Mainland Property Holdings Pty Ltd (Receivers and Managers Appointed) v Naplend Pty Ltd

Counsel for the Respondents: Mr SJ Maiden KC with Ms E Nikou Madalin

BETWEEN: MAINLAND PROPERTY HOLDINGS PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ACN 635 667 435) First Applicant

MAINLAND PROPERTY HOLDINGS 2 PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ACN 635 950 113) Second Applicant

MAINLAND PROPERTY HOLDINGS 3 PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ACN 635 951 512) (and others named in the Schedule) Third Applicant

AND: NAPLEND PTY LTD (ACN 619 325 889) First Respondent

JONATHAN PHILIP HENRY (and others named in the Schedule) Third Respondent

order made by: MCELWAINE J DATE OF ORDER: 4 November 2022

1. The respondents' application for summary judgment is dismissed.
2. Within 28 days from the date of these orders, Mr Mawhinney is to provide an indemnity (the indemnity) in favour of the respondents limited to the costs the parties may incur in respect of this proceeding on a party and party basis and in a form to be agreed by the parties or failing agreement to be determined by further order.
3. Mr Mawhinney must also provide security for costs in an amount to be determined (the security), following receipt of a referee report from a registrar of this Court, by the provision of a bank guarantee for the security in favour of each of the respondents (jointly and severally) from a recognised financial institution in Australia which is an Approved Deposit-taking Institution within the meaning of the Banking Act 1959 (Cth), which bank guarantee is to be provided within 28 days, or such further period as may be ordered, of the determination of the security.
4. Pursuant to s 54A of the Federal Court of Australia Act 1976 (Cth), there is referred to a registrar of this Court for inquiry and report in accordance with the Federal Court Rules 2011 (Cth) the assessment of the security on a party and party basis, which inquiry is to be undertaken in accordance with such directions as the registrar thinks fit.
5. Until the indemnity and the security are each provided this proceeding is stayed.
6. If the indemnity or the security are not provided, the respondents have liberty to apply for an order that the proceeding be dismissed.
7. The parties are to provide short submissions of no more than 3 pages on the question of costs or any further orders within 4 days.
8. Subject to any further order, the issue of costs and any further orders will be determined on the papers. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

MCELWAINE J 1 Mr Peter Mawhinney is the sole director of the seven applicant corporations (six of which are Mainland Property Holdings Pty Ltd and its eponymous related corporations numbered 2, 3,4,5 and 8 and the seventh is Jarrah Lodge Holdings Pty Ltd) (the applicants). Each has a privately appointed receiver and manager. On 13 April 2022, the applicants commenced this proceeding against one of the appointors, Naplend Pty Ltd (Naplend) and its receivers and managers Mr Kogan, Mr Henry, Mr Harris and Mr Connelly (the Naplend receivers). 2 Another corporation, PAG Holdings Pty Ltd (PAG) has also privately appointed receivers and managers to the applicants. They are Mr Jahani and Mr Campbell-Wilson (the PAG receivers). Neither PAG nor the PAG receivers are parties to this proceeding. 3 The appointments of each receiver and manager were made prior to the commencement of this proceeding and Mr Mawhinney was solely responsible for the decision to commence it. He did not consult nor seek permission from any of the receivers. 4 Broadly, another corporation controlled by Mr Mawhinney, M101 Nominees Pty Ltd (in liquidation) (M101 Nominees), raised money from investors in private equity ventures by issuing a series of security notes for the purpose of acquiring and developing properties at Mission Beach in Queensland. M101 Nominees appointed PAG as the security trustee for the notes. The applicants guaranteed the obligations of M101 Nominees to PAG and charged their assets and undertakings as security. Whether the charges extend to rights said to arise from the manner of sale of real property is in issue. 5 From December 2019, Naplend provided short-term bridging finance to assist the applicants with the acquisition of numerous properties. The applicants charged the entirety of their assets and undertakings (including real property) in favour of Naplend as security. The applicants failed to repay the borrowed monies on time and, on 19 August 2020, Naplend appointed the Naplend receivers over the assets and undertakings of the applicants. 6 On 9 September 2020, PAG appointed the PAG receivers over the assets and undertakings of the applicants. 7 On 13 August 2020, orders were made in this Court for the appointment of provisional liquidators to M101 Nominees and on 29 January 2021, further orders were made that it be wound up and liquidators were appointed. 8 In this proceeding the applicants make two distinct claims. One is that certain interest and fees payable by the applicants to Naplend are unenforceable penalties (the penalty claims). The other is that the Naplend receivers in effecting the mortgagee sale of numerous properties failed to take reasonable care to ensure that each was sold at market value contrary to s 85 of the Property law Act (Qld) , s 111A of the Conveyancing Act 1919 (NSW) and or s 420 of the Corporations Act 2001 (Cth). To that claim, the applicants add that the Naplend receivers breached several provisions of the Corporations Act in that they failed to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise contrary to s 180, did not act in good faith in the best interests of the applicants and for a proper purpose as required by s 181 and or gained an advantage for themselves or someone else or caused detriment to the applicants contrary to s 182. Further the applicants plead claims that the Naplend receivers acted unconscionably contrary to s 12CB of the Australian Securities and Investments Commission Act 2001 or alternatively s 21 of the Australian Consumer Law being Schedule 2 to the Competition and Consumer Act 2010 (Cth) (ACL). By reason of particular facts that are relied upon, the applicants contend that Naplend is liable for the acts, errors and omissions of the Naplend receivers or that the agency relationship between the applicants and the receivers "was displaced by an agency relationship" between Naplend and the receivers. It is convenient to refer to this second group of claims as the breach claims. 9 By way of relief, the applicants seek repayment of any amounts determined to be penalties plus damages, interest and costs. 10 The respondents have not filed defences. Rather, by an interlocutory application filed on 20 June 2022, the they seek the following orders: 1. An order pursuant to s 31A(2) of the Federal Court Act 1976 (Cth) and r 26.01(1)(a) of the Federal Court Rules 2011 (Cth) dismissing: (a) the whole of the proceeding; alternatively (b) that part of the proceedings which raises causes of action being the subject of security interests granted to PAG Holdings (Australia) Pty Ltd (ACN 636 870 963) (PAG) and in respect of which PAG has appointed receivers. 2. In the alternative to the order sought in paragraph 1, within seven days from the date of this order, the director of each of the applicants, James Peter Mawhinney: (a) provide a personal indemnity in favour of the parties to the proceeding in the terms set out in Annexure A to this application, which indemnity can be enforced by any of those parties; and (b) in support of the indemnity provided under paragraph 2(a), pay into Court a sum to be set out in the order, and provide the respondents' solicitors with written confirmation and evidence of having done so. 3. If any aspect of the order made under paragraph 2 is not complied with: (a) the proceeding be stayed indefinitely; and (b) the respondents may apply for an order seeking that the proceeding be dismissed. 4. James Peter Mawhinney pay the respondents' costs of the proceeding. 5. Such other orders as the court seems fit.

