By a further amended Notice of Motion filed in Court on 15 November 2024, the first defendant, National Australia Bank Ltd (NAB), and the second defendants, Joseph Ronald Hansell and Ross Andrew Blakeley (the Receivers), seek a stay of the claims brought against them by the third to sixth plaintiffs (together, the Corporate Plaintiffs), all of which are in receivership.
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Background
The facts of the case and the claims made in it are quite complicated. What follows is a simplified account which is sufficient to address the issues currently before the Court.
The sole director and shareholder of the fourth and sixth plaintiffs is the first plaintiff, Mr Paul Pearsall. The sole director and shareholder of the third and fifth plaintiffs is Mrs Rachelle Pearsall, Mr Pearsall's wife. Mr Pearsall, together with Mr Dean Salvestro, controlled a group of companies known as the Grainlink Group, which, until the appointment of the third defendants, Mr Quentin Olde and Mr Liam Healey as administrators (the Administrators), operated a bulk grain and trading business in regional New South Wales.
On 21 October 2021, NAB entered into two agreements. By one, it agreed to provide various companies in the Grainlink Group, including Grainlink NSW Pty Ltd (now ACN 094 464 516 Pty Ltd (subject to deed of company arrangement)) (Grainlink NSW) and Walsh Link Pty Ltd (now ACN 117 092 985 Pty Ltd (subject to deed of company arrangement)) (Walsh Link) with finance facilities with a total aggregate limit of $41,569,000 (Grainlink Facilities). Relevantly, the facilities were secured by a first-ranking mortgage over the Wumbulgal Grain Terminal owned by Grainlink Storage and a first-ranking mortgage over the Coleambally Grain Terminal owned by Walsh Link. In addition, Mr and Mrs Pearsall gave guarantees in respect of the facilities.
By the second agreement, NAB agreed to provide the Corporate Plaintiffs with finance facilities with a total aggregate limit of $7,106,000 (Pearsall Facilities). Again, Mr and Mrs Pearsall gave guarantees in respect of those facilities and the facilities were secured by first priority general security agreements over all present and after acquired property of the Corporate Plaintiffs and mortgages over real property owned by the Corporate Plaintiffs.
Grainlink NSW and another company in the group defaulted under the terms of the Grainlink Facility in February 2022. By a Deed of Forbearance and Variation made on 9 August 2022 (the Deed of Forbearance), NAB agreed to forbear from taking action to enforce its rights under the facilities until the earlier of an Event of Default or the conclusion of the Forbearance Period (as those terms were defined in the deed). In exchange, the Corporate Plaintiffs relevantly agreed to guarantee the borrowers' obligations under the Grainlink Facilities.
Following the appointment on 1 June 2023 of the Administrators to Grainlink NSW and Walsh Link (and other companies in the Grainlink Group), the Administrators entered into a deed of company arrangement proposed by Australian Grainlink Pty Ltd (AGL), an entity associated with Mr Salvestro, the result of which was that the assets of the companies in administration were sold to AGL. To enable that sale to occur, NAB released the mortgages it held over the Wumbulgal Grain Terminal and the Coleambally Grain Terminal in exchange for the payment of approximately $10,200,000.
On 28 February 2024, NAB served demands on the plaintiffs demanding the payment of a total amount of $21,877,650 due under the Pearsall Facilities and the guarantees they had given of the Grainlink Facilities.
On 8 April 2024, NAB appointed the second defendants as receivers of the Corporate Plaintiffs. According to the evidence before the Court, there is an anticipated deficiency of approximately $2.2 million owing to NAB after the sale of the property the subject of the receivership.
By their amended statement of claim filed on 29 August 2024 (the ASC), the plaintiffs relevantly claim the following relief:
1 A declaration that the appointment of the second defendant on 14 May 2024 in respect of the property of the first plaintiff and the entering into possession or assumption of control, as the case may be, of the property of the first plaintiff by the second defendant is and was invalid by reason of:
(a) the first plaintiff's obligations as guarantor pursuant to the 2021 Guarantee, the 2022 Guarantee and/or the Pearsall Guarantee (as defined in this pleading) were discharged or are to be set aside as alleged at paragraphs 36 to 41A of this pleading;
(b) the first defendant's unconscionable conduct as alleged at section G.2 of this pleading; and/or
(c) the first defendant's unconscionable conduct as alleged at section G.4 of this pleading.
