Pennant Hills Estates 88 Pty Ltd (Receivers and Managers Appointed) (In Liquidation) v Windsor Star Pty Ltd

JUDGMENT

1. By a Summons filed on 19 June 2023 the plaintiff (Pennant Hills) seeks, by way of interlocutory relief, orders pursuant to s 74K(2) of the Real Property Act 1900 (NSW) (Act) extending the operation of two caveats lodged by it over land owned by the first defendant (Windsor Star) and the second defendant (BNB 88) on 8 May 2023. It seeks the extension of the caveats until the date that is 21 days after the plaintiff's winding up application against the first and second defendants in Federal Court proceedings set down for hearing in September 2023 is granted or dismissed, or earlier order of this Court.
2. Windsor Star and BNB 88 served lapsing notices in respect of the caveats under s 74J of the Act on 5 June 2023 and accordingly unless the plaintiff obtains the orders sought to extend the caveats under s 74K(2) of the Act, they will lapse on 26 June 2023.
3. The final relief sought in the Summons includes declarations that the first and second defendants hold the entirety of their interest in the land the subject of each caveat on constructive trust for, or subject to a charge in favour of, the plaintiff. In addition, relief is sought against the other defendants who are related parties of the first and second defendants. None of this final relief is in issue in the present application.

Interest claimed in the caveats

1. The land to which the caveats relate can be referred to as Lot 1 (Windsor Star) and Lot 2 (BNB 88). Each caveat describes the interest claimed in the same terms, as follows. ESTATE OR INTEREST CLAIMED Estate in Fee Simple By virtue of: Beneficial Interest In Trust Dated: 15/06/2016 Details Supporting The Claim: as an equitable part owner on the grounds that the registered owner holds the title as constructive trustee and/or resulting trustee for the Caveator on grounds including the first and/or limb of the rule in Barnes v Addy (1874) LR 9 CH Ap 244.