The Issues and the Facts 11 Upon the hearing of the interlocutory application, counsel agreed that the questions for determination are: (a) As to the application for summary dismissal: (i) whether Mr Mawhinney has the right to cause the applicants to prosecute the proceeding, or that part of the proceeding raising causes of action which are the subject of PAG's security and in respect of which the PAG Receivers have been appointed; and (ii) If not, whether the applicants have 'no reasonable prospect' of prosecuting the proceeding (or the relevant part of the proceeding) pursuant to s 31A (2) of the Federal Court of Australia Act 1976 (Cth) (the FC Act) and r 26.01(1)(a) of the Federal Court Rules 2011 (the Rules); (b) alternatively, if summary dismissal is not ordered: (i) whether, as a condition of him continuing to cause the applicants to prosecute the proceeding, Mr Mawhinney ought to be required to provide a personal indemnity in the form described in Annexure A to the interlocutory application dated 17 June 2022; and (ii) if so: (A) in what amount should the indemnity be proffered; and (B) should Mr Mawhinney be required to pay the relevant sum into Court? 12 I am content to proceed by reference to these issues. The facts are not in dispute. Between December 2019 and June 2020, Naplend advanced approximately $14 million to the applicants. The applicants granted mortgages in favour of Naplend as security for the advances. The mortgages are relevantly identical in terms. In standard form, each applicant as mortgagor mortgaged the entirety of its estate and/or interest in the land specified to the mortgagee as security for all monies owing from time to time. 13 In addition, each applicant granted to Naplend a further security interest over all present and after-acquired property pursuant to a General Security Deed dated 20 December 2019 (the Naplend Security Deed). Pursuant to it, the "Secured Property" means: All present and after-acquired property of the Grantor. It includes anything in respect of which the Grantor has at any time a sufficient right, interest or power to grant a Security. 14 Clause 2.1 provides: To secure the punctual payment of the Secured Money and the punctual performance of the Secured Obligations, the Grantor grants to the Secured Party a Security Interest in and over all Secured Property. 15 Clause 2.2(a) provides that the nature of the security interest is: (i) A transfer by way of security of Secured Property consisting of accounts and chattel paper (each as defined in the PPSA) which are not, or cease to be Revolving Assets; and (ii) A charge in and over all Secured Property to the extent the Secured Property is not transferred. 16 A "Revolving Asset" means secured property which is inventory, negotiable instruments, machinery, plant or equipment with a value of less than $1,000 and money. The charge at subclause (ii) is a floating charge over Revolving Assets and a fixed charge over all other Secured Property to the extent the Secured Property is not transferred: cl 2.2(b). 17 The power to appoint receivers and managers is conferred by clause 9. By clause 9.3 (g) a receiver and manager has power, inter alia, to carry on the business of the applicants "in and with the secured property" and by subparagraph (kk) to take proceedings in the name of the applicants "in connection with any of the above", which is a general reference to each of the other broad powers of the receiver and manager. 18 Thus, it is clear that the Naplend receivers have power to act generally and in relation to all property of the applicants. It is common ground that the Naplend security extends to all choses in action of the applicants. 19 No mortgages were granted in favour of PAG. On 24 October 2019, PAG entered into a Security Trust Deed and a Secured Promissory Note Deed Poll with M101 Nominees (Security Trust Deed). On 10 April 2020, certain of the applicants entered into accession deeds with PAG on the basis that each either had granted or intended to grant security in favour of PAG and to that intent agreed to be bound by the Security Trust Deed. Further, between 29 November 2019 and 29 April 2020, the applicants as grantors entered into various General Security Deed Polls with M101 Nominees as the obligor and PAG as the secured party (the PAG security). Those deeds relevantly provide for the grant of a security interest at clause 3.1 as follows: To secure the punctual payment of the Secured Moneys and the punctual performance of the Secured Obligations, the Grantor grants to the Secured Party: (a) security - a security interest (as defined in the PPSA) over all PPS Property: and (b) charge - a fixed and floating charge over all Non-PPS Property, other than the Excluded Property. (Original emphasis.) 20 The schedule defines "Excluded Property" as: The legal and/or beneficial interest in any and all real estate held from time to time by the Grantor. 21 The power to appoint receivers, upon default, is expressed at clause 12, which refers to the appointment of a controller. The nomenclature is of no present relevance. By clause 12.4, a controller has full power to take possession of, collect and get in secured property "and for that purpose to take proceedings (in the name of the Grantor or otherwise)" and may carry on the business of the Grantor. 22 It is common ground that the Naplend receivers concede they will not commence a proceeding in relation to the penalty claims or the breach claims despite the security interest of Naplend in those claims. 23 The position of the PAG receivers is not as clear as evidenced by the course of correspondence that is before me. On 20 October 2020, lawyers acting for the PAG receivers, Hall and Wilcox, corresponded with the lawyers for Naplend, Dentons, and asserted that the default interest rate pursuant to the various loan facilities constitutes a penalty that is unenforceable. No threat to commence legal proceedings was made. An invitation was extended to "explain the reasons why your client considers that the default interest rate does not constitute a penalty". Dentons responded on 13 November 2020. No explanation as requested was provided. Rather, it was said that it is not for the lending parties to prove a negative and that Hall and Wilcox had provided insufficient information to justify the penalty interest assertion. 24 On 15 December 2020, Hall and Wilcox responded. The PAG receivers maintained their position. The following proposal was put: Despite the above, our clients are mindful that the receivers appointed by Naplend are currently involved in a marketing and sales campaign of the relevant security properties. Our clients share a desire for the campaign to yield the best possible results. Therefore, our clients do not intend to disrupt the sale process by commencing proceedings at this time, given that any proceedings might impact upon the sales campaign. Instead, we are instructed to request that your clients agree to sequester (and hold in a separate bank account) any sale proceeds realised by them as they relate to the default interest component, pending the earlier of a Court determining the substantive penalty issue or otherwise agreement between the parties concerning the release or application of this component. … 25 A response was requested by 22 December 2020. One was received on that day. The proposal was not accepted. Rather, an order of appropriation of sale money was set out, with default interest under the facility to be paid last. The correspondence concluded: In view of the above, and in recognition of the interest you say your clients have in these matters (but without conceding that point), our client will agree to give your clients no less than 10 business days' notice in writing prior to applying any proceeds from the sale of the secured assets towards the amounts referred to…above. 26 The matter not conceded was expressed in relation to the "standing" of the PAG receivers "to bring proceedings" in relation to the penalty question. Other than making that statement, no explanation was provided. 27 No response was received from Hall and Wilcox. On 28 January 2022, Dentons sent further correspondence to Hall and Wilcox. A very detailed analysis was provided to the effect that the default interest rate is not an unenforceable penalty. Notice was given to the effect that the Naplend receivers expected to "shortly be in receipt of proceeds" from various sales and in consequence 10 days' notice was given of the intention to apply the proceeds as earlier advised. Various threats were made to the effect that any litigation commenced by the PAG receivers would have the effect of delaying the realisation process and of consequentially increasing the accumulation of interest and fees payable pursuant to the loan facilities. No response was received from Hall and Wilcox and no proceeding was commenced by that firm. 28 On 20 May 2022, Dentons corresponded with Harris Carlson, the lawyers for PAG. Commencement of this proceeding was noted and advice was sought as to whether PAG considers the claims made are assets of the applicants subject to the PAG security interests, whether PAG had relinquished any rights to pursue those claims and whether consent had been given to Mr Mawhinney to bring the proceeding. Relevantly identical correspondence was sent to the PAG receivers on 23 May 2022. On 24 May 2022, Mr Jahani in part responded. He directed legal questions to Harris Carlson, confirmed that he had "not relinquished any of my rights as Receivers and Managers (sic)" to the causes of action pleaded in the proceeding and confirmed that he had not given consent to Mr Mawhinney to commence it. 29 On 26 May 2022, a brief response was provided by Harris Carlson which did not extend beyond the advice provided by Mr Jahani. On 20 June 2022, Roberts Gray Lawyers acting for the applicants corresponded with the PAG receivers and relevantly stated: We note that you have been on notice of the proceeding since at least April 2022 but have taken no steps in relation to it. In our view, your client has no interest or standing in relation to the Proceeding. The General Security Deed Polls between your client and the applicants expressly exclude all real property from the security granted to PAG. The causes of action the subject of the proceeding relate to the [Naplend receivers] and Naplend's realisation process of our clients' pool of real properties at or near Mission Beach, Queensland. 30 On 21 June 2022, Mr Jahani responded: I do not agree that I have no standing or interest in relation to the proceeding. However, I am currently without funds and as such not able to participate in the Proceeding. 31 The PAG receivers have not made any application to be joined as a party to this proceeding, nor have they provided advice to this Court as to their attitude concerning its commencement and prosecution by Mr Mawhinney.