2 A declaration, pursuant to s 418A of the Corporations Act 2001 (Cth), that the appointment of the second defendant on 8 April 2024 to the property of the third to sixth plaintiffs and the entering into possession or assumption of control, as the case may be, of the property of the third to sixth plaintiffs by the second defendant is and was invalid by reason of:
(a) the third to sixth plaintiffs' obligations as guarantors pursuant to the 2022 Guarantee and/or the Pearsall Cross-Guarantee were discharged or are to be set aside as alleged at paragraphs 36 to 41A of this pleading;
(b) the first defendant's unconscionable conduct as alleged at section G.2 of this pleading; and/or
(c) by reason of the first defendant's unconscionable conduct as alleged at section G.4 of this pleading.
3 A declaration that the Pearsall Facility Demands (as defined in this pleading) are invalid and of no effect.
4 A declaration that the obligations of the plaintiffs, as guarantors pursuant to the terms of the 2021 Guarantee, the 2022 Guarantee, the Pearsall Guarantee and/or the Pearsall Cross-Guarantee, as the case may be, were discharged or are to be set aside or reduced pro tanto.
5 Further, or in the alternative, by reason of the first defendant's unconscionable conduct as alleged at section G.2 of this pleading, an order pursuant to section 12GD(1) of the Australian Securities and Investments Commission Act 2001 (Cth) restraining the first defendant, whether by its directors, officers, servants, agents or employees, from exercising or seeking to enforce any rights or powers available to the first defendant pursuant to the terms of the Deed of Forbearance (as defined in this pleading) between the first defendant and the plaintiffs, amongst others.
6 Further, or in the alternative, by reason of the first defendant's unconscionable conduct as alleged at section G.2 of this pleading, an order pursuant to section 12GM(2) of the Australian Securities and Investments Commission Act 2001 (Cth) declaring that the appointment of the second defendant on 14 May 2024 to the property of the first plaintiff and the appointment of the second defendant on 8 April 2024 to the property of the third to sixth plaintiffs is and was invalid whether pursuant to the Deed of Forbearance or the Pearsall Facility.
7 Further, or in the alternative, an injunction restraining the second defendant from exercising all the powers of a receiver, whether pursuant to any instrument enabling their appointment, the Corporations Act 2001 (Cth) or any other statute or at law, in respect of their appointments on 8 April 2024 and 14 May 2024 to the property of the first plaintiff and the third to sixth plaintiffs.
8 Further, or in the alternative, by reason of the first defendant's unconscionable conduct as alleged at section G.2 of this pleading, an order pursuant to section 12GM(2) or 12GM(7)(a) of the Australian Securities and Investments Commission Act 2001 (Cth) declaring that the Deed of Forbearance made 9 August 2022 between the first defendant and the plaintiffs, amongst others, is void and be set aside.
9 In the alternative to paragraphs 5, 6 and 8 above, by reason of the first defendant's unconscionable conduct as alleged at section G.4 of this pleading, an order pursuant to section 12GM(2) or 12GM(7)(a) of the Australian Securities and Investments Commission Act 2001 (Cth) that the obligations of the plaintiffs, as guarantors pursuant to the terms of the 2021 Guarantee, the 2022 Guarantee, the Pearsall Guarantee and/or the Pearsall Cross-Guarantee, as the case may be, were discharged or are to be set aside or reduced pro tanto.
10 Further or in the alternative, an order for the taking of accounts as between the first defendant and the plaintiffs.
11 Further or in the alternative, damages against the first defendant, whether at law or pursuant to s 12GF(1) of the Australian Securities and Investments Commission Act 2001 (Cth).
The claims that are said to support that relief are detailed, but essentially the plaintiffs make two complaints. First, they contend that NAB released the mortgages it held over the properties owned by Grainlink Storage and Walsh Link for less than the value of those mortgages. They contend (in para 36 of the ASC) that as a result "NAB has sacrificed, diminished, impaired or otherwise prejudiced the rights [of the plaintiffs] to contribution and indemnity as guarantors pursuant to [the guarantees given by them]". It is alleged therefore that those guarantees are liable to be set aside or the plaintiffs are relieved of their liabilities under them. In addition, the plaintiffs claim that NAB, by releasing the mortgages for an undervalue, engaged in unconscionable conduct in contravention of s 12CB or s 12CA of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act). Second, they claim that NAB engaged in unconscionable conduct in contravention of those provisions by obtaining security under the Deed of Forbearance in circumstances where it knew or ought to have known "that its forbearance under the Deed of Forbearance was unlikely to improve the likelihood of the Grainlink Group being able to meet their obligations under the Grainlink Facility and that in fact, it was likely that the position under the Grainlink Facility and the Pearsall Facility could worsen during the term of the Deed of Forbearance" (ASC para 52).