Factual background

1. Pennant Hills, Windsor Star and BNB 88 (together with the other defendants in respect of which final relief is sought in the Summons) are members of the Dyldam Group of Companies. Pennant Hills was placed into voluntary administration on 13 July 2020, receivers and managers were appointed on 30 March 2021 and it was placed into liquidation on 31 March 2021.
2. In March 2016, Pennant Hills, Golden Carlingford Pty Ltd (Golden Carlingford) and Rainbow Carlingford One Pty Ltd (Rainbow Carlingford), all members of the Dyldam Group, entered into a secured facility for the borrowing of $30 million from Mission Sino Limited (Mission Sino), a company incorporated in the British Virgin Islands. The facility agreement describes the purpose of the facility as being to assist the borrowers with the financing of the costs of carrying on and completing a project to redevelop land at Pennant Hills, Sydney. The borrowers granted security by a general security agreement, specific security agreement and real property mortgage. None of these securities are in evidence. On 24 March 2016, Pennant Hills, Golden Carlingford and Rainbow Carlingford drew down $30,420,750 under the facility.
3. In May 2018, Rainbow Carlingford entered into a loan facility agreement with Banner Capital Management for a loan of a further $40 million and granted security by a general security deed. Pennant Hills was a guarantor of that facility.
4. The original development approval was for the construction of five apartment buildings of 9-11 storeys comprising 450 residential units with associated parking, although consideration was being given in late 2019 to seeking an amendment to the development approval to increase the number of residential units to 1,100 if development, funding, construction and market risks could be managed.
5. The Administrators' Report to Creditors dated 9 August 2020 indicates that Pennant Hills was insolvent on 27 February 2019 when Rainbow Carlingford was placed into liquidation.
6. The amount owing by Pennant Hills to secured creditors is approximately $68.49 million comprising an amount of $7.93 million owing to Mission Sino and an amount of $60.55 million owing to PT Limited (which is the security trustee under the loan facility from Banner Capital Management for which Pennant Hills has given a guarantee and associated security).
7. The Administrators' Report states that the Administrators understand that the reason for the failure of Pennant Hills is the placing of Rainbow Carlingford into liquidation on 27 February 2019 which resulted in a default event under the securities given by Pennant Hills in respect of the Pennant Hills development causing the entire amount of those facilities to become due and payable.
8. The particular transaction relevant to the two caveats occurred in June 2016. On 15 June 2016 Celex Pty Ltd (Celex), also a member of the Dyldam Group, transferred an amount of $5 million into Pennant Hills' account with Westpac Banking Corporation. On the same day, Pennant Hills withdrew the sum of $5 million from that account which it dispersed as follows. 1. $2 million to BNB; 2. $2.5 million to Windsor Star; 3. $500,000 to Windsor Entertainment Pty Ltd.
9. The general ledger accounting records of Pennant Hills described the receipt from Celex and the payments to the three companies identified above as "loans". The three "loans" to BNB, Windsor Star and Windsor Entertainment Pty Ltd are referred to collectively as "Loan to Bull & Bush" which appears to be a reference to the Bull & Bush Hotel which operates from premises located on Lot 1 and Lot 2. By transfers registered on 26 August 2016, Windsor Star became the registered proprietor of Lot 1 and BNB 88 became the registered proprietor of Lot 2. The balance sheet for Pennant Hills for the year ended 30 June 2016 records that the company had net assets of $3,070,961. Of relevance to the present matter are the following items. 1. Non-current assets are stated as $35,794,060 including amounts described as "loans" to BNB 88 ($2 million), Windsor Star ($2.5 million), Windsor Entertainment Pty Ltd ($500,000) and Celex ($25.1 million). 2. Non-current liabilities are shown as being $30,421,450 including an amount of $30,420,750 owing to Beijing Capital Pty Ltd (which is a reference to the amount drawn down under the $30 million facility provided by Mission Sino).
10. It appears that the "loans" to BNB 88 and Windsor Star were not documented, were not interest bearing and no security was provided. At the time the loans were made the sole director of Pennant Hills was Sultaney Khattar and the directors of Windsor Star and BNB 88 were Joseph Khattar and Sam Fayed. Sultaney Khattar and Joseph Khattar are siblings and Joseph was the brother-in-law of Sam Fayad. The evidence does not disclose who the shareholders of the company were, and their relationship, at the relevant time.
11. The Administrators have not been able to identify any benefit to Pennant Hills from making the loans to Windsor Star and BNB 88.
12. These proceedings are brought on behalf of Pennant Hills by Mr Joseph Hansell and Mr John Park who were appointed as receivers and managers to all the present and after acquired property of Pennant Hills by Mission Sino on 30 March 2021. Following their appointment, they received from the liquidators of the company its balance sheet as at 30 June 2020 which showed that the assets of Pennant Hills included loans to Windsor Star of $2,500,000 and to BNB 88 of $2,108,000. Following this, on 3 May 2021 the receivers issued demands on behalf of Pennant Hills to Windsor Star and BNB 88 for repayment of the loans and, following no response being received, the receivers issued statutory demands on behalf of Pennant Hills to those companies for the unpaid loans on 21 May 2021. In June 2021, Windsor Star and BNB 88 commenced proceedings in the Federal Court seeking to have the statutory demands set aside. These proceedings were discontinued by Windsor Star and BNB 88 on 26 September 2022 with the consent of Pennant Hills.
13. On 23 December 2022, Pennant Hills commenced proceedings in the Federal Court seeking the winding up of Windsor Star and BNB 88, which is set down for hearing commencing on 25 September 2023. In those proceedings, Pennant Hills is contending that the loans to Windsor Star and BNB 88 referred to in the previous paragraph are presently payable in accordance with the statutory demands.
14. In March 2023 there was a refinancing of the indebtedness of Windsor Star and BNB 88 involving two new loan facilities being entered into. Evidence was given for the first and second defendants by Ms Chahida Khattar who is the sole director and secretary of both companies. She is also the sole director and secretary and shareholder of Landlock Pty Ltd. She gave evidence in her affidavit of the two loan facilities entered into in March 2023. The first is a loan agreement for a facility from a number of lenders (unrelated to the borrowers) under which a first mortgage has been given by Windsor Star and BNB 88 over Lot 1 and Lot 2 to Calow Nominees Pty Ltd (Calow) acting as security trustee for the lenders, with a total commitment of $32,617,896. This facility is fully drawn. The second is a loan facility with a total commitment of $17 million entered into with Landlock Pty Ltd which is secured by a second mortgage given by Windsor Star and BNB 88 over Lot 1 and Lot 2. Windsor Star and BNB 88 have drawn down $13 million under this facility and can use the remaining undrawn commitment of $4 million to meet their expenses. Ms Khattar says in her affidavit that the lodgement of the caveats by the plaintiff constitutes an event of default under the Calow facility. She calculates the default interest rate under the Calow facility, following an event of default, to be $33,101.20 per week and estimates that the total default interest under the facility for 15 weeks to be $496,518.00. 15 weeks is the period proposed by the plaintiff as the period by which each caveat is to be extended.
15. It was not in dispute that the lodgement of the caveats is an event of default under the Calow facility. It represents a breach of cl 6.1(b) of the Memorandum of Mortgage read with the definition of "Encumbrance" in cl 1. It is true as pointed out by the plaintiff that the caveatable interest, if it exists, will also be an Encumbrance. However, what is also significant for present purposes is that the mere lodgement of the caveat even if ultimately no caveatable interest is established is an event of default.

