Olde & Ors v Primary Compass Limited ACN 129 159 812

Judgment 1This is an application for an interlocutory injunction to restrain the defendant, Primary Compass, from calling on a bank guarantee in the sum of $660,000. 2The first plaintiffs are the receivers of the property of the second plaintiff, Compass Hotel Group. Prior to the appointment of the receivers on 22 March 2011, Compass Hotel Group operated a hotel and tavern business by way of a managed investment scheme. Investors in the scheme received stapled securities consisting of a share in Compass Hotel Group and a unit in the Compass Hotel Group Trust (the Trust ). 3Primary Compass is the responsible entity of the Trust for the purposes of Chapter 5C of the Corporations Act 2001. It took over that role from Primary Securities Limited in September 2008. The relationship between Compass Hotel Group and Primary Compass is governed by an agreement dated 20 November 2007 known as the "Responsible Entity Services Agreement" ( RESA ). There is no dispute between the parties that Primary Compass became bound by the terms of that agreement in place of Primary Securities Limited when Primary Compass assumed the role of responsible entity, even though no formal document to that effect was executed by the parties. 4Clause 12 of the RESA provides: 12.1The Promoter or the Manager (as applicable) must either: (a) provide sufficient security to enable Primary to put up a bond or eligible undertaking in the form approved by ASIC; or (b) provide a loan to Primary's shareholder to enable it to subscribe for shares in Primary. (the NTA Support), for the purpose of increasing the net tangible assets of Primary. 12.2 The amount of the NTA Support is initially to be $350,000 prior to Allotment. 12.3 The amount of the NTA Support is to be periodically reviewed and increased (or decreased) with the approval of ASIC (where required) so that it is for such amount as represents 0.5% of the anticipated Trust Value within the next 3 months. 12.4 The Promoter or the Manager must provide sufficient additional security or an additional loan, to cover any required increase in the amount of the NTA Support, as required by Primary. 12.5 In the event that Primary ceases to be the responsible entity for the Trust, Primary is to use its best endeavours to obtain ASIC approval for release of the NTA Support (where such approval is required). 5At some stage, the amount of the guarantee was increased to $1 million and then, on 15 May 2009, it was reduced in accordance with cl 12.3 to $660,000. The purpose of the guarantee was expressed to be: To preserve 'net tangible assets' above the regulatory requirement of 0.50% of gross assets of the beneficiary. 6The bank guarantee is secured by a deposit of $695,015 made by Compass Hotel Group with St.George Bank. There is no dispute that, if the bank guarantee is called on, the deposit to the extent of the call will be forfeited to the bank. 7By an agreement (the Agreement to Lend Responsible Entity Services or ALRES ) dated 16 July 2009 between Primary Compass and Primary Managers Pty Ltd, another company in the Primary Group, Primary Managers is entitled to receive all the fees payable under the RESA to Primary Compass (cl 5) and Primary Managers is obliged to "lend" Primary Compass services to enable it to discharge its obligations under the trust deed governing the Trust. For that purpose, Primary Managers employs all relevant staff and pays all Primary Compass's expenses such as rent and insurance. 8Following the receivership of Compass Hotel Group, it ceased paying management fees to Primary Compass in accordance with the RESA and Primary Compass ceased paying Primary Managers amounts due under the ALRES. The total amount currently owing under the ALRES is $186,342.32. As a consequence, Primary Compass seeks to call on the guarantee to recover that amount and to pay it to Primary Managers. 9There is no dispute that Primary Compass has no other source to pay the amount it owes to Primary Managers. In particular, Primary Compass's paid up capital is $2 and, apart from the guarantee, it has no other source of funds. There also appears to be no dispute that if the amount is paid by Primary Compass to Primary Managers, Primary Compass will have no means of repaying the amount of the guarantee in the event that the court concludes that it was not entitled to call on the guarantee. 10The general principle is that the court will not grant an interlocutory injunction to restrain the beneficiary of an unconditional guarantee from calling on that guarantee. There are, however, three exceptions to that general principle. One is where the person seeking to call on the guarantee is acting fraudulently. The second is where the person seeking to call on the guarantee is acting unconscionably in contravention of s 51AA of the Trade Practices Act 1974 (Cth) (now the Competition and Consumer Act 2010 (Cth)). The third is where the beneficiary would be acting in breach of a contractual promise in favour of the person seeking the injunction not to call on the guarantee: see Putney Group Pty Ltd v The Royal Rehabilitation Centre Sydney [2008] NSWSC 1424 at [15] citing Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd (2008) 249 ALR 458 at [77]. 