HER HONOUR: Peter Marsden, Richard Stone and Andrew Bowcher have been appointed by Rabobank Australia Limited as joint and several receivers of an egg farm at Kootingal. The owner of the property, DCL Developments Pty Ltd, claims that the bank has acted unconscionably and contests the validity of the appointment on that basis.
The property includes seven large sheds, two of which are fully stocked with laying hens, and a residential property which is occupied by Mr Stuart Howe (the principal of DCL) and his wife. Mr and Mrs Howe presently run the business of the farm. They have no employees.
The receivers were appointed on 6 June 2016 and attempted to take possession of the property that morning. Mr Howe informed them that he would not let them onto the property and that his solicitor would be "filing an injunction". After some negotiation, the receivers were allowed to enter the property for the purpose of inspecting it but it became apparent that vacant possession would not be given without an order of the Court.
On 7 June 2016, the receivers made formal demand for vacant possession and offered financial assistance to Mr and Mrs Howe for relocation expenses.
On 8 June 2016, the demand for vacant possession having been refused, the receivers commenced these proceedings by summons filed electronically late that day. The defendants to the summons are DCL and Mr and Mrs Howe.
The proceedings came before Button J as duty judge on 9 June 2016. On that date, Rabobank sought to have the proceedings listed for an urgent final hearing. The claim of urgency arose from the receivers' concern as to the welfare of the chickens in circumstances where, owing to the steps taken by the receivers to freeze DCL's bank accounts, DCL would have insufficient funds to buy the required amount of feed. The receivers' concern in that respect was heightened by something Mr Howe had told Rabobank prior to a mediation held in March of this year under the Farm Debt Mediation Act 1994 (NSW). At that time, Mr Howe informed the Bank that he had had insufficient funds to buy feed in January and February and that, as a result, there had been what he described as "an animal welfare crisis" during which "the chickens were eating each other".
Button J made orders by consent for evidence to be exchanged with a view to bringing the matter on for urgent hearing in the duty list on 14 June 2016. In the meantime, the status quo was preserved on the strength of undertakings given by the defendants in the following terms:
Until further order, the defendants, through their counsel, undertake whether by themselves, their servants, agents or otherwise:
(a) to refrain, howsoever, from doing any act that in any way puts at harm the livestock located at [the security property];
(b) to provide sufficient feed to the livestock to ensure continuity of production in the ordinary course;
(c) to continue to operate the business in the ordinary course, including maintaining supply to customers of the business, including but not limited to Bartlett Farms, in accordance with agreed trading terms.
The proceedings came before me as duty judge on 14 June 2016. At that time, DCL filed a notice of motion in Court seeking orders restraining the receivers from exercising their functions as receivers or from taking possession of the property. The basis for the injunctive relief sought was a proposed cross-claim alleging that Rabobank had engaged in unconscionable conduct contrary to ss 12CA and 12CB of the Australian Securities and Investment Commission Act 2001 (Cth).
In light of the matters raised by the proposed cross-claim, the receivers accepted that it would be impracticable for the relief sought in the summons to be determined on a final basis in the duty list. After making an inquiry of the list clerk, I fixed the proceedings for final hearing with expedition commencing on 19 September 2016 with an estimate of 3 days. At the suggestion of the parties, I stood the proceedings over until 15 June 2016 in the hope that agreement might be reached as to a regime for management of the farm in the meantime.
The parties were unable to agree upon an interim regime. The receivers maintain their concern that the chickens are at risk under the management of Mr and Mrs Howe. They are also concerned to ensure that the business remains viable in circumstances where it is alleged the amount outstanding under the accelerated loan exceeds the value of the secured property. The receivers accordingly sought an interlocutory order permitting them to discharge their functions under the Deed of Appointment save as to sale of the property. The order sought was in the following terms:
Upon the plaintiffs, by their counsel, giving to the Court the usual undertaking as to damages, an order that until further order the plaintiffs may exercise their powers as receivers under the Deed of Appointment of Receivers dated 6 June 2016, other than to dispose of the mortgaged property (as defined in that Deed).
DCL contends that Mr and Mrs Howe, as experienced egg farmers and being familiar with the business of DCL, are best placed to manage the farm in the intervening period until final determination of the proceedings. DCL is also concerned that the conduct of the receivership may "put the frights" on people doing business with DCL and so damage the goodwill of the business. Accordingly, DCL maintained its application for the interlocutory injunctive relief sought in the notice of motion filed in court on 14 June 2016. In order to assuage the receivers' concerns as to the health of the chickens and the viability of the business, DCL proposed further orders allowing the receivers visual access to DCL's bank accounts and an opportunity regularly to inspect the chickens.
While agreement was not reached as to those competing positions, the issues were narrowed as a result of the helpful approach taken by counsel for both parties. For his part Mr Bagley, who appeared for DCL on the adjourned occasion, acknowledged that the receivers were prima facie validly appointed and entitled to discharge their functions in accordance with the Deed of Appointment. That was a sensible concession and one which significantly shortened the hearing. As submitted by Mr Katekar, who appears for the receivers, that entitlement would only be displaced if DCL were successful in obtaining the relief sought on the grounds of unconscionable conduct. An important focus of the argument was accordingly the apparent strength of DCL's proposed cross-claim.
