of this material.
In circumstances where this matter has been listed for hearing on an urgent basis, where the issue of market rent was a live issue between the parties, and where I have accepted submissions by the Plaintiffs that the material relied upon by the Defendants should be given little weight on this issue, I do not consider that it is consistent with the overriding purpose to order that the hearing of the proceedings be adjourned so as to allow the Defendants to obtain other evidence of market rent, which could have and should have been obtained last week.
The Defendants also raised an issue about the adequacy of the insurance in place for the use of the Terrace and, in particular, the failure of the policy to name 146 Henderson as an Insured. However, in circumstances where 146 Henderson holds the land situated at 146-150 Henderson Street as a trustee, and does not trade, I do not consider that the failure to name it as an Insured is significant.

[12]

Futility?

Finally, the Defendants contended that enjoining them from recovering possession of the Terrace is futile. They noted that their appointor, GI 377 Pty Ltd (the Mortgagee), has issued default notices to 152 Henderson under s 57(2)(b) of the Real Property Act 1900 (NSW) and s 111 of the Conveyancing Act 1919 (NSW), and submitted that "[t]here is nothing stopping the Mortgagee itself from exercising its rights under clause 42(a) of the Mortgage … and entering into possession itself if the defendants were to be enjoined". This submission was advanced on the following basis: "No item in the table in s 440B applies to prevent this course because the Terrace … is not the property of any of the plaintiffs (ruling out items 1 and 2) and the Mortgagee is neither a lessor nor owner of the Premises (ruling out items 3 and 4)."
I do not consider it necessary or desirable for the Court to express a view on whether or not a person who is not a party to the proceedings could, consistently with s 440B, take action in respect of the Terrace. This could be seen as akin to giving an advisory opinion to the Mortgagee prior to it taking certain enforcement action.
For present purposes, it is sufficient to note that the basis of this submission, namely, the proper interpretation of item 4 in the table, and therefore of s 440B, was disputed. The Plaintiffs contended that the terms of item 4 are not limited to the holder of the legal title, and can extend to a mortgagee in possession.
Any determination of this issue, on this application, cannot bind the Mortgagee. It may be that, if the Mortgagee takes such action, an issue will arise, on an application for interlocutory relief, as to whether there is a serious question to be tried as to the proper interpretation of s 440B and, on any subsequent application for final relief, as to the proper interpretation of that provision. Any such issue of interpretation should be determined as and when it arises.
On the present application, the issues for determination are whether the Defendants are unable to take any possession of the Terrace, by reason of s 440B, and whether they should be granted leave to do so.
I am satisfied, for the reasons given above, that s 440B does apply to prevent the Defendants taking possession of the Terrace, and that leave should be refused.

[13]

Relief

The Court has plenary jurisdiction to make a declaratory order concerning contravention of the Act: Australian Securities and Investments Commission v Sweeney [2001] NSWSC 114 at [30] (Austin J); Australian Securities and Investments Commission v Marco (No 6) [2020] FCA 1781 at [120] (McKerracher J). In circumstances where a contravention has been established and a declaration would have utility, including by identifying contravening conduct and recording the Court's disapproval of that conduct, the Court ought to grant declaratory relief: Australian Securities and Investments Commission v Ostrava Equities Pty Ltd [2016] FCA 1064 at [51] (Davies J); ASIC v Marco (No 6) at [120].
Having regard to those principles, I am satisfied that the Court should make a declaration in the terms sought by the Plaintiffs.
As regards the application for injunctive relief, "the touchstone of s 1324 is a contravention, past or threatened" of the Act; it is "in respect of conduct that constitutes, constituted or would constitute a contravention, or ancillary thereto, that the power to grant an injunction under that section is conferred": In the matter of Ikon Group Limited [2015] NSWSC 980 at [22] (Brereton J). The Court's power to grant an injunction "should be exercised only when it appears that the injunction would serve a useful end": Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd [2002] NSWSC 310 at [114] (Davies AJ).
I am satisfied that, in circumstances where the Defendants have previously taken the steps which I have outlined above, including erecting a fence and changing locks, despite having the terms of s 440B drawn to their attention and without making any application for leave prior to taking such steps, the Court should grant the injunction sought by the Plaintiffs. The granting of the injunction will ensure that the statutory moratorium in s 440B on the taking of such steps by the Defendants is enforced.
The period specified in the injunction is until the conclusion of the administration. The second creditors' meeting has been adjourned for 45 business days. Therefore, the injunction will be of a limited duration.
I consider that it should be a condition of the grant of the injunction that the Hotel Receivers undertake to the Court to pay, during the period of the administration, an amount of $1,500 per week to the Defendants for use of those parts of the Terrace that are used in the Hotel's business. At the hearing, Counsel for the Hotel Receivers confirmed that she had instructions to proffer that undertaking on behalf of the Hotel Receivers.
The result is that the Plaintiffs have obtained the relief sought in the Originating Process, and the Defendants have failed to obtain the relief sought in the Interlocutory Process. Costs should follow the event. I will accordingly make an order that the Defendants pay the Plaintiffs' costs of the proceeding. I will not make any order in respect of the costs of the Hotel Receivers.

At a glance

Court

Decision date

Before

Source

Judgment (15 paragraphs)

Legislation Cited (4)

Cases Cited (10)