The Issues Generally 32 The argument is not about the standing of the applicants to bring the proceeding. In doing so, they are the proper parties. However, if the proceeding was caused to be commenced by Mr Mawhinney without authority, although it is not a nullity, it is liable to be stayed or in some circumstances dismissed: Danish Mercantile Co Ltd v Beaumont [1951] 1 Ch 680 (Danish Mercantile) at 687-688, Jenkins LJ. Justice Finkelstein stated the relevant principle succinctly in Ox Operations Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd (in liquidation) [2007] FCA 1221 (Ox Operations) at [2]: The usual course when a company is improperly made a plaintiff is to stay or dismiss the action and require the solicitor who purported to act for the company to pay the costs: Newbiggin-by-the-sea Gas Company v Armstrong (1879) LR 13 Ch D 310; East Pant Du United Lead Mining Co (Limited) v Merryweather (1864) 2 H&M 254 [(1864) 71 ER 460]; Duckett v Gover (1877) LR 6 Ch D 82; Daimler Company Ltd v Continental Tyre & Rubber Company (Great Britain) Ltd [1916] 2 AC 307. The cases also show that the action though brought without authority is not a nullity in the sense that it is void ab initio without the possibility of subsequent ratification. To the contrary, it is well established that it is possible for the company to ratify the unauthorised act of the solicitor in bringing an action in its name without its actual or implied authority: Danish Mercantile Co Ltd v Beaumont [1951] Ch 680. And, because ratification is possible, a practice has developed that when an action is brought without authority it will not be stayed or dismissed forthwith, but the company will be permitted to convene a general meeting or a meeting of its directors to consider whether to adopt the action: S.B.A. Properties Ltd v Craddock [1967] 1 WLR 716, 722. 33 As such, although the interlocutory application primarily seeks an order for summary judgment pursuant to s 31A(2) of the Federal Court of Australia Act 1976 (Cth) (FCA Act), or alternatively pursuant to rule 26.01(1)(a) of the Federal Court Rules 2011 (Cth), on the ground that the applicants have no reasonable prospect of successfully prosecuting the proceeding, in my view that reflects a misunderstanding. In support of the application for summary judgment counsel for Naplend, whilst unable to locate authority "perfectly analogous to the present circumstances", referred me to the Full Court decision of C v Commonwealth (2015) 234 FCR 81; [2015] FCAFC 113 (Tracey, Buchannan and Katzmann JJ) which determined that members of the Australian Defence Force are not employees within the meaning of the Fair Work Act 2009 (Cth) and on that premise upheld the Commonwealth's application for summary judgment at [58]-[60] on the basis that the applicant did not have standing and hence the proceeding did not have a reasonable prospect of success. As with the application before me, the attention of the Full Court was not drawn to the decision of Finkelstein J in Ox Operations nor the long line of authority on which it is based. Justice Perram in DHH17 v Minister for Immigration, Citizenship, Migrant Services and Multicultural Affairs [2021] FCA 891 at [33] considered Danish Mercantile as "expressing a well-established principle of law". The ratio of C v Commonwealth is that an ADF member is not an employee for the purposes of the Fair Work Act and the entry of summary judgment is an example of the exercise of the discretion to do so which turns on the particular facts and is not part of the ratio of the decision. 34 Accordingly, the question is whether the proceeding was commenced without authority and not whether it has a reasonable prospect of succeeding. However, as each counsel was content to fully argue the questions for determination as framed by the respondents (and no point was taken by senior counsel for the applicants as to the form of the interlocutory application), I am content to proceed by deciding those issues seriatim.