The first and second defendants seek a stay on two bases. First, they submit that Mr and Mrs Pearsall need leave to bring at least some of the claims on behalf of the Corporate Plaintiffs and they have not obtained that leave. Second, they submit that even if leave is not required the proceedings against the Corporate Plaintiffs should be stayed in the absence of Mr and Mrs Pearsall agreeing to indemnify the Corporate Plaintiffs in respect of any costs of the proceedings and providing appropriate security in respect of that indemnity.
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Relevant legal principles
Section 236 of the Corporations Act 2001 (Cth) (the CA) permits an officer or former officer of a company to bring proceedings on behalf of the company provided the person is acting with leave granted under s 237. Section 237 permits the Court to grant leave if it is satisfied that:
(a) it is probable that the company will not itself bring proceedings, or properly take responsibility for them, or for the steps in them; and
(b) the applicant is acting in good faith; and
(c) it is in the best interests of the company that the applicant be granted leave; and
(d) if the applicant is applying for leave to bring proceedings - there is a serious question to be tried; and
(e) either:
(i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and the reason for applying; or
(ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied.
Section 418A of the CA relevantly provides that "[w]here there is doubt, on a specific ground, about … whether a purported appointment of a person … as receiver of property of a corporation is valid … the person, the corporation or any of the corporation's creditors may apply to the Court for an order under subsection (2)". Subsection (2) gives the Court power to make a declaration concerning the validity of the appointment of the person.
Apart from these specific provisions, the directors retain a residual power as directors to commence proceedings on behalf of the company to assert a claim against receivers and their appointor arising from their appointment. As Sackville J, after reviewing the relevant authorities, explained in Deangrove Pty Ltd (Receivers and Managers Appointed) and Another v Commonwealth Bank of Australia (2001) 108 FCR 77; [2001] FCA 173 (Deangrove) at [40]:
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 [Co Ltd v Landmark Finance Pty Ltd (1969) 92 WN (NSW) 199], 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), p 77.
Where there is a question whether the directors are able to make good on the indemnity they give, it may be appropriate to order that they provide security for the indemnity as a condition of the refusal to grant a stay. As Sackville J explained in Deangrove at [47]:
In my view, the governing principle is that those giving instructions on behalf of Deangrove, in order to continue the proceedings, must demonstrate that "nothing in the course of the proceedings which they institute is going in any way to threaten the interests of the debenture holders" (Newhart Developments [Ltd v Co-operative Commercial Bank Ltd [1978] 1 QB 814] at 821). Had there been evidence that Mr Jeans [the sole shareholder of Deangrove] has sufficient resources to satisfy an indemnity, it might not be necessary for any security to be provided in support of the indemnity. But no such evidence has been adduced. Nor is there evidence as to Deangrove's financial position. In these circumstances, it seems to me that Mr Jeans should provide appropriate security to support his indemnity to Deangrove if the company is to pursue its claim against CBA.
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Consideration
Applying these principles, in my opinion, Mr and Mrs Pearsall are entitled to advance the claims that they do on behalf of the Corporate Plaintiffs. Each, however, must indemnify those of the Corporate Plaintiffs on behalf of whom they advance the claims (Mrs Pearsall, in the case of the third and fifth plaintiffs and Mr Pearsall in the case of the fourth and sixth plaintiffs). The only question is whether Mr and Mrs Pearsall should be required to provide security for any indemnities they give.
The plaintiffs submit that Mr and Mrs Pearsall are entitled to advance at least some of the claims they do on behalf of the Corporate Plaintiffs on the basis that they are creditors of the third, fourth and fifth plaintiffs and consequently are entitled to advance some of the claims under s 418A of the CA. No indemnity or security is required in that case.
