KPE Superannuation Fund Pty Ltd v QRM Holdings Pty Ltd

Court of Appeal (NSW)|2022-12-20|Before: Ward P, Macfarlan JA, Mitchelmore JA, Richmond J, MacFarlan JA

Solicitors: Henry William Lawyers (Applicant) Keypoint Law (Respondent) File Number(s): 2022/379546 Decision under appeal Court or tribunal: Supreme Court Jurisdiction: Equity Citation: [2022] NSWSC 1708 Date of Decision: 14 December 2022 Before: Richmond J File Number(s): 2022/107858

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

DETERMINATION OF THE APPLICATION FOR LEAVE AND THE APPEAL

KPE seeks to appeal on the ground that the primary judge's exercise of discretion miscarried for a number of reasons including the following two proposed grounds of appeal.
KPE's first ground of appeal is as follows: "[T]he Primary Judge failed to take into account a material factor, that KPE (being a superannuation fund) proffered the usual undertaking as to damages, adduced uncontested evidence it owns an unencumbered commercial property in Cronulla with a value of $3.8 million to $4.2 million and an undertaking by its director to give notice to Quinn's solicitor within 7 days of entry into a contract for sale".
KPE's second ground of appeal is that, for a number of stated reasons, the primary judge erred in finding that there was sufficient equity in the Warners Bay property to secure KPE's loan, that is, in finding that that property was an adequate alternative for KPE to security in the Jindabyne property.

The first ground of appeal: the undertaking as to damages

As is implicitly asserted in the first ground of appeal, the primary judge did not refer in his judgment to the fact that KPE, which is a superannuation fund, proffered to Mr Quinn the usual undertaking as to damages in relation to loss that Mr Quinn might suffer if KPE's caveat remained in place and it were ultimately found that that should not have occurred. His Honour also did not refer to the fact that the undertaking was effectively supported by KPE's ownership of an apparently valuable unencumbered property.
In relation to that property, there was uncontested evidence that KPE is the registered owner of an apartment "along the north Cronulla beachfront and restaurant precinct". There are no encumbrances registered on its title other than a registered lease expiring on 31 December 2025 which contains an option to renew. The property is currently being marketed for sale at $4,000,000 - $4,200,000 and an appraisal letter from a local real estate agent, said to be based on "comparable sales within the immediate vicinity and demand for similar properties within an area of approximately one square kilometre", states that the current expected selling price is between $3,800,000 and $4,200,000. As noted in the ground of appeal, KPE undertook to notify Mr Quinn of any sale of the property.
Whilst this evidence clearly falls well short of formal valuation evidence, it still has some significance because it was not objected to and not contradicted. In my view it is appropriate to give the evidence some weight in considering the value of KPE's undertaking as to damages.
In some cases it is not appropriate to place significance on the absence of a reference in a judgment to a matter relevant to the exercise of judicial discretion because it can be inferred that the matter was nevertheless considered by the judge. Mr Quinn submitted that this was such a case, particularly as the undertaking as to damages was referred to in the course of argument before the primary judge and it should therefore be assumed that his Honour was aware of it when he wrote his judgment.
The structure of his Honour's judgment however does not in my view favour this approach. His Honour was very clear in identifying the six matters that he took into account in arriving at his conclusion that the potential prejudice to KPE did not have the consequence that it should be allowed to maintain its caveat. In this regard, his Honour prefaced his conclusion by stating that he weighed "all the above matters" (emphasis added), that is, the six matters he described, with particular mention being made of three of them. KPE's undertaking as to damages, and the real property owned by it, was not amongst those six matters. They were however significant matters that ought to have formed part of his Honour's reasoning process. I conclude that his Honour erred therefore in the exercise of his discretion which was thereby vitiated.
This conclusion is sufficient to require this Court to re-exercise the discretion by itself considering whether an order should be made requiring KPE to remove its caveat but I proceed below to deal with an additional basis for that result, being his Honour's reliance on Mr Quinn's offer to KPE of alternative security over the Warners Bay property, as it is of particular relevance to the Court's re-exercise of discretion.