The relief claimed in the draft pleading provided on behalf of DCL is as follows:
1. A declaration under s 418A of the Corporations Act 2001 (Cth) that the First, Second and Third Cross Defendants were not validly appointed as receivers of the First Cross Claimant.
2. An order pursuant to s 12GM(1) of the Australian Securities and Investments Commission Act 2001 9Cth) (ASIC Act) setting aside the Special Conditions 4, 5 and 6 of the facility created by the letter of offer from Rabobank to DCL Developments Pty Ltd dated 24 December 2015.
3. An order that Rabobank pay to DCL Developments Pty Ltd damages, or alternatively compensation for the amount of DCL Developments Pty Ltd loss or damage, pursuant to s 12GF of the ASIC Act.
4. An order pursuant to s 12GM(23) of the ASIC Act that Rabobank write to the appropriate credit authorities to remove adverse credit ratings notified as a result of the appointment of the receivership.
The contentions relied upon to support the cross claim were set out in an affidavit of Mr Howe affirmed on 13 June 2016. This judgment does not purport to summarise that evidence in any comprehensive way. In short, Mr Howe applied to Rabobank in March 2015 for a loan to refinance DCL's existing borrowings with the National Australia Bank. He applied for a loan of $3 million of which $2.4 million was required to refinance existing borrowings. He sought an additional $600,000 to upgrade the farm ($300,000) and to buy a flock of chickens ($300,000).
Rabobank approved a loan of only $2.7 million on the terms stated in a letter of offer dated 22 April 2015. That left Mr Howe short of the funds required to purchase a flock of young birds. However, Mr Howe alleges that representations made to him by Mr Littlejohns of Rabobank gave him the reassurance he needed to proceed with the loan in May 2015, when the signed mortgage documents were returned to the Bank.
The requirement for a new flock was critical. Mr Howe's existing flock were soon to become what are known in the egg industry as "spent birds", that is, hens who are no longer laying eggs. On 11 November 2015, Mr Howe submitted a further application to borrow the additional $300,000 required to pay for birds that were due to be delivered in early December. He claims that he informed Mr Littlejohns he needed a letter of comfort to ensure that the birds would be delivered as scheduled by 7 December 2015 (a Monday). Mr Howe claims that it was not until the Friday before that deadline, 4 December 2015, that he was contacted by the Bank. By then, Mr Howe says, there was no time to consult a solicitor and he had to sign the document with the conditions imposed by the Bank in order to obtain the letter of comfort required to ensure delivery of the young hens.
The letter of offer dated 4 December 2015 contained two new conditions. One prohibited further borrowings in excess of $60,000. Mr Howe claims Rabobank knew at that stage that, as a result of the change of flock and the period of time before young hens start laying, his cash flow would be severely constrained in early 2016. He asserts the bank also knew he would be seeking a loan from Westpac to purchase new machinery as a result of which he would be entitled to a GST refund of $88,000, the receipt of which was critical if he was to have the funds both to meet his interest repayments to Rabobank and to feed the chickens in January and February 2016.
Mr Howe alleges that, when he attended the Bank to sign the letter of offer on 4 December 2015, he complained that, if he signed up to the proposed new conditions, he would not have the required cash flow to feed the birds. He said to Mr LIttlejohns "These conditions are very tough. Are they designed to make me refinance?" to which Mr Littlejohns replied "yes".
Mr Howe alleges that Mr Littlejohns later told him that the reason the new conditions were imposed was:
"to force you out so you could not borrow from Westpac and get the grading machine and the refund because Rabobank had a loss of $50 million in a related industry in a deal that has gone bad while we were looking at your loan of $300,000 to buy the birds. The credit manager went tough on you because he is afraid of losing his job the same way as several others have now done over the $50 million loss. Not many people know this Stuart, but the head of the Rabo organisation rang our Australian CEO and asked who had been sacked. The CEO responded by saying 'no one yet, we are still investigating' and then the head of Rabo said to the CEO 'well if you don't sack somebody soon we will sack you'".
The conversation concluded with Mr Littljohns telling Mr Howe:
"That's why we put the conditions on you in the 4 December letter and the 24 December 2015 letter to force you off our books and clear the loan off Rabo's books quickly."
As noted by Mr Bagley, the receivers did not suggest that unconscionability cannot afford a prima face case for injunctive relief in the circumstances of this case. Rather, the thrust of the submissions put on behalf of the receivers was that the evidence was inadequate to establish a prima facie case on that basis. Mr Bagley submitted that, in assessing whether the proposed cross claim raises a serious question to be tried, it is appropriate to look at not only what the Bank did but why.
