I should also note "7.13 If in the opinion of the Lender there is a material adverse change in the financial condition of the Borrower".
35 By clause 8, the lender was empowered, at any time after default, to cancel the facility and require payment of the debt (defined as the sum of all advances together with interest calculated under the instrument).
36 Deeds of guarantee and indemnity in respect of each of the two loans were entered into by Masri Apartments and others on 17 September 2003. Under clause 3 of those deeds, Masri Apartments guaranteed payment of the "guaranteed sums" (broadly defined, in clause 5, to include all amounts owing and payable by AUS Constructions to the lender) "when they are due", and it undertook to pay the guaranteed sums to the lender "on demand if they are not paid by [AUS Constructions]".
37 Two mortgages were executed on 17 September 2003 to secure the loans, and were subsequently registered. They are in identical terms, so far as relevant to this case, except that they apply to the two different loans.
38 Each mortgage contained covenants by Masri Apartments as mortgagor to pay the secured money on demand by the mortgagee unless otherwise agreed in writing (clause 2), "secured money" being defined to include money owing under the guarantee in respect of the loan to AUS Constructions as debtor. Clause 14 provided that if anyone lodges a caveat against the property, the mortgagor must do everything it can and everything the mortgagee requires to remove the caveat. Clause 16.1 defined events of default to include
"(2) if default occurs under any Agreement, this Mortgage or a Collateral Security;"
"(11) if the Mortgagor or, where the Mortgagor is a corporation, a Related Entity of the Mortgagor creates or purports to create, assumes or permits any Encumbrance over any of its assets without the Mortgagee's prior written consent;" ["Encumbrance" is defined in to include a caveat]
"(17) if there is a material, adverse change to the Mortgagor's or the Debtor's assets, financial position or business that, in the Mortgagee's reasonable opinion, might affect the ability of the Mortgagor or the Debtor to comply with its obligations under the Mortgage or a Collateral Security."
39 By clause 17.1 the mortgagee's powers, if an event of default occurs, include the power to demand the immediate payment of the secured money.
40 On 3 March 2004 MFS posted "notices of termination and demand to borrower" to AUS Constructions in respect of each of the two loans, and notices of demand to guarantor and notices under s 57(2)(b) of the Real Property Act 1900 (NSW to Masri Apartments, also in respect of each of the two loans. Although that correspondence was directed to the "old" registered offices, like the subsequent statutory demands, the notices were in fact received by the companies, receipt being acknowledged by their solicitor in a letter dated 26 March 2004, which asked for time to complete a refinancing.
41 As previously noted, statutory demands were posted to the companies at their old registered offices, with covering letters, on 10 March 2004. The amount claimed against AUS Constructions as borrower and Masri Apartments as guarantor was $2,820,628.90. According to the statutory demands, this is the amount of the advance so far made, together with interest and a default fee. The defendant companies do not deny that a substantial advance has been made, and has been used for the purpose of acquiring the Liverpool property. They have not made submissions challenging the calculation of the amount demanded.
42 The principal dispute between the parties relates to whether there has been any default entitling Perpetual to demand repayment of the full amount owing. Perpetual has commenced an action for recovery of possession in the Common Law Division Possession List of this court. The position of the defendants can be conveniently identified by considering their defence to Perpetual's statement of claim. Perpetual relies on three events of default, each of which is denied by the defendants.
The requirement for complying contracts
43 Perpetual claims that the defendants defaulted by failing to provide Perpetual with certified copies of at least 15 complying contracts within the required time limit, which expired on 23 December 2003. The defendants say that the parties agreed in October 2003 to vary the provisions of the loan agreements by requiring only 10 complying contracts. Perpetual denies that the discussions that took place about reducing the required number of complying contracts ever led to a concluded agreement.
44 According to Mr Masri's affidavit, he had discussions with Robert Collins on behalf of MFS Premium Income Fund as a result of which, by 3 October 2003 Mr Collins told him that the lender would accept a reduction to 10 complying contracts, and Mr Masri agreed. Mr Masri says that by the second week in December, 11 complying contracts had been made.
