In the matter of Fellmane Pty Ltd (in liq) [2020] NSWSC 595

Solicitors: Hilton Bradley (Plaintiffs / Applicants) Norton Rose Fulbright (Contradictors) Advantage Legal (Interested person) File Number(s): 2019/142162Brendan James Copeland (Applicant)Rahul Goyal, Scott Langdon and Anthony Miskiewicz as liquidators of SX Projects Pty Limited (in liq) (Contradictor)Peter Hillig as liquidator of ACN 092 745 330 (in liq) (Contradictor)Batfamt Pty Limited (Interested person) 2016/109679SX Projects Pty Ltd (in liq) (Plaintiff)Fellmane Pty Ltd as trustee of the Battaglia Family Trust (Second Defendant) Publication restriction: No, see [86] of the judgment.

Judgment

1. GLEESON J: Application is made by Brendan James Copeland in his dual capacity as the court-appointed receiver and manager of the assets and undertakings of the Battaglia Family Trust (the Trust), and as liquidator of Fellmane Pty Ltd (Fellmane), the former trustee of the Trust, for "directions" concerning the manner in which he proposes to sell an asset of the Trust in his capacity as receiver and, if the direction sought is given, for "approval" as liquidator of Fellmane to enter into a Deed of Proposed Transfer and Release with respect to a property situated at Stafford Street, Gerroa (the Gerroa property).

Directions

1. The Court's power to provide a court-appointed receiver with directions arises as an incident of the statutory power to appoint a receiver provided by s 67 of the Supreme Court Act 1970 (NSW) and the Court's inherent jurisdiction: Glazier Holdings Pty Ltd v Australian Men's Health (NSWSC, Young J, 30 April 1998, unrep) (Glazier Holdings); Mariconte v Batiste (2000) 48 NSWLR 724; [2000] NSWSC 288 at [75] (Austin J); Re Anglican Development Fund Diocese of Bathurst (Recs & Mngrs Apptd) (2015) 33 ACLC 15-010; [2015] NSWSC 440 (Re Anglican Development Fund) at [11]-[12] (Brereton J).
2. The Court's powers are broad and extend to giving directions that provide guidance to the receiver on matters of law and on the propriety or reasonableness of the contemplated exercise of the discretion: Mariconte v Batiste at [76]; ASIC v Letten (No 7) [2010] FCA 1231; (2010) 190 FCR 59 (ASIC v Letten (No 7)) at [270]-[271] (Gordon J). However, such directions should not be given where it would make or condone a particular commercial judgment: Re One Tel Network Holdings Pty Ltd [2001] NSWSC 1065; (2001) 40 ACSR 83 at [32] (Austin J); ASIC v Letten (No 7) at [270(6)]. It is also important to keep in mind the limitation expressed by Brereton J in Re Anglican Development Fund at [14]: … However, the jurisdiction to give the opinion, advice and direction of the Court - whether to a trustee, a liquidator or a receiver - is not unlimited. Generally speaking, it is concerned with advice or direction as to how the person seeking it should act in conformity with the law. It is not a jurisdiction to authorise departures from the strict legal position, nor one to alter legal rights.

Section 477(2B) approval

1. The entry into the proposed transaction by Mr Copeland as liquidator of Fellmane requires approval under s 477(2B) of the Corporations Act 2001 (Cth), since the deed effectuating the proposed transaction includes terms, some of which, may be discharged by performance more than three months after the date on which the deed is entered into.
2. The object of the approval process under s 477(2B) is to ensure that contractual provisions as to timing do not cut across the general expectation that the winding up will proceed in an expeditious fashion as circumstances allow: Re HIH Insurance Ltd and related matters [2004] NSWSC 5 at [15] (Barrett J); Re HIH Overseas Holdings Ltd (in prov liq) [2001] NSWSC 426 at [5] (Barrett J).
3. The following propositions can be derived from the authorities, when deciding whether to grant approval under s 477(2B): (1) the controlling consideration is the interests of creditors concerned in the winding up; (2) the Court pays regard to the commercial judgment of the liquidator; (3) although the Court is not a rubber stamp for whatever the liquidator puts forward, it is not the role of the Court to independently appraise the commercial desirability and commercial terms of the transaction; (4) the Court will generally not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or some real and substantial ground for doubting the prudence of the liquidator's proposal: see Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-6; State Bank of NSW v Turner Corporation Ltd (prov liq apptd) (1994) 14 ACSR 480 at 483; Re HIH Insurance Ltd at [15] and Re GA Listing & Maintenance Pty Ltd (1994) 15 ACSR 308 at 311.

Interested party and contradictors

1. Notice of the application has been given to interested persons. By orders made by Black J on 25 November 2019, Batfamt Pty Ltd (Batfamt), SX Projects Pty Ltd (in liq) (SX Projects), and ACN 092 745 330 Pty Ltd (330 Co) were each granted leave to appear as interested persons without becoming a party pursuant to r 2.13 of the Supreme Court (Corporations) Rules 1999 (NSW).
2. Batfamt as the proposed purchaser of the Gerroa property supports Mr Copeland's application. The equal shareholders of Batfamt are Mrs Karen Battaglia and her son, Mr Stefano Battaglia.
3. SX Projects and 330 Co (together the contradictors), each claim to be unsecured creditors of Fellmane. The respective liquidators of SX Projects, specifically Mr Rahul Goyal, and of 330 Co, Mr Peter Hillig, object to the terms of the proposed sale of the Gerroa property and oppose the Court giving the directions sought by Mr Copeland, as receiver of Fellmane.
4. Prior to their winding up, each of SX Projects and 330 Co were companies controlled by Mrs Battaglia's husband, Mr Vince Battaglia. He is now a bankrupt. Mr Copeland has not yet made any final determination as liquidator of proofs of debt, however it is common ground that it is likely that SX Projects is a creditor of Fellmane in its capacity as trustee of the Trust in respect of a judgment given by the Supreme Court in the amount of $1,596,505.02: SX Projects Pty Ltd (in liq) v Battaglia [2018] NSWSC 1830. On the other hand, Mr Copeland's present view is that 330 Co's claim to be a creditor of Fellmane in an amount of $482,736.45 may have arisen in relation to another trust of which Fellmane was trustee.