The First Issue 35 As a general proposition, the appointment of receivers and managers to a company in the exercise of a private power of appointment does not extinguish or displace the power of the directors. A receiver acts as the agent of the corporation, but is duty-bound to the appointor: Oswal v Burrup Fertilisers Pty Ltd (2013) 295 ALR 708; [2013] FCAFC 9 (Oswal), Dowsett, Foster and Nicholas JJ at [61]. The extent to which the powers of the directors are circumscribed upon the appointment of a receiver and manager depends upon identification of the property in and business that is the subject of the appointment, the extent of the power conferred upon the appointee in order to perform his or her functions and whether the exercise of particular powers by the directors is likely to or does impede the performance of functions or the exercise of those powers by the receiver. Many cases have considered where the line is to be drawn in particular cases. The answer, as these reasons show, is always a question of fact. 36 A sub-issue that divides the parties is whether PAG has security over the various causes of action that the applicants press in this proceeding? That question is not framed so as to include Naplend for the reason that the Naplend receivers concede that they will not pursue the penalty claims or the breach claims and therefore no question of interference with the performance of their functions or the exercise of their powers arises. Mr Maiden KC for the respondents submits that the answer is unmistakably clear: upon a proper construction of the PAG security, PAG does not have security over real estate (because of the definition of Excluded Property), but it does have security over all other assets including each chose in action that is pleaded by the applicants. In contrast, Mr Gronow KC for the applicants submits that properly understood the breach claims relate to the manner in which the real estate was marketed and sold and therefore concern assets which are not the subject of the PAG security. In his written case, Mr Gronow drew a distinction between the breach claims and the penalty claims, and appeared to accept that the penalty claims were the subject of the PAG security. However, as developed in oral submissions his position altered. It was put to me, without elaboration, that each is within the carve out of Excluded Property. 37 I am unable to accept the submission of Mr Gronow. Dealing first with the breach claims, in my view the objective textual meaning of clause 3.1 of the PAG security is clear and unambiguous. The PPSA security and the fixed and floating charge over the property of the applicants does not extend to any legal or beneficial interest in any real estate. Whilst the manner in which the Naplend receivers marketed and sold real estate the subject of the Naplend securities is pleaded as a factual basis for the contention that, in doing so, various statutory duties were breached, it does not follow that each cause of action is Excluded Property. The exclusion is limited to the legal or beneficial interest of the applicants in real estate. That is a property interest in land. In contrast, the claims for breach of duty are in personam as against individuals for breach of duties said to be owed to the applicants arising from the manner in which the real estate was sold. The legal or beneficial interests of the applicants in the real estate, whilst a necessary fact to found the claims of breach, does not convert those claims into ones about those interests. They are separate choses in action that are independent property of the applicants, quite separate from the interests in real property. A chose in action is of itself intangible personal property as explained by Kitto J in National Trustees Executors and Agency Co of Australasia Ltd v Federal Commissioner of Taxation (Cain's Case) (1954) 91 CLR 540 at 584: The argument for the executor on this part of the case seems to involve and depend upon two propositions: first, that all personal property known to the law must consist either of choses in possession or of choses in action, and, secondly, that choses in action comprise only rights enforceable by action in the courts. But the term chose in action "furnishes an instance of the subject-matter of property having outgrown its nomenclature": Goodeve, Personal Property, 9th ed. (1949), p. 195; and the second proposition needs to be recast in more flexible terms if the first is to be accepted. The expression now comprises a heterogeneous group of rights which, as Goodeve observes, (loc. cit.) have only one common characteristic, viz. that they do not confer the present possession of a tangible object. Sir William Holdsworth considered the history of the subject in his History of English Law, 2nd ed. (1937), vol. vii, pp. 515 et seq., and showed that although "the original meaning of a chose in action - a right to be asserted by an action - has never been wholly lost sight of" (p. 517), the meaning of the term has become progressively extended to accommodate many forms of personal property which were not within the original conception. The topic has been developed by Sir Howard Elphinstone, Mr. Cyprian Williams and Mr. Charles Sweet in learned articles in the Law Quarterly Review, vol. 9, p. 311; vol. 10, pp. 143, 303; vol. 11, pp. 223, 238. (at p584). 38 Real estate may be possessed: a chose in action may not be: Colonial Bank v Whinney (1885) 30 Ch D 261 at 285-286, Fry LJ. 39 For these reasons, the breach claims are within the PAG securities. As to the penalty claims, each rests on the contention that the default interest rate in the loan contracts is "in the nature of a security for and in terrorem of the satisfaction of the primary stipulation": Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30, French CJ, Gummow, Crennan, Kiefel and Bell JJ at [10]. The claims are confined to the terms of the contracts and inquiry is limited to whether the stipulated amount "is in the nature of a punishment for non-observance of a contractual stipulation": Legione v Hateley (1983) 152 CLR 406, Mason and Deane JJ at 445. They are claims that arise from contracts. They are not claims to legal or beneficial interests in real estate and accordingly are subject to the PAG security. 40 Thus resolution of this issue turns on whether the appointment of the PAG receivers displaced the power of Mr Mawhinney as a director of the applicants to cause this proceeding to be initiated. In Oswal the Full Court comprehensively analysed the authorities at [54]-[77]. At [62] the Court endorsed as succinct and accurate the judgment of Street J in Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd (1969) 2 NSWR 782 at 790: Receivership and management may well dominate exclusively a company's affairs in its dealings and relations with the outside world. But it does not permeate the company's internal domestic structure. That structure continues to exist notwithstanding that the directors no longer have authority to exercise their ordinary business-management functions. A valid receivership and management will ordinarily supersede, but not destroy, the company's own organs through which it conducts its affairs. The capacity of those organs to function bears a direct inverse relationship to the validity and scope of the receivership and management. 41 Delineation of the "inverse relationship" is a question of fact. Whether the commencement and prosecution of this proceeding amounts to an impermissible interference with the exercise of powers or the performance of functions by the PAG receivers, as explained by Owen J in Re Geneva Finance Ltd; Quigley v Cook (1992) 7 WAR 496 at 510 (Re Geneva Finance), turns upon an analysis of "the effect which the exercise of the power will have on the receiver's functions rather than to concentrate on the identification and delineation of the residual duties reposed in the directors". That statement was referenced with approval by the Full Court in Oswal at [72]. 42 In the various authorities dealing with the commencement and maintenance of legal proceedings when a company is in receivership, there are references to claims that a receiver has "abandoned" or "declines to or does not wish to pursue" as permissible examples of exercise of the power of the directors to bring and prosecute claims that are within the scope of the assets charged in favour of a secured creditor. Some cases have considered the power of the directors to cause proceedings to be commenced against the appointing debenture holder. Others have dealt with the ability of a director to exercise his or her power to access company records. Upon analysis it is clear in my view that the factual inquiry must focus upon actual or likely prejudice to the interests of PAG and the PAG receivers in realisation of the assets that are subject to the PAG security. Prejudice in that sense must include consideration of potential interference with the legitimate exercise of the powers conferred upon the receivers in order to perform their primary realisation function. I now explain why I have reached that view. 43 In Newhart Developments Ltd v Co-Operative Commercial Bank Ltd [1978] QB 814 (Newhart), the Court of Appeal, Stephenson and Shaw LJJ, decided that a corporate borrower could bring an action for breach of contract against a lender despite the appointment by it of receivers. The leading judgment was delivered by Shaw LJ (with whom Stephenson LJ agreed) who rejected as too broad the reasoning of the primary judge that: "Any action which would interfere with the receiver must be something which should not be allowed" at 819 and continued that: One has got to see what the function of the receiver is. It is not, of course, to wind up the company. It is perhaps interesting to note in passing that when a liquidator is appointed, certainly in a winding up by the court, the powers of the directors immediately cease by statutory provision. There is no such provision in relation to the appointment of a receiver, whose duty it is to protect the interests of the mortgagee or debenture holders, as the case may be. In so far as it is requisite and necessary for him, in the course of his dealing with the assets of the company, bringing them in and realising them, and so on, to bring actions as well, he is empowered to do so by the debenture trust deed in the name of the company. That makes it possible for him to institute such proceedings without exposing himself to the risk of a liability for costs if those proceedings should fail. But the provisions in the debenture trust deed giving him that power is an enabling provision which invests him with the capacity to bring an action in the name of the company. It does not divest the directors of the company of their power, as the governing body of the company, of instituting proceedings in a situation where so doing does not in any way impinge prejudicially upon the position of the debenture holders by threatening or imperilling the assets which are subject to the charge. 