The second ground of appeal: the Warners Bay property

Understandably significant factors in his Honour's exercise of discretion were his conclusions that Mr Quinn proffered an undertaking to provide alternative security to KPE and that his Honour regarded Mr Quinn as having sufficient equity in one of the properties proffered, the Warners Bay property, to secure KPE's loan, even after Mr Quinn's refinancing.
The primary judge noted the following in relation to the Warners Bay property: "36 In relation to the Warners Bay property, the position may be summarised as follows: (a) It has recently been valued by the valuer retained by Mr Quinn at $15.38m; (b) It is subject to a mortgage with PrivateInvest securing a facility with a maximum facility amount of the lesser of $9.275m and 'an amount in dollars that would result in a LVR that is not greater than 56%'; (c) The further facility to be provided by Fincore [as part of Mr Quinn's refinancing] contemplates an advance of $4.337m secured by a mortgage over the Warners Bay property and three other properties. While the current value of these other properties was not established by the evidence there is evidence indicating that they are substantial pieces of real estate with a value that is not insignificant. 37 KPE obtained a 'desktop valuation' of the Warners Bay property which placed a value on the property of between $5m to $6.3m. However, this valuation is of no assistance to the Court given the qualifications to which it is subject. It is expressed to be 'preliminary valuation advice' which 'should not be relied upon without further investigation and information'. When the total amount secured by the PrivateInvest and Fincore facilities ($13.612m) is subtracted from the valuation tendered by Mr Quinn's valuer ($15.38m) the net surplus is approximately $1.768m. In addition, it is relevant that the Fincore facility will be secured over other substantial real property, not just the Warners Bay property. Hence there is a reasonable basis to conclude that the equity retained by Redzel in the Warners Bay property, even after the Fincore facility is entered into, will exceed the amount owing by the Trustee to KPE in respect of the unitholder loan."
It is apparent from these observations that critical to his Honour's later expressed conclusion that the Warners Bay property provided adequate alternative security to KPE (see [11] above) was the weight fairly able to be placed on Mr Quinn's valuer's valuation of $15,380,000 million. Even if that valuation were accepted in full, the net surplus available to KPE to secure its debt of at least $1,100,000 would only be about $1,768,000 (subject to his Honour's reference to the Fincore facility being secured over other property as well).
The report of Mr Quinn's valuer to which his Honour referred is a report dated 4 November 2021 of Mr Slim Hawatt of Castles Valuers. It identifies the subject property as currently vacant with a proposal for its development to provide 74 apartments for seniors. Mr Hawatt stated that his valuation "has been prepared on specific instructions from Guardian Capital Investments and a lender that is to be approved for the purpose of First Mortgage Lending". He states also that the value he assesses "may change significantly and unexpectedly over a short period". Under the heading "LAST SALE OF SUBJECT PROPERTY" he states that "RPData records do not indicate any recent sales of the subject property". He continues: "Due to a lack of directly comparable properties in the locality, a wider date and geographical range of sales may be evidenced with appropriate inferences made for value determination purposes".
As well as considering value on a comparative sale basis, Mr Hawatt made an assessment on a hypothetical development basis. His ultimate valuation was $15,380,000 excluding GST, "'AS IS' with DA".
The following points made by KPE in submissions tend against the primary judge's approach of adopting Mr Hawatt's valuation without qualification or discount.
First, Mr Hawatt's report was prepared without any statement of his reliance on the Expert Code of Conduct. For that reason it was admitted, not as expert evidence, but "as an indication of the value of the property subject to weight". His Honour did not however consider the weight to be attached to it, simply making the observations, quoted at [27] above, and expressing a conclusion that the property provided adequate security for KPE (see [11] above).
Secondly, Mr Hawatt prepared the valuation on the basis of "specific instructions from Guardian Capital Investments". He referred also to a lender but the inference from what he said is that that lender was yet to be identified. Guardian Capital Investments is a company associated with Mr Quinn. As KPE put it in submissions in this Court, the inference is in these circumstances open that the valuation was prepared, not as an objective assessment of value, but for the purpose of persuading an as yet unidentified, or at least uncommitted, financier to lend. Indeed, the primary judge himself referred to that possibility in the course of counsels' addresses.
Thirdly, as noted above, Mr Hawatt does not indicate that he was acting in accordance with the Expert Code of Conduct. Even when, in a subsequent affidavit, he stated that he was aware of the Code, he did not state that he had acted in accordance with it. Such a statement is important because it involves, inter alia, an acknowledgment by the expert that he or she is "not an advocate for a party" and owes a paramount duty to act impartially (Uniform Civil Procedure Rules 2005 (NSW), r 31.23, Sch 7 cl 2).
Fourthly, as also noted above, in his valuation Mr Hawatt indicated that he was unaware of any recent sales of the subject property. It had in fact been purchased by Mr Quinn under a contract entered into in August 2021 for $1,540,000. Although there was evidence that this was a sale pursuant to an option agreement made in January 2020 and that development consent had subsequently been granted, the vast disparity between that price of $1,540,000 and Mr Hawatt's value of $15,380,000 rendered the sale in the previous year of at least some significance in the valuation process. Yet Mr Hawatt was apparently ignorant of it.
Fourthly, Mr Hawatt indicates in his valuation report that there was a lack of directly comparable sales. As well, his valuation on the alternative basis of development of the site was necessarily founded on a large number of variables of uncertain magnitude which would tend against reliance on a precise valuation figure such as that arrived at by Mr Hawatt.
Fifthly, his Honour placed some weight on one of the financiers, Fincore, having security other than the Jindabyne property, upon which it could rely (see [27] above). A financier which has multiple securities however has the choice of which to enforce. Accordingly, little, if any, significance should be attached to the financier's possession of other securities.
Sixthly, although, as his Honour noted, the competing "desktop valuation" of Mr Shane Powell on which KPE relied was stated to be "preliminary valuation advice" which "should not be relied upon without further investigation and information", it was in my view going too far, as his Honour did, to dismiss it entirely from consideration by stating that it was of "no assistance to the Court". If it had been opposed by an entirely satisfactory expert valuation procured by Mr Quinn, that approach may have been appropriate. The limitations in relation to Mr Hawatt's report to which I have referred however justified some, albeit limited, weight being given to Mr Powell's assessment of a range of $5,000,000 - $6,300,000.
Seventhly, the net surplus calculated by the primary judge's of $1,768,000 after refinancing was in the circumstances a small one, not exceeding KPE's debt of at least $1,100,000 by very much, and in my view not a figure that could be relied upon, bearing in mind the matters concerning Mr Hawatt's report to which I have referred. Particularly is that so when the proposed refinance from Fincore would likely be repayable in 3 months and therefore subject to further refinancing. That alone indicates the existence of a degree of uncertainty as to the quantum of the refinancing debt that was to be compared with the value of the Warner's Bay property, whatever that value might be.
For these reasons, I consider that the primary judge erred in utilising the valuation figure arrived at by Mr Hawatt without qualification and without an express assessment of its weight.