Applicable principles

1. The relevant principles to be applied are not in dispute. The matter is to be approached by asking whether an interlocutory injunction would be granted to protect the interest claimed in the caveat, which in turn raises two questions (on both of which the caveator bears the onus): first, whether there is a serious question to be tried concerning the interest claimed in the property that is sought to be protected by the caveat, and second whether the balance of convenience is in favour of maintaining the caveat: Hanson Construction Materials Pty Ltd v Roberts (2016) 93 NSWLR 1; [2016] NSWCA 240 at [77]; Abraham v Abraham [2012] NSWSC 254 at [8].

Serious question to be tried

1. The receivers contend that the transfer of funds from Pennant Hills to Windsor Star and BNB 88 conferred no corporate benefit on Pennant Hills and consequently involves a clear case of breach of fiduciary duty by the sole director at the time of the transfer (Ms Sultaney Khattar). This is because if they were truly loans, they were not documented, no security was given for them and no interest was payable: cf. Hancock Family Memorial Foundation Ltd v Porteous (2000) 22 WAR 198; [2000] WASCA 29 at [83]. It is then said that once it is accepted that there is a breach of fiduciary duty (or at least a reasonably arguable breach of fiduciary duty), that Windsor Star and BNB 88 have received funds as a result of that breach, it is clear that Pennant Hills has a good claim that those funds were held by Windsor Star and BNB 88 on constructive trust for Pennant Hills pursuant to either the first or second limb of Barnes v Addy (1874) LR 9 Ch App 244 and that proprietary interest in the funds can be traced through to Windsor Star's interest in Lot 1 and BNB 88's interest in Lot 2, so that those interests are also held on trust for Pennant Hills. An alternative argument is put that if the transfer of funds was not by way of a loan, then it constitutes a contribution of funds to the purchase of Lot 1 and Lot 2 giving rise to a resulting trust in favour of Pennant Hills over Lot 1 and Lot 2 in proportion to its contribution to the purchase of those Lots.
2. For these reasons the plaintiff contends that the interest claimed in the caveat has or may have substance for the purposes of s 74K(2) of the Act.
3. The first and second defendants contend that the asserted claim to a caveatable interest is, at best, manifestly weak. They contend that as the two loans were repayable on demand time begins to run for the purposes of ss 14 and 63 of the Limitation Act 1969 (NSW) when the loans were made so that they were extinguished on 15 June 2022 by operation of those provisions. On the basis of the evidence before the Court, it is not clear that the loans were repayable on demand. First, the affidavit of Fayad Fayad (a director of BNB 88 from 2017 to 2022) of 9 June 2021 filed in the statutory demand proceedings states that advances made by Pennant Hills to Windsor Star and BNB 88 were made on the basis that the loan was repayable from any surplus funds on successful completion of the development of Lots 1 and 2. At the very least, this is contrary to the proposition that the loans were repayable on demand. Second, the balance sheet for Pennant Hills categorises the two loans as "non-current assets" which suggests that they were not expected to be repaid within 12 months. Hence, there will be a contested question of fact as to whether, if the transfer of funds was by way of loan, the debt was not immediately due and payable so that time does not begin to run at the date the loan was made: G E Dal Pont, Law of Limitation (2nd ed, 2021, LexisNexis) at [5.26]-[5.31].
4. The first and second defendants also contend that Pennant Hills cannot bring a proprietary claim against Windsor Star and BNB 88 because the loan transaction is at best voidable for breach of fiduciary duty and rescission of the transaction is essential before a proprietary remedy can be claimed: Grimaldi v Chameleon Mining NL (2012) 200 FCR 296; [2012] FCAFC 6 at [254] and [271]-[281]. It is pointed out that Pennant Hills has not rescinded the loan transaction, and indeed is pursuing the winding up application in the Federal Court on the basis that the loans are still on foot. Given that the caveatable interest needs to exist at the time the caveat is lodged, this is a fundamental difficulty for the plaintiff because whether there is an arguable case for the caveatable interest can only arise for consideration upon the condition precedent being satisfied, which has not occurred.
5. In my view there is force in this second submission. It was submitted for the plaintiff that the Full Court in Grimaldi notes at [281] that a review of the rescission requirement in this context may need to occur, but as things presently stand, I am bound by the authorities which hold that rescission is a precondition to claiming proprietary relief.
6. Nevertheless, I accept that the plaintiff has an arguable case for a proprietary interest in the land on the basis that the transaction may not, in fact, be a loan but rather a contribution to the purchase price of Lots 1 and 2, giving rise to a resulting trust. However, this will need to overcome the characterisation of the transaction in the business records of the plaintiff as a loan. Accordingly, on the basis of the evidence on this interlocutory application, in my view there is real doubt that the plaintiff had a caveatable interest when each caveat was registered.