Factual background

1. Fellmane was incorporated on 28 May 1996. Mr Vince Battaglia is its sole shareholder. He was a director from incorporation of Fellmane until he was made a bankrupt on 28 March 2019. Mrs Battaglia was also a director from 27 March 2000 to 30 October 2018.
2. On 20 March 2019, Fellmane was wound up in insolvency by order of the Federal Court of Australia and Mr Copeland was appointed liquidator. SX Projects was the applicant/creditor in those proceedings. Prior to the winding up order, SX Projects and its liquidators had brought proceedings against Mr Battaglia, Mrs Battaglia, Fellmane and others and obtained judgment against Fellmane in the amount of $1,596.502.02 on 11 December 2018: SX Projects Pty Ltd (in liq) v Battaglia [2018] NSWSC 1830.
3. The Battaglia Family Trust was established by a deed dated 3 June 1996. The trust deed contained an ipso facto clause to the effect that where the trustee is a company, it is automatically removed from office as trustee upon the winding up of the company: cl 10. Nonetheless, on 13 March 2019, Mr Battaglia, in his capacity as sole director of Fellmane, resolved that Fellmane resign as trustee, having abridged the required period of notice, and in his capacity as appointor of the Trust, he appointed Batfamt as the replacement trustee.
4. Notwithstanding that Batfamt is the current trustee of the Trust, it has not taken any step to seek to transfer the property to itself; Fellmane remains the registered proprietor of the Gerroa property.
5. The evidence indicates that whilst Fellmane did not trade, carry on business or own any assets in its own right, Fellmane was also previously the trustee of the Battaglia Family Superannuation Fund until it was replaced as trustee of the superannuation fund on 30 October 2018. It seems that Fellmane may also have been the trustee of the Vince Battaglia (No 2) Family Trust.
6. Fellmane's sole asset is the Gerroa property which it purchased in its capacity as trustee of the Trust for $1,193,000 by contract for sale of land which completed on 2 May 2014.
7. Following his appointment as liquidator of Fellmane, Mr Copeland made enquiries of the NAB concerning the Gerroa property. He was informed by the NAB in an email of 8 April 2019 that "[t]he Gerroa asset only secures facility for $1,460,000 and is not in arrears". At that time, Mr Copeland believed that Fellmane owed the debt to the NAB. He later became aware that Mrs Battaglia not Fellmane was the borrower, and that Fellmane in its capacity as trustee of the Trust had provided a guarantee and granted a third-party security over the Gerroa property to secure Mrs Battaglia's obligation to repay that loan to NAB
8. On 13 June 2019, the Court appointed Mr Copeland as the receiver and manager of the assets and undertaking of the Trust. The purpose of the appointment was to aid the realisation of Fellmane's right of indemnity as the former trustee over the Trust assets to meet the claims of creditors of Fellmane incurred in its capacity as trustee of the Trust. The Court orders provide that the receiver is not to make any distribution of the proceeds of the realisation of the assets of the Trust to creditors of Fellmane or the beneficiaries of the Trust without a further order or direction of the Court.

Conditional Deed

1. On 30 September 2019, a Deed of Proposed Transfer and Release (the conditional deed) which was expressed to be subject to the directions and approval of the Court, was exchanged between Mr Copeland (in his capacity as the liquidator of Fellmane and the receiver of the Trust), Fellmane and Batfamt.
2. As explained in his affidavit sworn 3 October 2019, at that date, Mr Copeland was still of the belief that the amount owing to NAB with respect to the NAB loan to Mrs Battaglia was $1,500,000, being the facility limit (par 11). Mr Copeland identified the three valuations of the Gerroa property which had been obtained by Mr Battaglia and the valuation which Mr Copeland had commissioned himself, and referred to his negotiations with Batfamt. (The four valuations are the subject of a confidentiality order). Mr Copeland expressed the view, subject to the Court's directions, that a transfer of the Gerroa property to Batfamt on the terms of the conditional deed was a preferable outcome to a public sale of the property (par 20).
3. Mr Copeland described the conditional deed as having terms to the following effect (par 23):

• a "notional" sale price for the Gerroa property payable by Batfamt to Mr Copeland in his capacity as receiver, which is higher than all the registered valuations received by Mr Copeland;
• the consideration payable is comprised of: (a) a release by NAB of Fellmane, including under the guarantee, and a discharge of the mortgage over the Gerroa property; and (b) payment to Mr Copeland of a cash sum ($850,000) which had already been deposited into the trust account of Batfamt's solicitors, which Mr Copeland described as "this essentially reflects a payment to me (in my capacity as receiver) of the equity in the [Gerroa] property";
• Batfamt provides an indemnity in favour of the receiver and Fellmane from any claim made by NAB with respect to the Gerroa property, the winding up of Fellmane, and the Trust;
• Batfamt provides a release of all claims against Mr Copeland and Fellmane arising from or in connection with the Gerroa property, the winding up of Fellmane, and the Trust (other than a claim to assert that the net assets in the receivership (after the Receiver's fees, expenses and disbursements) may be payable to Batfamt).

