HRNG ADELAIDE, 8 April 1995 #DATE 2:3:1995 #ADD 1:5:1995

Counsel for appellant: Mr N J T Swan with him

Counsel for respondent Mr W J N Wells QC Allesandro Zollo: with him Mr G W Dart

Counsel for respondent Mr R F A Wills Iolanda Zollo:

Solicitors for respondent Moody Rossi and Co Iolanda Zollo:

JUDGE1 MATHESON J In this action the appellant claims from the respondents monies said to be owing to it on an instalment loan account, on a personal loan account and on a current account. As at the date of the hearing before this court, the sum alleged to be owing was $800,000 (including interest) with further interest accruing at the rate of $221.73 per day. The respondents do not dispute the appellant's allegations that they have not made any payments since 3 August, 1990. In addition, and in the same action, the appellant claims possession of three properties owned by the respondents, and comprised in three certificates of title over which the appellant has registered mortgages. The respondents have filed separate defences and counterclaims, both alleging inter alia breach of fiduciary duty by the appellant, while the second respondent does not admit that she signed the mortgages, and pleads additional defences.

2. On 27 June, 1994, the respondent appointed Bruce James Carter pursuant to the mortgages "until such appointment is revoked by the mortgagee or otherwise terminated to be the receiver of the income of (the) mortgaged propert(ies) and exercise all or any of the powers conferred upon him by the terms of the said mortgage(s) or contained in the Real Property Act, 1886 and the Law of Property Act, 1936."

3. On 28 June, 1994, the respondents applied for an order setting aside the appointment of the receiver. On 7 July, 1994, Prior J made the following orders: "... the defendants (now the respondents) by their counsel undertaking to abide by any order the Court or Judge may make as to damages in the case the Court or a Judge should hereafter be of the opinion that the plaintiff (now the appellant) shall have sustained any by reason of this order which the defendants ought

That the plaintiff forthwith execute and serve upon the receiver, Bruce James Carter, an instrument having the effect of suspending the appointment by the plaintiff pursuant to the powers under registered Memoranda of Mortgage No. 5030265, 4631949 and 5261440 of a Receiver of the income of the mortgaged property being the property comprised and described in Certificate of Title Register Book Volume 2563 Folio 198, Volume 1820 Folio 100 and Volume 2008 Folio 183.

That subject to paragraph 3 hereof until further order the plaintiff be, and is hereby restrained, whether by itself, its servants agents or otherwise, from revoking the suspension effected in accordance with paragraph 1 hereof.

That the plaintiff forthwith serve, or cause the said receiver to serve, upon each and every tenant to whom a Notice of Appointment has been sent, a further Notice in a form to be agreed between the parties, or in default of agreement to be settled by this court, advising the recipient of the terms and effect of this Order and in particular that until further order the defendants are the proper persons to whom to pay the rent reserved under their leases/tenancy agreements with the defendants.

That the plaintiff be restrained from exercising its power to further appointment of a Receiver of the income of the mortgaged properties.

AND further consideration of the application adjourned.

4. The appellant now seeks an order setting aside those orders, and seeks an order that the income from the mortgaged properties be paid into Court.

It is convenient to mention here that the respondents are involved in two other actions in this Court in which the appellant is also a party. In Action No. 1026 of 1993, the respondent Alessandro Zollo, (who is a builder and who suffered an injury on 4 June, 1990 allegedly rendering him permanently unfit and unable to work as a builder), claims he is entitled to the benefit of insurance under an insurance agreement and an agreement to procure insurance. In Action No. 2031 of 1990, the respondents are suing the appellant for damages for breach of an agreement to provide banking accommodation. In that Action, they already have a judgment in their favour, but damages have not yet been assessed.

It is also convenient to mention here that on 6 February, 1995 Bollen J made the following order: "1. That the insurance action 1026/93 be heard as the first action in March.

2. That the possession action 1794/93 be the next action to be heard in March.

3. That the breach of contract action 2031/90 be heard immediately following the other actions."

Mr. Swan, counsel for the appellant, referred to a number of cases starting with Inglis and Anor v Commonwealth Trading Bank of Australia (1972) 126 CLR l61, where the High Court upheld the refusal of Walsh J to grant an interlocutory injunction. At p169, Barwick CJ said (Menzies and Gibbs JJ concurring): "The case falls fairly, in my opinion, within the general rule applicable when it is sought to restrain the exercise by a mortgagee of his rights under the mortgage instrument. Failing payment into court of the amount sworn by the mortgagee as due and owing under the mortgage, no restraint should be placed by order upon the exercise of the respondent mortgagee's rights under the mortgage."