44 In later passages and as I read the judgment, Shaw LJ examples proceedings that do not "impinge prejudicially" upon the functions and powers of a receiver. Thus at 819: If in the exercise of his discretion he chooses to ignore some asset such as a right of action, or decides that it would be unprofitable from the point of view of the debenture holders to pursue it, there is nothing in any authority which has been cited to us which suggests that it is not then open to the directors of the company to pursue that right of action if they think it would be in the interests of the company. 45 At 821 his Lordship did not consider that prosecution of a right of action is to be equated with the disposition of assets subject to the debenture charge and, provided that the company is indemnified as to costs: I see no principle of law or expediency which precludes the directors of a company, as a duly constituted board (and it is not suggested here that they were not a duly constituted board when they took the step of instituting this action) from seeking to enforce the claim, however ill-founded it may be, provided only, of course, that nothing in the course of the proceedings which they institute is going in any way to threaten the interests of the debenture holders. 46 Sir Nicholas Browne-Wilkinson VC in Tudor Grange Holdings Ltd v Citibank NA [1992] Ch 53 at 63 expressed "substantial doubts" that Newhart was correctly decided as failing to address the difficulty "which arises if two different sets of people, the directors and the receivers, who may have widely differing views and interests, both have power to bring proceedings on the same cause of action". See also Robinson T & Walton P, Kerr & Hunter on Receivers and Administrators (20th Ed, 2018, Sweet & Maxwell) at [23-25]-[23-28] and Lightman G & Moss G on The Law of Administrators and Receivers of Companies (6th Ed, 2017, Sweet & Maxwell) at [2-034]-[2-036]. 47 Despite those doubts, Newhart has been consistently referred to with approval in Australia. The primary cases are Bank of New Zealand v Essington Developments Pty Ltd (1991) 5 ACSR 86 (Essington Developments), McLelland J at 89; Re Geneva Finance at 510-511; Sun-Life Properties Pty Ltd v Chellaston Pty Ltd (1993) 10 ACSR 476 at, French J at 481; Deangrove Pty Ltd v Commonwealth Bank of Australia (2001) 108 FCR 77; [2001] FCA173 (Deangrove) Sackville J at [31]-[34], and most relevantly for my purposes by the Full Court in Oswal at [64]-[65]. 48 I note that in Essington Developments McLelland J, when deciding an application by receivers for directions as to their entitlement to represent the company to which they were appointed in a winding up proceeding and to consent to the application in the exercise of the power to defend a proceeding under the Corporations Law (as set out in s 82 of the Corporations Act 1989 (Cth), at 89 reasoned that: It follows that if a receiver having power under s 420(2)(u) to defend in the corporation's name a winding up application exercises that power, the authority of the directors to do so is suspended, although, in my view, the mere existence of the power does not affect the authority of the directors prior to the actual exercise of the power by the receiver: cf Newhart Developments Ltd v Co-operative Commercial Bank Ltd (Citation omitted.) 49 That passage was cited by Sackville J with express approval and emphasis on the "mere existence" qualification in Deangrove at [39] and who then concluded at [40] that: In my view, the authorities clearly support the proposition that, where a company in receivership has a claim against the debenture holder and the receiver declines to pursue the claim, the directors are entitled to initiate and maintain proceedings in the name of the company, provided the directors offer the company a satisfactory indemnity against costs. The latter requirement is designed to ensure that the interests of the debenture holder, qua debenture holder, are not prejudiced: O'Donovan, Company Receivers and Administrators (2nd Ed, 1992), at [8.30]. The entitlement of the directors reflects the fact that, as Street J observed in Hawkesbury Development, at 210, it borders on the absurd to contemplate that a receiver would institute proceedings in the name of the company challenging the very debenture to which he or she owes office. It is almost as absurd to contemplate the receiver instituting proceedings against the debenture holder or chargee claiming damages for misleading and deceptive conduct or breach of duty. In any event, an action conducted by the receiver against his or her appointor is likely to encounter a variety of practical difficulties: Kerr on Receivers (2nd Cum Supp to 17th Ed, 1997), at 77. 50 The present case is not one commenced by the applicants against PAG as the appointor, but there is nothing in the authorities which I have referenced which confines the permissible scope of proceedings to claims of that character. Rather, as relevantly concluded by the Full Court in Oswal at [76]: The board of directors of a corporation in receivership has residual powers: (a) … (b) To cause proceedings to be taken in the corporation's name to enforce rights which are not comprised in the receiver's appointment or which he does not wish to pursue, including proceedings against the debenture holder and proceedings challenging the validity of the debenture or charge pursuant to which the receiver was appointed. The available causes of action against the debenture holder or in respect of the charge may be more extensive (as it was in Newhart Developments) but directors will not be permitted to pursue actions which prejudice the legitimate interests of the receiver or his appointor or which would impede the receiver in the proper exercise of his functions. 51 Mr Maiden KC submits that I should find that the penalty claims and the breach claims are assets available to the PAG receivers to prosecute, the receivers have not within the meaning of the authorities "ignored", "abandoned" or "declined to pursue" those claims and that in consequence the prosecution of the claims is detrimental to the performance of the receivers' functions. I do not agree. Nor do I accept the submission of Mr Gronow for the applicants that I should infer that the PAG receivers have abandoned, ignored or have declined to pursue the claims. 52 What is clear on the evidence is that the PAG receivers have been on notice of this proceeding since 20 May 2022. No application has been made by the receivers to intervene in the proceeding. No advice has been provided to the Court to the effect that the receivers consider that this proceeding adversely affects the interests of PAG as secured creditor or the exercise of powers or performance of functions by them. The receivers have not said in any of the correspondence that I have summarised that the prosecution of the proceeding will stultify their activities. The receivers are without funds: a consequence no doubt brought about by the extent of the Naplend security and the exclusion of real estate from the PAG security. The finding of fact that I make is that unless the PAG receivers are put in funds, they are not able to prosecute or intervene in the proceeding and nor are they able to assess its prospects of success. They maintain that the claims are within the PAG security and that all rights which may flow therefrom are maintained. Presently, and to adopt that well-understood expression, they are "fence sitting" on whether the proceeding does or does not prejudice their interests. 53 If the proceeding is successful, or is otherwise compromised on favourable terms, then the PAG receivers will be entitled to claim the proceeds if the claims of PAG as a secured creditor remain unsatisfied: Newhart Developments at 820. It will remain open to the PAG receivers, in the event that they are put in funds or otherwise determine that it is appropriate to do so, to intervene in this proceeding and to take it over in the exercise of their powers. Until that is done, the "mere existence of those powers" does not in the particular circumstances of this case affect the authority of Mr Mawhinney as the director: Essington Developments at 89. 54 In my view, provided that a sufficient indemnity is secured for the costs of this proceeding, then there is no likelihood that the proper interests of PAG as a secured creditor, or the proper discharge of the powers and the exercise of the functions of the PAG receivers, will be imperilled by the continued prosecution of the penalty claims and the breach claims.