1. Whilst the amount of the "notional" sale price is not stated in the conditional deed, Mr Copeland's understanding at that time was that Fellmane's equity in the property was $850,000 given that the mortgage to NAB secured the amount of $1,500,000. Mr Copeland's mistaken understanding of the amount secured by the mortgage to NAB was later clarified in his 5 December 2019 affidavit: see [25] below.
2. Mr Copeland deposed that the proposed transaction contained a number of benefits when compared to a public sale and some disadvantages. The benefits were identified as: the notional sale price was above the market value of the property; the sale price is certain; no commission is payable to an agent; the receiver's fees and expenses are likely to be lower; the transaction will complete immediately; and there is unlikely to be any risk of Batfamt failing to complete.
3. As to the disadvantages, one was identified by Mr Copeland, namely, the potential is lost for an even higher price to be paid for the Gerroa property by another purchaser. Against this, Mr Copeland deposed that he ultimately decided that the potential disadvantage is outweighed by the benefits of the transaction he had identified.

Fellmane's liability to NAB

1. In his affidavit of 5 December 2019, Mr Copeland explained that he had undertaken further investigation of the financial arrangements between NAB, Mrs Battaglia and Fellmane. That disclosed that the "all monies" mortgage over the Gerroa property secures the total indebtedness of Fellmane under separate guarantees given by Fellmane in respect of three loans advanced by NAB to Mrs Battaglia under the following facilities:

• Flexi-plus mortgage for $1,460,000, which was fully drawn as at 4 November 2019;
• Variable rate interest-only home loan for $1,252,000, which had a balance of $1,231,932.34 owing to NAB as at 4 November 2019;
• Variable rate interest-only home loan for $1,041,000, which had a balance of $1,023,687.12 owing to NAB as at 4 November 2019.

1. NAB also holds registered mortgages over the two other properties owned by Mrs Battaglia as security for the loans referred to above:

• a property at Belgrave Esplanade, Sylvania Waters, New South Wales (the Sylvania property), with an estimated "curb-side" valuation of $2,250,000 as at 19 November 2019;
• a property at Borrowdale Close, Berry, New South Wales (the Berry property), with an estimated "desk-top" value of approximately $1,900,000 as at 9 August 2019, according to the report to creditors of SX Projects by Mr Goyal, one of its liquidators.

1. Mrs Battaglia owed NAB $3,715,615.46, as at 4 November 2019.
2. Although the total limit of Mrs Battaglia's debt that has been guaranteed by Fellmane is $3,753,000, plus NAB's costs of enforcing the guarantees, NAB has indicated in an email to Mr Copeland's solicitors dated 6 November 2019 that if the Gerroa property is sold, NAB will require an "indicative amount of no less than $2,160,000 plus accrued interest", from the sale proceeds.
3. As counsel for Mr Copeland fairly acknowledged in written submissions, it is not exactly clear why NAB would not require the whole of the net sale proceeds in return for releasing its security over the property. It was suggested by counsel that this is because NAB has comfort from the balance of its security in the form of its mortgages over the Berry property and the Sylvania property (if the debt was reduced by $2,160,000); whereas in contrast, if the Gerroa property is transferred to Batfamt, it might be inferred that NAB will retain its mortgage security over the Gerroa property to secure Mrs Battaglia's indebtedness. That inference seems reasonably likely.
4. There seems to be no prospect of any recovery by NAB from the two other guarantors of Mrs Battaglia's loans from NAB - Mr Battaglia, who is a bankrupt, and Contact Constructions Pty Ltd, which is in liquidation.
5. The mortgage over the Gerroa property is presently in default of the memorandum of common provisions which are incorporated in the mortgage. First, Fellmane has relinquished its position as trustee of the Trust apparently without NAB's prior written consent: cll 2.3(e)(ii) and 15(b). Second, Fellmane is insolvent: cl 15(g). Third, the Gerroa property is subject to a freezing order: cl 15(m). However, NAB has not sought to enforce its security over the Gerroa property, nor enforce its security over the Sylvania property or the Berry property.

Fellmane's assets and liabilities

1. In addition to the contingent debt of approximately $3.715 million owed by Fellmane to NAB by reason of the guarantees, the other liabilities (or alleged liabilities) of Fellmane comprise:

• the SX Projects judgment debt for $1,596,505.02, plus the liability for costs ordered against Fellmane in those proceedings;
• the claim made by Mr Hillig in his capacity as liquidator of 330 Co of $482,736.45, together with a costs order made against Fellmane in certain appeal proceedings. As indicated, this claim has not yet been accepted by Mr Copeland;
• a small debt of $6,870 owing to the Deputy Commissioner of Taxation dated 4 April 2019.

1. Two further background matters should be mentioned. One is that on 11 April 2016, the plaintiffs in the SX Projects proceedings (2016/109697) obtained a freezing order over Fellmane's assets, including the Gerroa property. Those orders were extended on 13 April and 19 April 2016. In order to sell the Gerroa property, Mr Copeland seeks an order by notice of motion filed 9 October 2019 in those proceedings that the freezing orders against Fellmane be discharged.
2. The other matter is that in separate proceedings (2016/98899), 330 Co and Mr Hillig as liquidator of 330 Co obtained undertakings from, among others, Fellmane, which require that 14 days' notice be given before any proposed disposal of Fellmane's property. Mr Copeland does not seek any orders in this regard.

