McLean v Elvapine Aberglasslyn Road Pty Ltd [2008] NSWSC 484 | Case summary

1656/08 JUDITH ANNE MCLEAN & ANOR V ELVAPINE ABERGLASSLYN ROAD PTY LTD & ORS JUDGMENT (Ex tempore; revised 19 May 2008) 1 HIS HONOUR: This is an application by a liquidator, made by interlocutory process filed in Court on 14 May 2008, under s 477(2B) of the Corporations Act 2001 (Cth). That provision states, relevantly, that except with the approval of the Court, a liquidator must not enter into an agreement on the company's behalf if the term of the agreement may end more than three months after the agreement is entered into. The applicant is Bradd Morelli, who was appointed provisional liquidator of the company and has now become its liquidator. 2 The company owns some land at 117 Aberglasslyn Road, Rutherford, which is near Maitland. Prior to the applicant's appointment as provisional liquidator, the company exercised two options to acquire adjoining properties at 121 and 126 Aberglasslyn Road, the contracts being due for completion on 18 March 2008. The company's property at 117 Aberglasslyn Road is subject to a mortgage in an amount that, with interest and costs, is now about $600,000. The amount of money needed to complete the two contracts for purchase is about $1.2 million. Therefore the liquidator would need about $1.8 million plus costs to discharge the mortgage and complete the purchases. 3 Having become the liquidator of the company, Mr Morelli has formed the commercial view that it would be in the interests of the creditors and contributories of the company to pay out the existing mortgage. The mortgagee is claiming that the company is in default under the mortgage, and is demanding full payment and threatening possession proceedings. Mr Morelli has also formed the commercial view that it would be in the interests of the creditors and contributories to complete the purchase of the two additional properties. He would then sell all three properties together, as there is an existing development approval in respect of the three properties for subdivision into housing lots. He believes that if he does so, there will be a profit on sale, and indeed there will be a surplus in the winding-up available for distribution to contributories. If, however, he does not take these steps, his belief is that the mortgagee of 117 Aberglasslyn Road will take possession of and sell that property separately in a forced sale. If that were to happen, the benefit of the sale of all three properties together as a development project would be lost. 4 There are no funds in the company for discharge of the mortgage or completion of the purchase of the other two properties. Therefore Mr Morelli has endeavoured to obtain finance to permit him to pay out the mortgage and complete the purchases. He has obtained two letters of offer from financiers, the better one in his opinion being from Provident Capital Limited. That is for a loan of more than $1.8 million for a period of three months, on payment of a substantial application fee and relatively high interest, with an option for the borrower to extend the period of the loan for another three months, upon prepayment of further interest. The letter of offer makes provision for limiting the liquidator's personal liability. Since the term of the loan agreement may end more than three months after the agreement is entered into, in the event that the borrower exercises the option to extend the period of the loan, the loan agreement falls within s 477(2B) and the liquidator must obtain the approval of the Court, the committee of inspection or creditors, before entering into the agreement. 5 When the application came before me on 14 May, I was concerned that the evidence was incomplete. There was evidence to show that the liquidator had made reasonable enquiries to obtain offers of finance, and there was some evidence to show the attitude of the mortgagee of the company's land, and of the vendors of the adjoining properties. I expressed the view in argument that in some respects that evidence could be clarified, and in particular I was not sure whether the existing mortgagee would be prepared to forego any enforcement action if arrangements were made to pay arrears of interest, and to continue to pay interest when due. 6 My main concern, on the last occasion, was the absence of evidence about the prospects of sale of the three properties together. Under s 477(2B), the Court has regard to the commercial judgment of the liquidator, but "that is not to say it rubber stamps whatever is put forward by the liquidator." (Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85) In Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 86, Giles J said the court will interfere where there is: "a lack of good faith, some error in law or principle or real and substantial grounds for doubting the prudence of the liquidator's conduct."

(See also Re Aslor Pty Ltd (1997) 24 ACSR 612 at 613; Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 29 ACSR 109 at 118; Stewart re Newtronics Pty Ltd [2007] FCA 1375 at [26]). 7 There was nothing in the evidence presented in the application to raise any concern about lack of good faith or error in law or principle, but I harboured some doubts about the prudence of the liquidator's conduct, because of the absence of evidence about the prospects of sale. It seemed to me that it would be undesirable for the liquidator to enter into a financial contract for a short term loan, involving the payment of a substantial application fee ($30,000) and a reasonably high rate of interest, if there was no reasonable prospect that the borrowing could be funded out of the sale of the three properties together in equivalently short time. The risk, as I saw it, was that in the absence of a successful sale, the surplus value of the three properties attributed to their development potential, which was intended to be made available to creditors and contributories, would be gobbled up by the financier in interest charges and fees. 8 The application was adjourned to today, and now I am happy to say that there is a substantial amount of additional evidence that is directed to addressing this concern. So far as the question of the present mortgagee's attitude to deferral of enforcement is concerned, there is now very clear evidence that the mortgagee requires immediate repayment, or else it will seek leave to enforce the mortgage security. The mortgagee is not interested in leaving the mortgage on foot upon resumption of interest payments. 9 So far as prospects of sale are concerned, there is now evidence that a number of offers had been received. Additionally there is evidence from two real estate agents, who express a measured degree of confidence in the prospects of sale of the three properties together as a development site, in a three to six month time frame, for an apparently acceptable price. Specifically, one of the agents comments that although the global sub-prime mortgage crisis, the collapse of credit markets, and the consequent general dampening of the real estate market, have made property development projects more difficult for the time being, the part of the Maitland area in which these properties are located seems to have a measure of insulation from those forces, because of the current resources boom and the consequent high level of activity of mining operations in the immediate vicinity. 10 The principles I have enunciated make it clear that it is for the liquidator rather than the Court to make a commercial judgment on these matters. I have set out the evidence, admittedly in abbreviated fashion, in order to show that now there is a plausible evidentiary case before the Court supporting the liquidator's commercial judgment. Therefore the grounds for doubting the prudence of the liquidator's conduct on any prima facie basis have been removed. Obviously that assessment does not imply any endorsement by the Court of any aspect of the liquidator's commercial judgment, or any prediction by the Court of the likelihood of a successful sale. 11 I shall therefore make orders approving of the liquidator's proposal to enter into the specified loan agreement with Provident Capital. **********

McLean v Elvapine Aberglasslyn Road Pty Ltd

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