45 Affidavit evidence was given on behalf of the defendants by John Khall, the general manner manager Pacific Mortgage Group Pty Ltd. He participated in discussions between representatives of the defendants and of the MFS group in August 2003, before the loan documentation was signed. He gave evidence that Mr Collins, representing the MFS Group, told Mr DeBono in about mid-August 2003 that he was "confident" that the number of complying contracts would be reduced at a later time, and he urged the defendants to sign the documents. This evidence does not entirely support the defendants' case. Mr Khall's evidence implies that the defendants were well aware that the loan documentation, which they subsequently signed, contained a condition requiring 15 complying contracts. His evidence indicates that Mr DeBono understood the distinction between what would be legally binding under the documentation, and what Mr Collins would be prepared to recommend to the decision-makers of the lender as a subsequent variation.
46 Mr Khall gave evidence of a telephone conversation he had with Mr Collins on 12 January 2004. He said that Mr Collins told him the lender had reduced the number of complying contracts to 11. The conversation was not directly denied by Mr Collins in his affidavit, but Mr Collins' evidence about the decisions of the MFS Credit Committee implies that he would deny making any such categorical statement. In any case, Mr Khall's evidence of the conversation signifies nothing more than a belief on the part of Mr Collins, which proved to be incorrect, about what the Credit Committee decided.
47 The defendants have put into evidence a series of e-mails over the period from October 2003 to January 2004 which, they say, confirm that an agreement was reached to reduce the number of complying contracts from 15 to 10. The e-mails before late November are unhelpful, even though it is alleged that the variation was agreed in October. Beginning on 25 November, there is a string of e-mails between Mr DeBono and Mr Collins, the gist of which is that Mr DeBono was pressing Mr Collins to permit a construction drawdown on the finance facility, and Mr Collins asked for and received a price list for the units. On 19 December Mr DiBono send an e-mail to Mr Collins confirming that contracts had been exchanged for six units, and he was expecting contracts for a further five or six units to be exchanged that day; and he inquired again about the timing of the first construction drawdown. There is no record of any reply.
48 Then there are some e-mails in January 2004 between Mr DeBono and Rachel Werner, of the MFS group. From those e-mails it appears that Ms Werner asked for and received copies of the 11 complying contracts, and put them to the lender's solicitors to confirm that they were satisfactory. On 19 January Ms Werner wrote an e-mail saying that the contracts appeared to be "fine", although confirmation was required with respect of the payment of deposits. On 20 January 2004 the defendants' solicitors wrote a letter setting out confirmation of payment of deposits in respect of the 11 contracts. Mr DeBono continued pressing for the first construction drawdown, and eventually there was an exchange of e-mails in which he provided banking details so that the money could be paid into an AUS Constructions account.
49 The e-mail correspondence before January 2004 seems to me ambiguous as to whether there was any agreement to reduce the requirement for complying contracts from 15 to 10 or 11. The e-mails between Mr DiBono and Ms Werner in January 2004 seem to me to show that Ms Werner was proceeding on the basis that 11 complying contracts would be acceptable to the lender. Even so, the e-mails would be as consistent with the interpretation that the lender had not finally made a commitment to accept 11 complying contracts, as to the interpretation that a committed arrangement had been made.
50 The financing unravelled when, on 2 February 2004, Mr Collins wrote to AUS Constructions attaching amended terms of offer regarding the loan facilities, which proposed to reduce the requirement for complying contracts to 11, to prescribe a requirement for a further 11 complying contracts by 31 July 2004, to impose an "exit fee" of $500,000, and also (in the event that the additional 11 complying contracts were not achieved by 31 July) to impose a risk participation fee of $500,000. The defendants were not prepared to accept the revised offer and subsequently, the loan was placed in default.
51 In his affidavit Mr Collins denied ever having told Mr DeBono or Mr Masri that the lender had agreed to reduce the number of complying contracts from 15 to 10 or 11. He said he did not have the authority to do so, and that the authority to make such a decision rested with the MFS Credit Committee, of which he was not a member. He said that he referred the request for a reduction in the number of complying contracts to the MFS Credit Committee, and in late November 2003 the Committee told him they were prepared to allow AUS Constructions an extension of one month to reach the required number. That meant that the relevant date for compliance became 23 December 2003. Mr Collins said that AUS Constructions did not satisfy the requirements of the loan agreements by 23 December, and in January 2004 the defendants again sought a reduction in the number of complying contracts, and he again referred the request to the MFS Credit Committee. He said that his facsimile of 2 February 2004, offering amended terms including an exit fee and a risk participation fee, reflected the Committee's decision.