Amendments to the conditional deed

1. During the hearing, counsel for Batfamt handed up a revised proposed deed of transfer and release (Ex 2), which sought to address criticisms which had been raised by the contradictors about the certainty and legal effect of the conditional deed. There were two substantive amendments. One was an amendment to Recital F and the definition of "Guarantee" in cl 1.1 to clarify that the guarantees the subject of the proposed release by NAB extended to all three guarantees given by Fellmane to NAB in respect of loans to Mrs Battaglia: see [25] above.
2. The other amendment was to add a new cl 5.4 which was intended to address a criticism by the contradictors that it was uncertain whether the completion of the sale of the Gerroa property to Batfamt would extinguish Fellmane's right of indemnity, against liabilities incurred in its capacity as the former trustee of the Trust and its charge over the Gerroa property supporting that right of indemnity: Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367; [1979] HCA 61; Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20; 93 ALJR 87 at [29]-[32], [80]-[84], [130]-[132]. The new cl 5.4 was as follows: The receiver acknowledges that upon the transfer of the Property as contemplated by this clause 5 any right, title, interest he holds or holds in the Property in his capacity as receiver of the trust is extinguished.
3. Counsel for the contradictors raised a number of further queries in relation to Ex 2. Pursuant to leave granted by the Court at the conclusion of the hearing, Mr Copeland put forward a further revised proposed deed of transfer and release (MFI 2), and the parties have provided written submissions directed to the transaction embodied in that proposed deed.
4. The substantive amendments contained in MFI 2 are the deletion of cl 5.4 and, in its place, the addition of new cll 6.6 and 6.7. In addition, it is now proposed that if the transaction proceeds, Mr Copeland and Fellmane will seek a variation of the orders appointing Mr Copeland as receiver and manager of the assets and undertaking of the Trust, to exclude the Gerroa property from the receivership on an ex nunc (not nunc pro tunc) basis. It is convenient to reproduce in full the whole of cl 6: 6 Release and Indemnity 6.1 On the transfer of the Property to Batfamt as referred to in clause 5.1(c) of this Deed, Batfamt unconditionally releases, and discharges and forever holds harmless each of the Receiver and Fellmane from all Claims of every description and whenever occurring that Batfamt (or any subsequent trustee of the Trust) now has, may now have, or but for the execution of this Deed may have had, against the Receiver and / or Fellmane arising from or in connection with the Property, the liquidation of Fellmane, the Trust or the Receivership Orders. 6.2 The release contained in clause 6.1 of this Deed expressly does not affect in any way the right of Batfamt to make a claim with respect to the net assets of the Trust (being the Net Payment Sum, less the Receiver's fees, expenses and disbursements), of the Property or the assets of any trust for which Fellmane is trustee. 6.3 Batfamt agrees that this Deed may be pleaded and used as a complete bar and defence to any Claim that is brought by Batfamt (or any other party or entity) that is the subject of a release in clause 6.1. 6.4 For the avoidance of doubt, nothing in clause 6.1 precludes any party from bringing any Claim seeking to enforce this Deed or any provision of it. 6.5 On the transfer of the Property to Batfamt as referred to in clause 5.1(c) of this Deed, Batfamt indemnifies the Receiver and Fellmane against any Claim made against any of them by the NAB insofar as any Claim in any way either directly or indirectly relates to the Property, the liquidation of Fellmane, the Trust or the Receivership Orders. 6.6 On the transfer of the Property to Batfamt in accordance with clause 5.1(c) of this Deed (which, for the avoidance of doubt, is only to occur following satisfaction of the conditions in that clause), each of Fellmane and the Receiver: (a) acknowledge and agree that: (i) they will have no right, title or interest in the Property; (ii) Fellmane's right of indemnity, exoneration or reimbursement out of the assets of the Trust, as the former trustee of the Trust, will no longer subsist over the Property; (b) unconditionally releases, discharges and forever holds harmless Batfamt (or any subsequent trustee of the Trust) from all Claims of every description and whenever occurring that they have, may now have, or but for the execution of this Deed may have had in respect of the Property (or any right, title or interest in the Property); and (c) covenant to apply to the Court for a variation of the Receivership Orders in the following terms (also set out as Annexure A to this Deed): Order that order 1 of the Orders made on 13 June 2019 be varied, ex nunc, by the inclusion at the conclusion of the Orders of the words "other than the property located at 74 Stafford Street, Gerroa NSW being land in folio identifier Lot 99 of Deposited Plan 29242" so that, as at the date of these orders, order 1 of the Orders made on 13 June 2019 is as follows: 1. The First Plaintiff, Brendan James Copeland (Mr Copeland) of Hogan Sprowles, Level 9, 60 Pitt Street Sydney NSW 2000, be appointed, until further order, as receiver and manager (Receiver), without security, of the assets and undertakings of the Battaglia Family Trust (the Trust), being the trust established by Deed of Trust dated 3 June 1996 between Andrew Poole, as settlor, and Fellmane Pty Limited (in Liquidation) (the Company), as trustee, other than the property located at 74 Stafford Street, Gerroa NSW being land in folio identifier Lot 99 of Deposited Plan 29242. 6.7 Each of Fellmane and the Receiver agree that this Deed may be pleaded and used as a complete bar and defence to any Claim that is brought by either of them that is the subject of a release in clause 6.6(b).

Submissions

1. The contradictors took the position that the more appropriate course is for the receiver to sell the Gerroa property at public auction, pay the amount required by NAB to discharge the mortgage and then assert any rights of subrogation that arise with respect to the other securities held by the NAB from Mrs Battaglia in order to make further recoveries in the receivership.
2. In writing, counsel for Mr Copeland emphasised the benefits of the proposed transaction by reference to Mr Copeland's evidence referred to at [23] above. In particular, it was submitted that:

• the transaction immediately unlocks cash of $850,000 from the equity in the property, which is a substantially greater sum of money than could possibly have been expected to be obtained from a public sale of the property, whether by public auction or private treaty in circumstances where it is likely that there would be little by way of net proceeds of sale available to the receiver given NAB's position that at least $2.16 million must be paid to it from the sale price of the property;
• the transaction would involve Fellmane obtaining a discharge of the guarantees and a release by the NAB from its obligations and any claims the bank may have against it. Against this, if the property was sold in the usual manner, while this would lead to a reduction in Mrs Battaglia's indebtedness to the NAB, it would not eliminate that indebtedness completely and Fellmane would remain exposed to the bank as guarantor.