The Second Issue 55 It follows from my conclusion on the first issue that the second does not arise.

The Third Issue 56 Mr Gronow correctly accepts that ordinarily the commencement and maintenance of this proceeding by the applicants is conditional on the provision of a satisfactory costs indemnity: Deangrove at [40]. In my view (as I have explained) a costs indemnity is necessary to ensure that there is no likelihood of prejudice to PAG and the PAG receivers. 57 I do not accept the further submission of Mr Gronow, that no indemnity is required in this case for the reason that the value of the remaining unsold properties is at least $10,000,000 and the current amount owing to Naplend is approximately $3,300,000. Thus, according to the argument, there is "no danger that the respondents would be unable to recover a costs order in their favour". The difficulty with that contention is that it is founded upon a bundle of out-of-date valuations provided by a Mr Gard from the valuation firm NP Valuers each of which is dated November or December 2020 and addressed to the various applicants. Expressly those valuations provide: This valuation is current at the date of valuation only. The value assessed herein may change significantly and unexpectedly over a relatively short period of time (including as a result of factors that the valuer could not reasonably have been aware of as at the date of valuation). We do not accept responsibility or liability for any losses arising from such subsequent changes in value. 58 The submissions of Mr Gronow do not, with respect, rise above speculation as to what might be an available pool of assets to discharge an adverse costs order at an unidentified point of time in the future. The continued existence of those assets and their realisation is a matter for the Naplend receivers. Further, it is not in my view appropriate for Mr Mawhinney as the director of the applicants, to point to an apparent surplus of asset values which are not subject to the PAG security as a reason why he should not be required to provide a personal costs indemnity as the condition which is central to address any likely prejudice to the legitimate interests of PAG as a secured creditor or the proper exercise of the powers and discharge of the functions of the PAG receivers. There is a risk that if the applicants fail and suffer an adverse costs order that the pool of assets available to the PAG receivers will diminish. And, the applicants' assets should not be put at risk. The appropriate mechanism to address these risks is the provision of a satisfactory indemnity by Mr Mawhinney. And there is no evidence that any requirement to do so will stultify this proceeding. 59 For these reasons in my opinion an indemnity (with security in support) is the price that must be paid as the condition for the continuation of this proceeding at the direction of Mr Mawhinney.