RE-EXERCISE OF DISCRETION AND ORDERS

The determination of the course to be adopted is difficult as it must turn on the balance of convenience and, for the reasons appearing above, whichever course is taken, there is a real prospect of one of the parties suffering loss. In my view however the balance of convenience favours KPE and it should not therefore be ordered to withdraw its caveat lodged in relation to the Jindabyne property. KPE has at least a strongly arguable claim to a charge ranking in priority to Certane's charge. It has offered the usual undertaking as to damages and demonstrated that it has a significant, relevantly unencumbered, property to which resort should be able to be made in the event that the undertaking is required to be made good. On the other hand, Mr Quinn has an interest that prima facie ranks behind that which KPE claims. Whilst Mr Quinn has sought to provide KPE with alternative security, the evidence does not in my view justify any confidence in that security being adequate to satisfy KPE's claim if it were successful at a final hearing. I have dealt above, specifically with the charge proffered in respect of the Warners Bay property, as that is the principal alternative security proffered by Mr Quinn. I add that no other aspect of Mr Quinn's proffered undertakings to my mind establishes the availability to KPE of adequate alternative security.
For these reasons, I propose the following orders: 1. Grant leave to appeal. 2. Appeal allowed. 3. Set aside orders 1 and 2 made in the Equity Division on 14 December 2022 in 2022/107858. 4. In lieu of those orders, order that: 1. Mr Quinn's notice of motion filed on 28 November 2022 is dismissed. 2. Order that the costs of that notice of motion are KPE's costs in the cause. 1. Order Mr Quinn to pay KPE's costs of the appeal proceedings.
MITCHELMORE JA: I agree with Macfarlan JA.

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: 23 December 2022

(Uniform Civil Procedure Rules 2005(NSW)

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