1. Against this, counsel for Mr Copeland accepted that there were two potential downsides of the proposed transaction. The first has already been mentioned - the possibility of a missed opportunity to obtain a sale price for the property higher than the estimated price in the valuations. The second is the potential undesirability of the receiver undertaking a sale with Batfamt, a related party of the company, in circumstances where, it is acknowledged, the contradictors are understandably suspicious of Mr Battaglia.
2. Mr Copeland candidly acknowledged in his 5 December 2019 affidavit (pars 38-39), that he has some reservations about the transaction with Batfamt but expressed the view that, on balance, the sale of the property on the terms of the deed is in the best interests of Fellmane's creditors and, to the extent relevant the beneficiaries of the Trust, because in Mr Copeland's opinion it provides the most likely prospect of realising the greatest amount of money from the assets of the Trust and does so in the realistically quickest time.
3. Counsel for Mr Copeland further submitted that the position taken by the contradictors is misconceived for a number of reasons, including: that no right of equitable subrogation would exist in the scenario posited by the contradictors; in any event, cl 9.1 of the guarantees displaces any equitable right of subrogation while NAB continues to be owed money by Mrs Battaglia (or Fellmane); the winding up and receivership are presently unfunded; there are reasons to doubt that Mrs Battaglia is solvent and any claim against her is likely to be of little value; any claim against Mrs Battaglia will inevitably involve time and greater cost to the receivership and there are no assurances that any such claim will succeed; there is nothing in the conditional deed that excludes any rights that Fellmane may have against Mrs Battaglia and Fellmane would retain a right to seek indemnity from her; and, a wait-and-see approach in the hope that the other properties owned by Mrs Battaglia are sold for the Gerroa property, whilst having superficial appeal is neither practical nor consistent with Mr Copeland's duties as receiver.
4. It is convenient first to address the legal issues raised by the terms of the conditional deed.

Legal issues raised by the conditional deed

1. Three legal issues arise for consideration. Two concern the rights of a guarantor in the position of Fellmane, in particular, whether the right of subrogation only arises once the guarantor has paid the principal debt in full, and whether Fellmane would have any rights of indemnity against Mrs Battaglia as the principal debtor consequent upon the proposed transaction. The third concerns the effect of the conditional deed on Fellmane's right of indemnity against the Gerroa property.

Subrogation

1. In Bofinger v Kingsway Group Ltd (2009) 239 CLR 269; [2009] HCA 44 (Bofinger), the High Court observed at [8] that it is the ultimate liability of the principal debtor which provides a foundation for the application of subrogation in aid of the surety. Thus, where a claim to the benefit of securities held by the creditor is made by a surety, the equity of subrogation is derived from the obligation of the principal debtor to indemnify the surety.
2. The Court in Bofinger at [4] approved the statement of the right of subrogation in favour of a surety by Sir Andrew Morritt V-C in Liberty Mutual Insurance Co (UK) Ltd v HSBC Bank plc [2001] Lloyd's Rep Bank 224 at 225; affd [2002] EWCA Civ 691: The right operates so as to confer on the surety who has paid the debt in full the rights against the debtor formerly enjoyed by the creditor or by imposing on a creditor the obligation to account to the surety for any recovery in excess of the full amount of his debt. [emphasis added]
3. Similarly, in Austin v Royal (1999) 47 NSWLR 27; [1999] NSWCA 222 at [19], this Court (Cole AJA, Meagher and Handley JA agreeing) said: The theory underlying the equitable concept of subrogation is that a creditor, having no use for a security over his debtor's assets because the creditor's debts have been paid and obligations discharged by the guarantor, is obliged to transfer that security to the guarantor who may then enforce it to recover the moneys from the debtor which he, the guarantor, has paid to the creditor. … [Emphasis added.] See also: Buckeridge v Mercantile Credits Ltd (1981) 147 CLR 654 at 668-669; [1981] HCA 62.
4. Notwithstanding the absolute terms of the statement of principle in cases such as Bofinger and Austin v Royal, there is a line of cases for the proposition that although rights of subrogation only arise when the creditor's debt has been paid in full, it is not fatal to a claim for subrogation that the claimant has not paid the creditor in full: Equity Trustees Executors & Agency Co Ltd v New Zealand Loan & Mercantile Agency Co Ltd [1940] VLR 201 at 207 (Lowe J); AE Goodwin Ltd v AG Healing Ltd (1979) 7 ACLR 481 (AE Goodwin v AG Healing Ltd) at 487-488 (Powell J); Russet Pty Ltd (in liq) v Bach (New South Wales Supreme Court, unreported, Hodgson J, No 2856 of 1985, BC8801811) at 10; Raffle v AGC (Advances) Ltd (1989) 5 BPR 11,992 at 11,994 (Young J); Bayley v Gibsons Ltd (1993) 1 Tas R 385 at 396-397 (Zeeman J); Aquilina Holdings Pty Ltd v Lynndell Pty Ltd; Lynndell Pty Ltd v Capital Finance Australia Ltd [2008] QSC 57 at [22] (Daubney J).
5. The contradictors do not rely upon this line of authority. Rather, the contradictors submitted, based on statements in some first instance authorities, that the right of subrogation can arise from payment of part of the debt to the principal debtor to the extent of the payment even though the creditor's debt is not paid in full: State Bank of New South Wales v Geeport Developments Pty Ltd (1991) 5 BPR 11,947 at 11,953-11,954 (Cohen J); followed in Padovan v MGG Group Pty Ltd (in liq) [2011] NSWSC 1080 at [30] (Black J). It should be observed, that in Padovan it seems that Black J was not referred to Bofinger or Austin v Royal.
6. At face value, the statements in Geeport and Padovan are not consistent with principle. However, the statements were qualified by the acknowledgment that the right of subrogation remains dormant and is not enforceable until the whole of the principal debt is paid. In that sense, the statements might be read as intending to convey, consistent with authority, no more than that subrogation is "potentially" available to the guarantor who has paid part of the debt, and that the right crystallised when the debt is otherwise paid in full: AE Goodwin Ltd v AG Healing Ltd at 487-488.
7. In the present case, it is plain that the proceeds of the sale of the Gerroa property would not, on any possible scenario, be sufficient to discharge Mrs Battaglia's debt to the NAB which exceeds $3.7 million. Thus, on a sale of the Gerroa property to Batfamt or another purchaser, the debt owed by Mrs Battaglia to the NAB would not be repaid in full, and the guarantees given by Fellmane to NAB would remain in place. Fellmane would not have a right of subrogation to the other securities held by NAB from Mrs Battaglia over the Berry property and the Sylvania property.
8. A further difficulty with the contradictors' submission is that the right of subrogation may be excluded by contract: Bofinger at [82]; O'Day v Commercial Bank of Australia Ltd (1933) 50 CLR 200 at 223. Mr Copeland submitted that Fellmane's right of subrogation had been relevantly excluded. The contradictors submitted to the contrary.
9. Clause 9.1 of each guarantee provided: You give up certain rights 9.1 Subject to 11, as long as you or the customer has any liability to NAB for any reason, you may not without NAB's prior written consent: (a) recover any amount in competition with NAB against the customer, another of you or any other co-surety under any security interest, in an insolvency, under any right of contribution or indemnity, or in any other way; or (b) claim the benefit, or seek the transfer, of any security interest, guarantee or indemnity from any co-guarantor; or (c) take over any of NAB's rights as creditor; or (d) require NAB to resort to any security interest or right of NAB before or when NAB resorts to you.
10. Plainly, the terms of cl 9.1 of the guarantees, exclude the equitable right of subrogation which Fellmane as guarantor might otherwise have had, for so long as NAB is owed money by Mrs Battaglia or Fellmane.