In its written submissions, DCL noted that the notion of unconscionability in ss 12CA and 12CB of the ASIC Act is not limited to the species of unconscionable conduct involving taking advantage of another in circumstances of special disadvantage. The Full Court of the Federal Court has recognised that special disadvantage can be "situational" in the sense that it arises from a particular combination of circumstances: ACCC v Samton Holdings Pty Ltd [2002] FCA 62; (2002) 117 FCR 301 (Gray, French and Stone JJ). It should be acknowledged that the Court held in that case that, at least in the case of an experienced business person, there must be something more than "commercial vulnerability (however extreme) to elevate disadvantage into special disadvantage". For present purposes, the point is that the categories of special disadvantage are not closed and may extend beyond "constitutional disadvantages engendered by such disabilities as illiteracy or lack of education, illness or infirmity".
The notion of unconscionability requires "some degree of moral tainting in the transaction by the kind that permits the opprobrium of unconscionability to characterise the conduct of the party": Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389 at [293] per Allsop P; Bathurst CJ and Campbell JA agreeing at [1] and [303] respectively. That is an evaluative judgment very much dependent upon the facts of the particular case and one as to which no judgment can be made at this preliminary stage.
Mr Bagley submitted, however, that a serious question is raised in the present case, having regard to the content of Mr Howe's affidavit set out above. He submitted that, had Rabobank taken the decision to get DCL "off its books" based on its assessment of, for example, the viability of the egg industry, the position may be different. He submitted that, prima facie, the suggestion that the decision was made by reference to a manager's concerns about "losing his job" raises a question of moral tainting of the kind referred to by the President (as his Honour then was) in Tonto.
Mr Bagley submitted that, looking at the position as at 4 December 2015, it was arguable that the Bank was "squeezing" DCL; that Mr Howe had to sign at that point or lose the new flock; that the Bank was motivated to get DCL off its books for discreditable reasons and that in that circumstance Mr Howe was offered terms he could not refuse in circumstances where the Bank knew those terms would place DCL in default.
Mr Bagley submitted that s 12GM(2) of the ASIC Act confers sufficiently broad power to grant relief as though the unconscionable conduct had not occurred.
Mr Bagley's submissions persuaded me that the proposed cross-claim raises a serious question to be tried. Accordingly, I concluded that the application should be determined according to the balance of convenience.
In addressing the balance of convenience, Mr Katekar relied on the decision of Campbell J in Liristis v Bank of Western Australia [2002] NSWSC 1119. That case was determined on the premise that any case that the receivers were invalidly appointed was "a weak one". Campbell J took that factor (the strength of the case for final relief) into account in assessing the balance of convenience. I would not characterise DCL's claim as "weak". However, beyond that indication, it is not possible to form a confident view as to the likely strength of the claim; it is perhaps enough to say that Mr Bagley's submissions persuaded me that the argument is respectable.
In Liristis, the property over which the receivers were appointed was the matrimonial home of Mr and Mrs Liristis. However, there were Family Court proceedings on foot and, as at the time of the hearing, they had both moved out of the premises. In the present case, Mr and Mrs Howe continue to live on the property. Mr Howe's evidence is that there is nowhere else for them to live. Leave was not sought to cross-examine him on his affidavit. However, the receivers sought to challenge his credibility in a number of respects. In particular, on the evening of 14 June 2016, a notice to produce was served seeking documents to confirm the veracity of the assertion that there was no place else for Mr and Mrs Howe to live, it being apparent that Mr Howe owns two investment properties at Hallidays Point. In the manner in which that issue unfolded, I determined not to enforce compliance with the notice to produce for the purpose of determining the interlocutory application.
In Liristis it was said that there were no employees whose employment would be affected by the receivership. In the present case, egg farming is the sole source of income for Mr and Mrs Howe.
Mr Katekar noted that there have been no payments made by DCL since January. The amount of arrears is $105,000. There was evidence to suggest that amount could have been paid on time, but that would probably have left almost no funds for the ongoing operation of the farm.
In addition to the $105,000 outstanding, Rabobank provided a further $150,000 by way of finance following the mediation held in March (prior to which the question of the health of the chickens was ventilated). Rabobank has also offered to pay the removal costs and is facing the prospect of paying a manager to manage the farm. In those circumstances, the bank's concern to ensure that receivers manage the business so as to maintain its viability is a compelling consideration.
Conversely, however, the evidence has ultimately not persuaded me that there is a risk that Mr and Mrs Howe will allow the business to be run down in the relatively short period between now and the final hearing. On the contrary, the evidence put on by DCL suggests that they are fighting tooth and nail to maintain the viability of the business, having overcome the difficulties of the constrained cash flow during January and February resulting from the need to change the flock. I am further persuaded that, with the conditions proposed, the flock is no longer at risk of being inadequately fed.
In all the circumstances I am persuaded that, with appropriate conditions (as to which the Bank is yet to be heard), the balance of convenience favours maintaining the status quo pending the final hearing.
[2]
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Decision last updated: 21 June 2016
Parties
Applicant/Plaintiff:
Marsden
Respondent/Defendant:
DCL Developments Pty Ltd
Legislation Cited (3)
Australian Securities and Investment Commission Act 2001(Cth)