11In this case, the plaintiffs say that it is an implied term of the RESA that the bank guarantee could only be called on to meet liabilities to investors under s 601MA of the Corporations Act and to meet claims brought against Primary Compass pursuant to s 1325(3) of the Corporations Act . 12The question, then, in the present application is whether there is a serious question to be tried that the RESA contains an implied term to that effect and whether, if there is, the balance of convenience is in favour of granting an interlocutory injunction. 13In my opinion, the plaintiffs have failed to establish that there is a serious question to be tried that the RESA contains an implied term that limits Primary Compass's rights to call on the guarantee to meet liabilities arising under ss 601MA and 1325(3) of the Corporations Act. It is clear that the obligations imposed on Compass Hotel Group by cl 12 of the RESA were to provide Primary Compass with sufficient assets to meet the regulatory requirements imposed on it. Compass Hotel Group could discharge those obligations by providing a guarantee or by providing a loan to Primary Compass's shareholder to enable it to subscribe for additional shares. In the latter case, there is no question that the subscription price of the shares would be available to meet all of the company's liabilities. 14The relevant regulatory requirements are set out in Primary Compass's licence. Section 601FA of the Corporations Act provides: The responsible entity of a registered scheme must be a public company that holds an Australian financial services licence authorising it to operate a managed investment scheme. Condition 10(a) of Primary Compass's licence provides that it must "be able to pay all its debts as and when they become due and payable". Condition 10(c) sets out 5 options for how Primary Compass must meet its cash needs. Option 3 (chosen by Primary Compass) was: [A] requirement that an Australian ADI or a foreign deposit-taking institution approved in writing by ASIC as an eligible provider gives the licensee an enforceable and unqualified commitment to pay on demand from time to time an unlimited amount to the licensee or the amount for which the licensee is liable to its creditors at the time of the demand to the licensee's creditors or a trustee for the licensee's creditors, that the licensee reasonably expects will apply for at least three months, taking into account all commercial contingencies for which the licensee should reasonably plan. Condition 11 relevantly requires Primary Compass to hold "NTA of 0.5%" of the value of the assets of the scheme operated by it. "NTA" is defined in the licence to mean "adjusted assets minus adjusted liabilities". 15"Adjusted liabilities" means "the amount of total liabilities as they would appear on a balance sheet ..." minus a number of items which are not relevant to the current dispute. It seems clear that amounts payable under the ALRES by Primary Compass fall within the description of "adjusted liabilities". 16It is also relevant to observe that ASIC has issued a regulatory guide (RG 166) setting out the requirements that must be met by a responsible entity. RG 166.63 provides: If you are a responsible entity, you must hold at all times a minimum net tangible assets (NTA) of 0.5% of the value of: (a) the assets; plus (b) any other scheme property not counted in calculating the value of the assets, of the registered schemes you operate, with a minimum requirement of $50,000 and a maximum requirement of $5 million. 17There is nothing in the license conditions or RG 166 to suggest that the net tangible assets that Primary Compass is required to retain can only be used to satisfy obligations arising from claims made under ss 601MA and 1325(3) of the Corporations Act , or that the amount that Primary Compass is required to have to enable it to meet its cash needs is only available to meet some of those needs. If Primary Compass incurs liabilities that mean that its net tangible assets fall below the required percentage, then it will be in breach of condition 11 of its licence. However, that does not mean that it must retain what assets it has to meet possible liabilities under ss 601MA and 1325(3) of the Corporations Act . On the contrary, if it set aside some of its assets for that purpose and did not meet liabilities that had fallen due, it may also be in breach of condition 10(a). 18As I have said, the purpose of the guarantee is to assist Primary Compass to meet these requirements. The RESA must be interpreted in that light. There is nothing in its terms that suggest that the guarantee can only be called on in certain circumstances. In addition, if the guarantee is only available to meet certain liabilities that may never arise, it is difficult to see how it could be regarded as "an unqualified commitment to pay on demand", or how it could be taken into account in determining the net assets of the company, or how it could be said to be available to meet the cash needs of the company. For example, take a case where Primary Compass has incurred liabilities other than under ss 601MA and 1325(3) of the Corporations Act . On the plaintiffs' approach, it seems to me that, in determining the net assets of Primary Compass, it would be necessary to ignore the guarantee since it would not be available to meet the liabilities in question. If, as a result, Primary Compass's net assets did not meet the regulatory requirement, the guarantee would not achieve the very purpose for which it was given. 