Indemnity against principal debtor

1. In writing, Mr Copeland submitted that Fellmane would have a right to seek indemnification from Mrs Battaglia upon the transfer of the Gerroa property to Batfamt, referring to Israel v Foreshore Properties Pty Ltd (in liq) (1980) 30 ALR 631. Although no payment would be made by Fellmane to NAB, it is said that, in a broad sense and as a practical matter, this is what would occur under the proposed transaction and that Fellmane would have a right of indemnity against Mrs Battaglia in an amount representing the difference between the value of the Gerroa property and the $850,000 cash payment proposed to be made by Batfamt to Fellmane.
2. In oral argument, counsel for Mr Copeland adopted a more qualified position and accepted that there is some uncertainty as to whether Fellmane would have a right of indemnity against Mrs Battaglia upon completion of the proposed transaction.
3. In O'Donovan and Phillips, Modern Contract of Guarantee (Thomson Reuters, online service), the authors state at [12.800]: Finally, a guarantor can seek an indemnity not just in respect of amounts paid in reduction of the principal debt but also in respect of property transferred to the creditor for this purpose.
4. Three of the authorities cited by the authors bear out this statement. In Fahey v Frawley (1890) 26 LR Ir 78 at 90, the surety on a promissory note had transferred a mortgage security, which was his property, to the holder of the promissory note, who thereupon released him from liability. The security was valued at a certain sum. The plaintiff obtained judgment against the principal debtor for the value of the security. The Queen's Bench Division in Ireland upheld the verdict. Holmes J said at 90: Where a person is expressly or by implication requested by another to pay his debt, and where he arranges with the creditor to pay it, in whole or in part, by the transfer of property possessing a certain marketable value, it is, as far as the debtor is concerned, the same as money paid; and I see no reason for his not being answerable in this form of action.
5. In Rodgers v Maw (1845) 15 M&W 444; 153 ER 924, execution was levied against a guarantor's property and the proceeds of execution was paid over to the judgment creditor by the sheriff. That was treated as a payment by the guarantor in reduction of the principal debt.
6. In Paton v Wilkes (1860) 8 Gr 252, a surety, having paid nothing, transferred to the creditor collateral securities granted to him by the principal debtor by way of counter-indemnity in consideration of the release of the debt. Esten VC held that the creditor had all the remedies that a surety would have if he were to pay the debt and then put the securities in force.
7. By contrast, the proposed transaction the subject of the further revised conditional deed (MFI 2) does not involve any payment by Fellmane to NAB in reduction of the principal debt of Mrs Battaglia or any transfer of property by Fellmane to the NAB for this purpose. Under the proposed transaction, as presently structured, Fellmane would not have a right of indemnity against Mrs Battaglia for the difference between the "notional" sale price and the amount of $850,000 to be paid to Fellmane.
8. The Court was informed that during the course of the hearing Mr Copeland had requested a deed poll be given by Mrs Battaglia acknowledging that notwithstanding the form of the proposed transaction, Fellmane would have a right of indemnity against her. Mrs Battaglia has declined to enter into such an arrangement.

Does Fellmane retain its right of indemnity against the Gerroa property?

1. A corporate trustee's right to be indemnified out of the assets of the trust survives the trustee's loss of office: Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd (2008) 74 NSWLR 550; [2008] NSWSC 1344 at [50] (Brereton J); Apostolou (as trustee of the Vasiliou Family Trust) v VA Corporation of Australia Pty Ltd [2010] FCA 64; (2010) 77 ACSR 84 at [49] (Finkelstein J). No issue arises on the present application as to the difference of view between Lemery and Apostolou as to whether the former trustee is entitled to retain possession of the trust property, subject to a court order to the contrary, until it is paid what it is due or until it sells the property.
2. As originally drafted, the conditional deed left open the possibility that Fellmane could assert its right of indemnity against the Gerroa property as a Trust asset after it had been transferred to Batfamt, the new trustee of the Trust. Clause 6.6 of the revised conditional deed makes plain that on transfer of the Gerroa property to Batfamt, Fellmane forgoes its right of indemnity against the Gerroa property as former trustee of the Trust. And, for the abundance of caution, cl 6.6 provides that the parties are to approach the Court to vary the order appointing Mr Copeland as receiver of the assets and undertakings of the Trust, to effectively exclude the Gerroa property, ex nunc, from the receivership. Clause 6.7 provides for a plea in bar to any such claim for indemnity.
3. I am satisfied that cll 6.6 and 6.7 remove the uncertainty concerning any continuing right of indemnity against the Gerroa property and achieve the parties' intention, as stated to the Court, that upon transfer of the Gerroa property to Batfamt, Fellmane as the former trustee would no longer have any right of indemnity against that property as a Trust asset.