Mr. Swan then referred to the judgment of Morling J in Glandore Pty Ltd and Ors v Elders Finance and Investment Co Ltd [1984] FCA 407; (1984) 4 FCR 130. His Honour pointed out that Inglis' case was not a case in which the mortgagor sought to impugn the validity of the mortgage transaction itself. He then referred to the decision of Sugerman J in Harvey v McWatters [1948] NSWStRp 58; (1948) 49 SR (NSW) 173 and said at p134: "It was held in Harvey v McWatters that where a mortgagor seeks an interlocutory injunction to restrain his mortgagee from selling, there is a distinction with respect to the terms that will be imposed as to payment into court between the case in which the power of sale is admittedly exercisable and the only dispute is as to the amount due or the mode in which the mortgagee proposes to exercise the power, and the case in which the very matter in dispute is whether the power of sale is exercisable at all. Sugerman J held that, in the first case, the general rule is that the mortgagor will be required to pay into court the amount demanded by the mortgagee, unless it appears from the terms of the mortgage that the amount claimed by the mortgagee is wrong. He further held that in the second class of case, the amount which would be ordered to be paid into court is not necessarily the whole amount claimed or appearing to be due under the terms of the mortgage, and in such a case the terms as to payment into court that are imposed upon the mortgagor may be moulded as to require payment in of so much only as will suffice to give adequate protection to the mortgagee."

Later at pp135-136, Morling J said: "I do not think that the present case is a case of the kind to which the general principle in Inglis' case applies. It

falls more easily into the second class of case discussed by Sugerman J in Harvey v McWatters. This being so I am not

constrained by authority to require the applicants to pay into court the whole amount of the mortgage debt as a condition of obtaining interlocutory relief. Rather I think the proper approach is to mould an order so as to ensure adequate protection to the mortgagee and to otherwise do justice between the parties during the period pending the final hearing.

Having regard to the fact that the value of the security held by Elders (at Elders' own valuation) is more than double the amount of the mortgage debt it is difficult to see how any prejudice will be suffered by Elders by the granting of interlocutory relief, provided the final hearing is not unduly delayed. During the course of the argument it was agreed that the parties could be ready for a final hearing with three months. There is no suggestion that the secured property is falling in value and

in those circumstances I do not think the applicants should be required to pay any part of the principal debt into court

However it is not right that Glandore should have the use of the respondent's money without paying interest on it. There is already an amount of $307,000 unpaid interest and expenses owing to Elders and this must be paid as a term of the grant of interlocutory relief. Moreover, the unpaid interest must be paid to Elders, and not into court. This will ensure that Elders has the use of the money pending the hearing, and will reduce the amount of its mortgage debt to about $1.5 million, for which it will have security in excess of $4 million. Because Elders does not appear to have any immediate plans for the sale of 'Oonavale' and as the applicants will want some time to raise the $307,000 to pay Elders I propose to give them until 14 January 1985 to pay the unpaid interest and expenses."

Next Mr. Swan referred to Andreas and Angelatos and Ors v National Australia Bank [1994] FCA 1223; (1994) ATPR 41-333. At p42-404, Branson J said: "As Hedigan J stated in Nicholas John Holdings Pty Ltd v ANZ Banking Group [1992] VicRp 98; (1992) 2 VR 715 the principle referred to in Inglis' Case 'has caused judicial uneasiness from time to time'. In Contractor Services Pty Ltd v Esanda Finance Corporation Ltd (1990) ATPR 41-020 at p.51,355 French J stated:-

'The full impact of that (Inglis) condition has been mitigated in cases where the claim is said to go to the root of the mortgagee's title, including the case in which relief is sought under s.87 of the Trade Practices Act 1974 to vary or set aside the mortgage.'

See also Graham v Commonwealth Bank of Australia (1988) ATPR 40-908; Glandore v Elders Finance and Investment Co Ltd [1984] FCA 407; (1984) 4 FCR 130 and Harvey v McWalters(sic) [1948] NSWStRp 58; (1948) 49 SR (NSW) 173.