The Fourth Issue 60 The respondents contend for an indemnity as follows together with a payment into court: I, James Peter Mawhinney, personally indemnify and continue to keep indemnified each of the parties to Federal Court of Australia proceeding number VID192 of 2022 (the Proceeding): 1. against any costs the parties may incur in respect of and/or associated with the Proceeding; 2. against any liabilities of the applicants or the first respondent to indemnify the second to fifth respondents in relation to the Proceeding; and 3. in respect of the accrual of any interest, costs and other amounts pursuant to the Facility Agreement, First Amending Deed, Second Amending Deed, Third Amending Deed and Further Deed (as those terms are defined in the Statement of Claim filed 13 April 2022) which would not have accrued but for the Proceeding having been brought. 61 In my view the wording is too broad. The costs referred to in paragraph 3 are likely to be broader than the costs in paragraph 1: the distinction being between party and party costs and indemnity costs. Further, the indemnity that I have concluded is required is limited to the costs of this proceeding. It should not embrace any other liabilities. No explanation was provided as to why the indemnity is necessary in respect of all interest and other amounts that may accrue under the securities but for the commencement of this proceeding. There is no interim injunction in place which restrains the Naplend receivers from proceeding with the realisation of the Naplend securities. As to the amount to be paid into Court to secure a costs indemnity, the evidence differs markedly. An experienced litigation solicitor, Mr David McIntosh, has provided affidavit evidence, with supporting particulars and calculations, that for all preparation steps, and assuming a 12 day hearing, the total quantum of solicitor's professional fees will be in the order of $480,000 and his estimate of counsel's fees is approximately $550,000. To these amounts, he has allowed for $125,000 in disbursements. In round figures the total is $1,300,000. These estimates are provided on a solicitor/client basis. 62 In stark contrast, another experienced litigation solicitor, Mr Rhys Roberts, has provided affidavit evidence to the effect that the various estimates of Mr McIntosh are excessive, both in terms of the number of likely hours required and the rates of charge. The effect of his evidence is that a more reasonable figure is approximately $180,000, on a party/party basis. 63 That evidence was not the subject of cross-examination. On the face of it, the assessment of Mr Roberts appears excessively modest when one objectively considers the complexity of the various contentions that make up the breach claims and the penalty claims. Contrary to the submission of Mr Gronow that I am "adequately equipped to make the necessary judgement", I am not. And more so because none of this affidavit evidence was questioned before me. It is a common function of registrars of this Court to make cost estimates and to resolve disputing costs contentions. Ultimately, each counsel accepted that determination of the quantum of the amount to be secured by a payment into court should be undertaken by a registrar. The mechanism to achieve that is to order pursuant to s 54A of the FCA Act that the question be referred to a registrar for inquiry and report and subject to such directions and manner of inquiry that the registrar thinks fit. 64 That leaves for decision whether the quantum of costs should be assessed as between solicitor and client or as between party and party. As is well understood, the usual costs order is made on a party and party basis. There is no basis for me to conclude at this early stage of the proceeding that there is a likelihood that an order may be made in favour of the respondents on any other basis. Further, pursuant to the undertaking, Mr Mawhinney is at risk personally. In my view therefore, the costs assessment should proceed on the usual party and party basis. 65 I accept the submission of Mr Gronow that once the quantum of the costs security has been determined, it should be secured by the provision of a satisfactory bank guarantee rather than a payment into court which is a more commercial and expedient mechanism. 66 Finally, there is no reason why the proceeding should not be stayed unless and until the indemnity and security have each been provided. If they are not, the respondents should have liberty to apply for dismissal.