In my opinion, that submission is misconceived. Under s 418A, Mr and Mrs Pearsall have standing themselves to seek a declaration concerning the validity of the appointment of the receivers. There is no reason to join the Corporate Plaintiffs as plaintiffs to advance that claim and there is no basis for construing s 418A as impliedly authorising Mr and Mrs Pearsall to join the Corporate Plaintiffs as plaintiffs for that purpose. Moreover, many of the claims go beyond seeking a declaration concerning the validity of the appointment of the Receivers on specific grounds. That includes the relief sought under the ASIC Act. Those claims are not authorised by s 418A.
Section 236 of the CA has no application since no leave has been sought or granted.
Accordingly, the Corporate Plaintiffs may only be joined by Mr and Mrs Pearsall in accordance with the principles stated in Deangrove.
The plaintiffs submit that, in accordance with those principles, the Court has a discretion whether to require directors (or former directors) to give an indemnity. I do not accept that submission. The plaintiffs do not point to any case where a court has not required the directors to give an indemnity. The requirement is not stated in discretionary terms by Sackville J in Deangrove and the purpose of the requirement - to prevent the value of the security-holder's security being diminished by legal costs incurred by the company in challenging the exercise of the security - counts against the requirement being discretionary.
The remaining question is whether Mr and Mrs Pearsall should be required to provide security for the indemnities they are required to give.
In the particular circumstances of this case, I have concluded that they should not be required to give security. Mr and Mrs Pearsall have not led any evidence concerning their financial position and their ability to make good on any indemnity that they give. I accept that in the normal course of events that provides a strong discretionary ground for requiring security to be given. However, the purpose of the security is to protect the security-holder against a diminution in the value of its security. It is not to improve the security-holder's position.
The indemnity is designed to protect the security-holder in two ways. Primarily, it is designed to protect the security-holder against a diminution in the value of the company's assets by the expenditure of money in bringing the legal proceedings. There appears to be little risk of that happening in this case. Mr and Mrs Pearsall are also plaintiffs in the proceedings, and it might be inferred that they, not the Corporate Plaintiffs, are funding them. An indemnity in favour of the Corporate Plaintiffs in respect of those legal costs will make the position clear. In any event, it is not suggested that Mr and Mrs Pearsall should be required to provide security in respect of those costs.
Secondly, the indemnity is designed to protect the security-holder in respect of costs orders against the company (in favour of the security-holder). In those cases, the indemnity may be important where the security-holder has sufficient security to satisfy the amount it is owed but insufficient security in respect of any costs order in its favour (which is also likely to be the subject of the security it holds). The result in that case is that, absent an indemnity, the security-holder would go from a position of being fully secured to a position of being partially secured. And, if the plaintiff giving the indemnity could not make good on the indemnity, that position would obtain absent security.
However, in this case, the evidence is that NAB obtained security over all the Corporate Plaintiffs' property and that security is insufficient to discharge the secured debt. As a result, there can be no question of the security being diminished by a costs order. It will be exhausted by enforcement of the secured debt in any event. Consequently, there can be no question of the indemnity protecting NAB as a security-holder.
Of course, in the normal course of events NAB may be entitled to an order for security for costs against the Corporate Plaintiffs. The existence of indemnities and the ability of Mr and Mrs Pearsall to make good on those indemnities would be relevant to the question whether security should be ordered. However, it is for the defendants to make an application for security. And any such application would raise the normal questions relevant to a security for costs application. One such question is whether it is appropriate to order security against the Corporate Plaintiffs in circumstances where Mr and Mrs Pearsall (against whom security would not be ordered) are also plaintiffs in the proceedings and bring claims in substantially the same terms as those brought by the Corporate Plaintiffs.
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Conclusion and orders
NAB and the Receivers have succeeded in their contention that Mr and Mrs Pearsall must provide indemnities to the Corporate Plaintiffs. They have been unsuccessful in their contention that Mr and Mrs Pearsall must provide security for their indemnities. Moreover, it would be premature to stay the proceedings before giving Mr and Mrs Pearsall an opportunity to provide indemnities. In those circumstances, provided indemnities are given there should be no order for costs of the motion.
Accordingly, the orders of the Court are:
1. Stand the further amended notice of motion over to 5 December 2024, with the intention that it be dismissed if the first and second plaintiffs agree to indemnify the third to sixth plaintiffs in respect of their costs of the proceedings on terms that are acceptable to the defendants or to the Court;
2. Reserve the question of costs.
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Decision last updated: 27 November 2024