I accept the submission made on behalf of the applicants that I have a discretion in the circumstances of this case not to insist upon payment of the amount of the alleged debt into court as a condition of any grant of any injunction in the terms sought. In my view the circumstances of the case render it appropriate for such payment not to be insisted upon. The amount of the debt is large but the respondent holds security not suggested to be inadequate for its payment. So far as the applicants are concerned, their case is that they may not be called upon to pay the debt until some time early next century. They invoke the jurisdiction of the Court to make orders to prevent or reduce the loss or damage suffered or likely to be suffered by them by the conduct of the respondent which they seek to characterise as misleading or deceptive. The capacity of the Court to do so should they make out the case pleaded by them is likely to be hampered should their circumstances have been significantly altered in the meantime as a consequence of the need to raise A$7,700,000 for payment into court.

It follows that I do not accept the submission that as a matter of law I am unable to grant the interlocutory relief

claimed in this matter. I turn to consider the two submissions advanced on behalf of the respondent that in the exercise of my discretion I should refuse the relief sought."

In Mainbanner Pty Ltd and Ors v Dadincroft Pty Ltd and Ors (1988) ATPR 40-896 in the course of referring to the judicial tendency to relax the requirements of the rule that a mortgagee will not be restrained from exercising its security rights at the incidence of the mortgagor unless the amount, if it be disputed, is paid into court, Pincus J in the Federal Court agreed that he had some discretion to relax the requirements of the rule. However, at p49,663 he said:

"In my opinion, it would, in general, not be correct to exercise that discretion in favour of an applicant in a case such as this, merely on its being shown that there is a prospect, however modest, of success of an allegation of oral misrepresentation. If that were so, the rule would be, in effect, reversed, and would be that where misrepresentation is alleged in such a way that one could not deny the seriousness of the question to be tried, and the applicant claims rescission, prima facie the contract the mortgagor and mortgagee have made must be suspended.

It seems to me that the adoption of any such principle would be, in the long run, pernicious, because it would tend to destroy or weaken people's confidence in such bargains and in the rights of holders of security."

The last of the cases referred to by Mr. Swan that I wish to mention is Graham and Ors v Commonwealth Bank of Australia (1988) ATPR 40-908. At p49,758, French J said: "The Court is concerned here, of course, with the exercise of a discretion and it is always a dangerous course to extract from earlier decisions exercising that discretion on particular facts any general principles purporting to fetter its exercise. That is not to say, and should not be taken to imply, that the observations of Pincus J. on the importance of confidence in bargains does not expose a significant and relevant factor which will in most cases be given considerable weight. But in the end, each case is to be judged on its own facts."

Mr. Swan conceded that in none of the cases to which he referred was it shown that a party would be unable to continue the litigation unless the order sought was made.

In the course of his reasons in the case under appeal, Prior J said: " A basis for the application now being sought was that this Court should not permit the plaintiff to take action outside of the Court inconsistent with adjudication by the Court of matters at issue before it.

Counsel for the defendants relied upon an extempore judgment in the Ontario High Court: Canada Permanent Trust Co v Welton (1973) 33 DLR (3d) 417. In an action for possession of mortgaged lands and for payment due under a covenant, the plaintiffs elected to proceed under a power of sale under the mortgage. The defendant sought an order restraining the plaintiffs from proceeding with the sale under the mortgage. Zeber J said that whether the default under the mortgage occurred or whether relief against forfeiture should be granted were matters for the trial, the question for him being whether the plaintiffs should be allowed to proceed with a power of sale outside the ambit of the action. It was his view that they should not. He said, at 418:-

"The plaintiffs come to this Court seeking certain relief, the possession of land and the payment of the funds. Clearly if the funds were paid in response to this writ they would have to then surrender the security back to the defendant. At the same

time, the plaintiffs are seeking to sell the mortgage premises which, to my mind, almost negatives what they are doing in the action. They were then clearly, having sold the land, in a position where they could not restore the security of the defendant. In my view, the plaintiffs, having submitted their rights to this Court, should not be allowed to then step outside the ambit of this action and attempt to enforce their rights in a different way, especially in view of the fact that there appears to be a triable issue here.'