19Mr Ashhurst SC, who appeared for the plaintiffs, relied on cl 8.2 of the RESA and cl 22.1 of the trust deed which make it clear that Primary Compass is to be remunerated and indemnified out of the trust fund. He submitted that it was at least arguable from these provisions that the RESA draws a distinction between fees and expenses payable to Primary Compass, which are to be paid out of the trust fund, and liabilities to investors, which are to be met from the guarantee. I do not accept this submission. In my opinion, there is a distinction between fees payable to Primary Compass under the RESA and liabilities incurred by Primary Compass. Primary Compass is clearly not entitled to call on the guarantee to recover fees. However, in my opinion, it cannot seriously be argued that it is not entitled to call on the guarantee to meet its liabilities. It is true that in this case the relevant liabilities are owed to a related company and, because of the structure that has been adopted, its liabilities equal the fees it is entitled to be paid. However, as I have said, I do not think that that is a basis for saying that the regulatory requirements draw a distinction between different categories of liability and similarly I do not think that there is a basis for saying that the RESA draws a distinction between different categories of liability. Once it is accepted that the liabilities are liabilities for the purposes of determining whether Primary Compass meets its license conditions, it seems to me the guarantee must be available to meet those liabilities. 20Mr Ashhurst also pointed to cl 12.5 of the RESA, which provides that Primary Compass must use its best endeavours to obtain ASIC approval to the release of the guarantee if Primary Compass ceases to be the responsible entity of the trust. However, in my opinion, that clause does not assist the plaintiffs' argument. Primary Compass has not ceased to be the responsible entity for the trust and so long as it remains the responsible entity I do not see why it cannot use the assets available to it to discharge the liabilities it has. If that means that ultimately there is no guarantee to be released, then that is simply a result of what has happened. 21Nothing I have said is intended to suggest that Primary Compass is free to call on the guarantee at any time. It may well be an implied term of the RESA that Primary Compass is required to meet its liabilities from any other assets it has before calling on the guarantee. However, there is no suggestion that Primary Compass has other assets available to it to meet the liabilities in question. 22I am conscious that the question for determination is not the correct construction of the RESA but whether there is a serious question to be tried. The plaintiffs did not say precisely on what basis the term for which they contend should be implied. However, given the way that they put their case, it seems to me that their contention is that the term should be implied in accordance with the principles set out in BP Refineries (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 283. Those principles require that the term be "reasonable and equitable", that it be necessary to give "business efficacy to the contract", that it be so obvious that it "goes without saying", that it be "capable of clear expression" and that it not contradict any express term. For the reasons I have given, I do not think that it can seriously be argued in this case that the term contended for by the plaintiffs is necessary to give business efficacy to the RESA or that it is so obvious that it goes without saying. 23I am also conscious that, in this case, the balance of convenience favours the plaintiffs. If an injunction is not granted and the guarantee is called on, the plaintiffs are unlikely to recover any amount paid by Primary Compass to discharge its liabilities. On the other hand, the evidence does not suggest that Primary Compass will suffer irreparable harm if an injunction is granted for a reasonably short period of time to enable the matter to be determined on a final basis. It was suggested that if Primary Compass was not able to call on the guarantee then it may be in breach of its licence conditions. However, in my opinion, it is likely that it is already in breach of its licence conditions because its net tangible assets do not exceed the required amount. Where the balance of convenience favours the plaintiffs, that is a matter that may lead a court more readily to grant an injunction: Bullock v The Federated Furnishing Trades Society of Australasia (No 1) (1985) 5 FCR 464 at 472. However, it is still necessary for the plaintiffs to establish that they have a serious question to be tried. That is particularly so when dealing with what on its face is an unconditional bank guarantee. Parties are entitled to expect courts to give effect to unconditional bank guarantees unless there is a serious question that one of the exceptions to their operation applies. For the reasons I have given, I am not satisfied that that is the position in this case. 24The application for an interlocutory injunction should be dismissed.