Balance of convenience

1. The plaintiff submitted that the balance of convenience favours the continuation of the operation of the caveats. It said that it will suffer prejudice should the caveats not be extended. The only prejudice identified is that, without caveats in place to protect Pennant Hills' interest in Lots 1 and 2, further encumbrances or other dealings could be registered on title which may result in a loss of priority to Pennant Hills. That concern has been amplified by the fact that Windsor Star and BNB 88 have granted registered second mortgages over Lot 1 and Lot 2 to another company within the Dyldam Group, Landlock Pty Ltd, and there is a risk of further encumbrances being granted over the property.
2. The plaintiff submitted that the only prejudice for Windsor Star and BNB 88 is the potential exposure to default interest charged by the first ranking mortgagee, Calow, and that prejudice is limited in this case because Pennant Hills only seeks to extend the caveat until determination of the Federal Court winding up proceedings. To deal with potential prejudice of default interest under the Calow facility, the plaintiff offered the usual undertaking as to damages both for itself and Mission Sino and in addition undertook to cause $500,000 to be paid into Court as security for the undertaking within 14 days (and if that does not occur, the orders extending the caveats would be vacated).
3. The first and second defendants submit that the receivers cannot give an adequate undertaking as to damages because Pennant Hills is in liquidation and is hopelessly insolvent and there is no evidence to indicate the financial capacity of Mission Sino to meet any undertaking as to damages. They submit that the undertaking to pay $500,000 into Court within 14 days is still inadequate because it does not deal with the full nature of the prejudice which is that the registration of the caveat is an event of default under the first mortgage. On an event of default occurring the lenders can by notice determine that the secured money is immediately due for payment and exercise their power of sale and, further, the interest under the facility will increase to the default rate. The prejudice to the first and second defendants is that the lenders under the Calow facility can potentially exercise their power of sale for default in circumstances where ultimately it is found at final hearing that no caveatable interest exists. The proposed undertaking (and security) did not deal with this potential prejudice.
4. The first and second defendants also say that this prejudice has come about because the plaintiff has delayed in asserting its proprietary claim. The facts upon which it relies to support the caveat have been known to it since 2021 (see [16] above). In the interim, the Calow facility was entered into in March 2023. The consequences of the delay are twofold. First, the first and second defendants are now exposed to the potential enforcement of the Calow facility from breach of the loan covenants. Secondly, the total amount of the secured loans obtained in March 2023 of approximately $43 million raises an issue as to whether the interest sought to be protected by the caveats has value or substantial value having regard to the claims of the registered mortgagees.
5. In my opinion, three matters are particularly significant in weighing the balance of convenience in the present matter. First, the strength or weakness of the caveator's claim is a relevant matter, in particular whether there is a real doubt whether the interest claimed by the caveator is valid and enforceable: Hanson Construction at [79]. In my opinion, there is real doubt. Secondly, there is a risk that the lenders under the Calow facility will exercise their powers following the event of default, including the power of sale which is not properly addressed by the proposed undertaking by the plaintiff. It cannot be determined how real that risk is, on the evidence on this application, but it cannot be discounted. Thirdly, delay on the part of the caveator is a relevant matter: see Xcel Rural Properties Pty Ltd v South Creek Dairy Pty Ltd [2002] NSWSC 139; 10 BPR 19,607 at [65]-[69]; Capgemeni US LLC v Case [2004] NSWSC 674 at [40]. It is clear in the present case that the delay on the part of the plaintiff has been very significant and this delay has contributed to the registration of the two mortgages without notice of the plaintiff's asserted interest. Those mortgages will take priority over the interest, if any, of the plaintiff which is sought to be protected by the caveats due to its delay: B Edgeworth, Butt's Land Law, (7th ed, 2017, Thomson Reuters) at [12.960]. However, the prejudice to the first and second defendants arises by reason of that delay which gives to the lenders under the Calow facility rights to enforce their security merely by reason of the registration by the plaintiff of the caveats.
6. Taking all of the circumstances into account I have come to the conclusion that the risk of injustice to the first and second defendants if the caveats are extended exceeds the risk of injustice to the plaintiff if the caveats are not extended.
7. For the above reasons, the plaintiff's application under s 74K(2) of the Act to extend the operation of the plaintiff's caveats should be dismissed. The costs of the application for interlocutory relief are costs in the cause.

Amendments 23 June 2023 - Amendment to [29] DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 23 June 2023