Should the Court give the direction sought?

1. As indicated, the Court will not give directions as to a matter which relates to the making and implementation of a business or commercial decision, if no particular legal issue is raised, but may do so where legal issues or a challenge to the reasonableness or proprietary of the decision is raised: see [3] above. I accept that in the present case, the receiver seeks the proposed directions to provide guidance on matters of law arising in the receivership, rather than merely a question of business judgment or commercial wisdom. The proposed sale of the Gerroa property involves legal issues, which have been addressed above, and at least potentially might be open to challenge.
2. In particular, the receiver said that the method of realisation raises a question of law as to whether that is consistent with the receiver's duties, referring to Re Australasian Barrister Chambers Pty Ltd (in liq) [2017] NSWSC 597 at [44]-[52]. That can be accepted given the sales process adopted and the manner in which the proposed transaction has been structured so as to effectively preclude any right of indemnity by Fellmane against Mrs Battaglia.
3. As to the receiver's duties when realising property of a trust, the judgment of Gordon J in ASIC v Letten (No 11) [2011] FCA 499 is instructive. Her Honour stated the following principles in the context of an application by a court-appointed receiver for directions to approve a sale of property of schemes which were being wound up under s 601EE(1) of the Corporations Act at [15]-[17]: [15] As was stated in Letten (No 8) at [11], one way of approaching the current issue (but not the sole way) was to enquire whether the Receivers had discharged the duty imposed on them by s 420A of the Corporations Act. That section provides: In exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for: (a) if, when it is sold, it has a market value - not less than the market value; or (b) otherwise - the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold. [16] In ascertaining whether a controller has taken all reasonable care in the sale of a property pursuant to s 420A of the Corporations Act, the section necessitates an assessment or enquiry into the process adopted by the Receivers in selling the property: Florgale Uniforms Pty Ltd v Orders (2004) 11 VR 54 at [442]-[443] and Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd (2002) 10 BPR 19,565 at [126]. The actions of the controller in selling the property (in this case the Receivers) is of course a human endeavour which requires "the exercise of judgment, taking into account all the relevant variables and circumstances of the particular case": Letten (No 8) at [12] also referring to Florgale Uniforms Pty Ltd v Orders (2004) 11 VR 54 at [442]-[443] and Artistic Builders Pty Ltd at [126]. [17] The Receivers must act in good faith and not in a manner which is unconscionable. So, for example, the court may refuse to authorise a sale if another course of action can be pursued to the benefit of all parties concerned: AIDC at 649 and 652 and see also Re Buenos Aires Port and City Tramways Ltd (1920) 123 LT 748 at 750. However, a court will usually sanction an immediate sale if the only alternative is for the Receiver to continue his or her management of the company indefinitely: see Company Receivers and Administrators by O'Donovan (Thomson Reuters) at [23.3510]. In the present case, the proposed course does not necessarily involve a sale but such a course will be permitted by the court if that course is one which is sound in the all the circumstances.
4. Here, four things can be said about the sale process undertaken by the receiver. First, so far as the evidence revealed, the receiver has only dealt with one party, Batfamt, a related party to Mr Vince Battaglia, which made an offer to acquire the Gerroa property on the terms of the conditional deed.
5. Second, the offer by Batfamt was made at a time when the receiver was unaware of the true security position held by the NAB and the two further loans made to Mrs Battaglia which Fellmane had guaranteed. It also seems that up until the time of the hearing the receiver was under a misapprehension that, notwithstanding the structure of the proposed transaction, Fellmane would have a right of indemnity against Mrs Battaglia, which the receiver understood to be the difference between the "notional" sale price to Batfamt and the cash payment to be made to Fellmane of $850,000. That is not so under the proposed conditional deed, including as further revised: see [58]-[62] above.
6. Third, there is no evidence that upon becoming aware of the true security position of the NAB, the receiver attempted to negotiate a better deal with Batfamt or the NAB, given the ultimate liability of Mrs Battaglia to the NAB.
7. Fourth, the effect of the proposed transaction is that Mrs Battaglia, through the $850,000 payment by Batfamt to Fellmane, "buys out" Fellmane's rights of indemnity and subrogation qua guarantor for an amount considerably less than the estimated value of the Gerroa property, which stands as a third party security for Mrs Battaglia's debts to the NAB. Why Mrs Battaglia, as the party ultimately liable to the NAB, should obtain such an advantage to the detriment of Fellmane as the party secondarily liable was not explained in the evidence, nor in submissions.
8. The receiver submitted that if the Gerroa property was sold to a third party, there is reason to doubt that Mrs Battaglia is solvent, thus rendering Fellamne's right of indemnity against Mrs Battaglia of little value. I do not accept that the evidence makes good this submission. First, there is evidence that the estimated total security value of the Gerroa property and Mrs Battaglia's two properties substantially exceeds the debt owed by her to the NAB: see [25]-[27] above. Second, after judgement was reserved, the Court was informed by the parties that the bankruptcy proceedings against Mrs Battaglia by 330 Co as substituted creditor were resolved on 10 April 2020 by payment by Mrs Battaglia of $199,000 to Mr Hillig as liquidator of 330 Co.
9. The receiver emphasised that the winding up and the receivership is presently unfunded and submitted that the course of action favoured by the contradictors would ensure that the administrations remain unfunded even after sale of the Gerroa property to a third party. That however ignores two matters. One is that the receiver has a right of indemnity against the Gerroa property for his remuneration, costs and expenses reasonably incurred in the care, preservation and realisation of the Gerroa property: Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 at 174 (Dixon J). The other matter is that the NAB has indicated to the receiver that it is prepared to accept an amount in discharge its security and the guarantees from Fellmane which is less than the "notional" sale price to Batfamt, if that amount was obtained from a third party purchaser.
10. The receiver also submitted that a wait and see approach in the hope that the other two securities held by the NAB are sold first with the consequence that the equity of redemption in the Gerroa property is thereby increased, was neither practical nor consistent with the receiver's duties. In a broad sense that is correct if the receiver does nothing, but that is not the essence of the contradictor's position. Their complaint is that the receiver has not attempted to obtain a better deal from Batfamt than that offered by the proposed transaction, or from a third party purchaser, and in either case, in conjunction with negotiations with the NAB to maximise Fellmane's position in recognition of Mrs Battaglia's ultimate liability for the NAB debt.
11. Whilst the application for directions does not involve a final determination of the rights of the parties, the direction sought by the receiver would have the effect of protecting the receiver from any personal claim that he has acted unreasonably in the sales process or that he would breach his duty by giving effect to the transaction the subject of the revised conditional deed: see generally the remarks of McLelland J in Re GB Nathan and Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 679-680. Accepting that it is not the role of the Court to make a commercial judgment on the proposed transaction, I am not satisfied on the present evidence that sufficient and appropriate consideration has been given by the receiver to the disadvantages of the proposed transaction in terms of its effect on Fellmane's right of indemnity against Mrs Battaglia. Nor am I satisfied that the receiver has taken all reasonable steps to attempt to negotiate a better outcome for Fellmane, either with Batfamt, the NAB or potential third party purchasers.
12. Accordingly, I am not satisfied that the Court should give the direction sought by the receiver that he would be justified in disposing of the Gerroa property on the terms of the further revised conditional deed (MFI 2). That is not to say that the receiver is precluded from making a further application for directions with respect to the sale of the Gerroa property based on new evidence or changed circumstances.
13. It follows that no occasion arises to consider the approval sought pursuant to s 477(2B) of the Corporations Act.
14. Nor is it appropriate at this time to vary the freezing orders in proceedings 2016/109679. The applicants' notice of motion filed 9 October 2019 will be dismissed.