An injunction issued upon the Judge's view that it was not fair and equitable to allow the plaintiffs to exercise a power concurrently with an attempt to enforce rights by way of action in the Court. Counsel also referred to Argyle Art Centre v Argyle Bond and Free Stores (1976) 1 NSWLR 377 at 383, 384 and 386. It was contended that in this case the appointment of the receiver of income was calculated to interfere with the course of justice in these proceedings. It was put that the Bank had made an election to pursue a court remedy by way of an action for possession and in the alternative, for the appointment of a receiver. Whilst the action is pending in this Court, it is submitted that the exercise of powers outside the Court, calculated to interfere with the determination of the issues in the case, is open to restraint by proper order of the Court. It is also put that a further factor of aggravation in this case justifying the grant of some order in restraint is that the Bank's action is likely to render extremely difficult the abilities of the defendants to respond to the proceedings."

Prior J did not state whether or not he accepted the argument based on the Canada Permanent Trust Co and Argyle Art Centre cases. Because of what I say later in these reasons, it is not strictly necessary for me to comment on the argument, but at present I am inclined to the view that the cases upon which the argument is based are distinguishable. This is not a case like Canada Permanent Trust Co where the appellant is seeking to exercise its power of sale under the mortgages. And the Argyle Art Centre case was a landlord and tenant case in which the head-tenant had given notice to quit to a sub-tenant and issued a summons for ejectment. During an adjournment of the court hearing on the summons, the head-tenant broke into the premises and was engaged in clearing the sub-tenant's property out of them. In those circumstances I can understand the decision of Needham J to hold that an election to proceed curially excluded the right to proceed physically. Further, it was not correct of counsel for the respondents to put to Prior J (if he did) that "the bank had made an election to pursue a court remedy by way of an action for possession and in the alternative, for the appointment of a receiver".

I am not sure about the precise reason for his Honour's orders. Perhaps it is to be contained in this passage towards the end of his judgment. He says: "With respect to a further submission that the plaintiff's action is not inconsistent with the issues before the Court I incline to the view that, in fact, to permit the Receiver to take and retain monies is to assume issues in favour of the plaintiffs. On that ground I think some order must now be made."

In an affidavit filed on behalf of the respondents and sworn on 28 June, 1994, James Michael Cudmore deposed inter alia: "4. The land comprised in Certificate of Title Register Book Volume 2563 Folio 198 known as 3 Ravendale Road Port Lincoln (being one of the three properties, supra) is a property on which is situated 10 rental flats each of which are tenanted for a rental of between $85.00 and $100.00 per week each. I am informed by Mr Zollo and verily believe that this is his principal source of income.

5. I am informed by Mr Zollo and verily believe that it will be impossible to defend the within proceedings and also to prosecute his proceedings against the Bank in action number 1026 of 1993 if the income from his rental properties are not available to him."

In his reasons, Prior J said: " In support of the application the defendants refer to the fact that income on ten rental flats amounts to a sum between $850 and $1,000 per week, that sum being required to defend these proceedings and prosecute the third matter which seeks an indemnity from the Bank pursuant to a contract of mortgage insurance. There is evidence before the Court of the impecuniosity of the defendants. An affidavit from the solicitor for the first defendant says that he believes it will be impossible to defend these proceedings and also to prosecute the other if the income from the rental properties is not available to the defendant."

Although his Honour did not actually state whether he took into account the respondent's alleged impecuniosity, it was referred to by him in his reasons, (as I have indicated), and it was certainly referred to frequently in the course of the argument before him. Counsel before this Court took different stances on its relevance, and after hearing argument, the court admitted two further affidavits of Anthony John Crossman, a solicitor employed by Finlaysons, solicitors for the appellant, one sworn on 5 December, 1994 and the other sworn on 7 February, 1995. The affidavits were admitted on the basis that they contained fresh evidence as to the financial position of the respondents as a result of discovery taking place after the judgment under appeal. The court also admitted an affidavit of the respondent Alessandro Zollo sworn on 20 December, 1994. The financial position of the respondents as revealed by the additional affidavit material is not entirely clear because discovery was incomplete, but it appears that the respondent is receiving $541.26 net per week from Workcover. However, he supports a wife and three children aged between twelve and sixteen years of age all living at home and attending secondary school. He also deposed: "I have had my accountant Mr Cunningham prepare a summary of income from the rental flats, rental homes and the rental shops for the 1993/94 financial year. It shows rental income of $31,097.00 and expenses of $30,738.00. It is to the best of my information and belief a true and accurate summary of the income and expenses from the rental properties ..."

Later he deposed: "There are currently three Supreme Court Actions between myself and the bank. I am informed by my solicitors and verily believe that each of the actions will proceed to trial early in 1995. If the income from rental flats and rental homes is paid into Court I will not have funds to defend the within proceedings or to prosecute actions No. 2031 of 1990 and 1026 of 1993 in which I am a plaintiff."