Orders 67 For these reasons, I order as follows:

1. The respondents' application for summary judgment is dismissed.
2. Within 28 days from the date of these orders, Mr Mawhinney is to provide an indemnity (the indemnity) in favour of the respondents limited to the costs the parties may incur in respect of this proceeding on a party and party basis and in a form to be agreed by the parties or failing agreement to be determined by further order.
3. Mr Mawhinney must also provide security for costs in an amount to be determined (the security), following receipt of a referee report from a registrar of this Court, by the provision of a bank guarantee for the security in favour of each of the respondents (jointly and severally) from a recognised financial institution in Australia which is an Approved Deposit-taking Institution within the meaning of the Banking Act 1959 (Cth), which bank guarantee is to be provided within 28 days, or such further period as may be ordered, of the determination of the security.
4. Pursuant to s 54A of the Federal Court of Australia Act 1976 (Cth), there is referred to a registrar of this Court for inquiry and report in accordance with the Federal Court Rules 2011 (Cth) the assessment of the security on a party and party basis, which inquiry is to be undertaken in accordance with such directions as the registrar thinks fit.
5. Until the indemnity and the security are each provided this proceeding is stayed.
6. If the indemnity or the security are not provided, the respondents have liberty to apply for an order that the proceeding be dismissed.
7. The parties are to provide short submissions of no more than 3 pages on the question of costs or any further orders within 4 days.
8. Subject to any further order, the issue of costs and any further orders will be determined on the papers. I certify that the preceding sixty-seven (67) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice McElwaine.

SCHEDULE OF PARTIES VID192 of 2022 Applicants Fourth Applicant: MAINLAND PROPERTY HOLDINGS 4 PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ACN 635 951 807) Fifth Applicant: MAINLAND PROPERTY HOLDINGS PTY 5 LTD (RECEIVERS AND MANAGERS APPOINTED) (ACN 635 955 814) Sixth Applicant: MAINLAND PROPERTY HOLDINGS PTY 8 LTD (RECEIVERS AND MANAGERS APPOINTED) (ACN 636 594 208) Seventh Applicant: JARRAH LODGE HOLDINGS PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ACN 632 018 458) Respondents Fourth Respondent: WILLIAM JAMES HARRIS Fifth Respondent: ANTHONY NORMAN CONNELLY