Costs

1. I am satisfied that Mr Copeland's costs of this application were properly incurred in the receivership of the Trust and an order should be made that such costs be paid from the assets of the Trust.
2. The receiver asked that the question of payment of the contradictors' costs be reserved. That is appropriate to allow the parties an opportunity to consider the Court's reasons. A direction will be made that, in the absence of agreement as to payment of the contradictors' costs, the parties are to provide short written submissions and that issue will be decided on the papers.
3. I should indicate for the benefit of the parties that, although the contradictors were not formally joined as a party to the proceedings but were granted leave to appear and to participate without becoming a party, their submissions were of assistance to the Court, and it was reasonable for the contradictors to retain counsel to appear at the hearing to advance those submissions. Subject to any further argument, I would be disposed in the circumstances of this case to make an order for payment of their costs as a cost of the receivership: Re Pan Pharmaceuticals; Selim v McGrath [2004] NSWSC 129; (2004) 48 ACSR 681 (Barrett J); Re Perpetual Investment Management Ltd [2011] NSWSC 615 at [8] (Ward J). The contradictor's costs should be paid from the assets of the Trust after the discharge of all amounts to which the receiver is entitled pursuant to his right of indemnity for his reasonable remuneration, costs and expenses of the receivership.
4. No order as to costs should be made in favour of Batfamt having regard to its self-interest in the proposed transaction.

Orders

1. The Court makes the following orders: 2019/142162 1. The Court declines to give directions to Brendan James Copeland in his capacity as receiver of the Battaglia Family Trust and liquidator of Fellmane Pty Ltd (in liq) that Mr Copeland is justified in entering into and performing and causing Fellmane Pty Ltd (in liq) to enter into and perform the deed of proposed sale and release in the form of the document contained in MFI 2. 2. The interlocutory process filed 3 October 2019 be dismissed. 3. The applicants' costs of the interlocutory process filed 3 October 2019 be costs in the receivership of the Battaglia Family Trust and be paid from the assets of that Trust. 4. In the absence of agreement between the parties as to the costs of the contradictors, SX Projects Pty Ltd (in liq) and ACN 092 745 330 (in liq), direct that the contradictors file and serve short written submissions in support of any application for costs within 7 days and the applicants file and serve short written submissions in response within a further 7 days (in each case not exceeding 3 pages). The question of the contradictors' costs will be determined on the papers. 5. Direct that the parties confer and provide to the Associate to Gleeson J within 5 days any proposed redactions of those parts of this judgment which reveal commercially confidential information concerning the value of the Gerroa property. 6. Direct that the exhibits be returned. 2016/109679 (1) Dismiss the applicants' notice of motion filed 9 October 2019. (2) The applicants' costs of the notice of motion filed 9 October 2019 be costs in the receivership of the Battaglia Family Trust and be paid from the assets of that Trust.
2. On 26 May 2020, the parties informed the Court pursuant to the direction in [4] in proceedings 2019/142162, that the parties do not propose any redactions to any part of the judgment or any publication restriction in respect of it. The parties also informed the Court, pursuant to the direction in [5] in proceedings 2019/142162, that agreement had been reached as to the costs of the contradictors. Accordingly, on 27 May 2020 the Court made the following additional order in proceedings 2019/142162: (7) The Contradictors' reasonable costs of the interlocutory process filed 3 October 2019 be costs in the receivership of the Battaglia Family Trust and be paid from the assets of that Trust after the discharge of all amounts to which the first plaintiff is entitled pursuant to his right of indemnity for his reasonable remuneration, costs and expenses of the receivership.

Amendments 29 May 2020 - Additional order made in proceedings 2019/142162 - refer [86]. 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: 29 May 2020