It is necessary to remind oneself of the principles governing the grant or refusal of interlocutory injunctions. In Castlemaine Tooheys Limited v South Australia [1986] HCA 58; (1986) 161 CLR 148, Mason ACJ (as he then was) said at p153: "In order to secure such an injunction the plaintiff must show (1) that there is a serious question to be tried ... (2) that he will suffer irreparable injury for which damages will not be an adequate compensation unless an injunction is granted; and (3) that the balance of convenience favours the granting of an injunction."

It is true that these principles do not apply in relation to paragraph 1 of the order (supra), but paragraph 1 would not be of any real worth without the injunction in paragraph 2. Prior J did not in terms refer to the principles, but he did not have to do so, and I am not persuaded that he overlooked them.

Mr. Swan conceded there was "a serious question to be tried" and that there was jurisdiction to make the orders. It is clear that if the respondents are unable to defend or prosecute the respective actions, they will lose absolutely everything and will have no claim for damages.

The phrase "balance of convenience" is not a very apt one. In the 3rd Edition of "Equity Doctrines and Remedies" by Meagher, Gummow and Lehane, the learned authors say at p597: "What is meant by saying that the court must take into account the balance of convenience and the question of hardship is that it must consider carefully what effects the granting of an injunction will have on both parties, and in particular whether to grant one would cause hardship to the defendant or to refuse one would cause hardship to the plaintiff. It is not difficult to imagine circumstances in which the granting of an interlocutory injunction would cause a defendant no hardship whatever, eg an injunction restraining a defendant from whistling in the street in such a manner as to constitute a nuisance to the plaintiff. On the other hand, in some circumstances an injunction could cause grave hardship: it could involve the suspension of a defendant's business. The greater the hardship to the defendant, the greater the reluctance of the court to grant the injunction; but, the more it is apparent that an equal of further hardship would be caused to the plaintiff by refusing an injunction, or the stronger a plaintiff's case appears, the more that reluctance will be dissipated: Beese v Woodhouse (1970) l All ER 769."

I also refer to the judgment of May LJ in Cayne v Global Natural Resources plc (1984) l All ER 225. At p237, his Lordship said: "It is only thereafter, if damages after a trial are thought to be inadequate, that one is then enjoined to look at what is described as the 'balance of convenience'. That is the phrase which, of course, is always used in this type of application. It is, if I may say so, a useful shorthand, but in truth, and as Lord Diplock himself made clear in the NWL case, the balance that one is seeking to make is more fundamental, more weighty, than mere 'convenience'. I think that it is quite clear from both cases that, although the phrase may well be substantially less elegant, the 'balance of the risk of doing an injustice' better describes the process involved. Again, I need only refer to a very brief passage from the speech of Lord Diplock in the NWL case (1979) 3 All ER 614 at 625, (1979) l WLR 1294 at 1306."

Mr. Swan strongly relied on the respondents' failure to make any payments at all since 3 August, 1990, and on what he called the inadequacy of the appellant's security. The mortgage debt now exceeds $800,000. There was affidavit evidence that the total value of the three properties in September 1990 was only $600,000. Mr. Carter inspected them on 27 June, 1994, and said they were not being properly maintained and were run down. The Valuer General valued them at 27 May, 1994 at $530,000. Mr. Swan also argued that the respondents' undertaking as to damages was of little or no value.

Whilst I acknowledge the strength of these arguments, I have reached the conclusion that they are outweighed by the respondents' argument that they would not be able to litigate if the order was not made, an argument that gains strength when one considers that the rents payable between the date of the order and the date of the forthcoming trial would amount to a relatively insignificant sum in relation to the alleged debt. It is true that the appellant now wants the rents to be paid into court, but such payments would have the same practical effect as payments to the appellant. It must also be remembered that the respondent Alessandro Zollo has been on Workers Compensation since 4 June, 1990.

Section 53(5) of the Law of Property Act, 1936 states: "(5) The receiver may be removed, and a new receiver may be appointed, from time to time by the mortgagee by writing under his hand."

It may be that the learned Judge's use of the words "suspending" and "suspension" was inappropriate. The mortgages are not before us. I would dismiss the appeal, but I would hear counsel as to whether some minor amendments should be made to the wording of the orders.