52 Mr Collins' evidence is consistent with the series of e-mails and fills in some gaps, by identifying Credit Committee decisions at relevant times. Neither Mr Collins to Mr Masri was cross-examined. It is difficult to reach a firm conclusion on the rather scanty evidence. My view, however, is that it is implausible that a senior lending manager of a lender would have firmly committed to an alteration of terms expressly reflected in the loan documentation that had been approved by the lender, and on the other hand plausible that such a person would have told the borrower that he would recommend an amendment to the relevant decision-making authority. It is plausible, also, that the borrowers, under great pressure to move the project forward, would have attributed too much significance to the lending manager's support for the amendment, and would even have convinced themselves that the lending manager's support was tantamount to agreement on the part of the lender.
53 If it were necessary for me to make a decision on the balance of probabilities, I would conclude from the evidence as a whole that there was no agreement between the defendants and the lender to reduce the number of complying contracts required under the loan agreements from 15 to 10 or 11.
Lodgement of caveats
54 In its statement of claim in the Possession List proceeding, Perpetual contends that caveats were lodged against the Liverpool land on 2 and 6 February 2004, in breach of the loan agreements, and that Masri Apartments has failed to do everything it could to remove the caveats, in breach of the mortgages. In their defence, the defendants admit that two caveats were lodged against the property. They say that the caveators did not have caveatable interests. They say that the first caveat was withdrawn immediately upon it being challenged. They say that the second caveat was lodged by Perpetual's finance broker as a result of Perpetual failing to pay the broker's fees from the loan, and the broker had no caveatable interest.
Material adverse change
55 In its statement of claim Perpetual contends that the caveats and any interests they claim in the land, constitute a material adverse change in Masri Developments Apartments' assets, financial position or business that, in Perpetual's reasonable opinion, affects the ability of Masri Apartments to comply with its obligations under the mortgages. The defendants deny this claim, presumably on the basis that the caveats do not disclose caveatable interests and are not sustainable.
Disputed debts
56 As I have said, in the unusual circumstances of this case it is permissible for the defendants to raise at the hearing of the winding up application matters which, in other cases, could only be raised in an application to set aside a statutory demand. They are therefore able to contend that there is a genuine dispute as to whether the amount claimed in the two statutory demands is due and payable. It is not necessary for the defendants to prove that the amount claimed by Perpetual is in fact due and payable, since there is a broad general principle that a winding up order will not, as a matter of discretion, been made on a debt which is bona fide disputed, provided that the dispute is based on some substantial ground: A Keay, McPherson's Law of Company Liquidation (4th edition, 1999), citing Mann v Goldstein [1968] 1 WLR 1091.
57 In Mann v Goldstein, Ungoed-Thomas J observed (at 1098) that "the winding-up jurisdiction is not for the purpose of deciding a disputed debt (that is, disputed on substantial and not insubstantial grounds) since, until the creditor is established as a creditor he is it not entitled to present the petition and has no locus standi". He added (at 1099) that "to invoke the winding-up jurisdiction when the debt is disputed (that is on substantial grounds) or after it has become clear that it is so disputed is an abuse of the process of the court."
58 In the present case, although it seems to me unlikely, on the balance of probabilities, that the court would find that there was any variation of the loan agreements with respect to the number of complying contracts that were required, I can see from the evidence that there is a ground for concluding that there is a genuine dispute between the parties on that matter. Applying the approach described by Ungoed-Thomas J, I should not resolve that issue. Therefore, to the extent that Perpetual relies on the defendants' failure to provide 15 complying contracts within the requisite period, I should not proceed on the basis that Perpetual was right to do so.
59 But Perpetual relies on two other events of default. The lodgement of each of the two caveats, without the lender's consent, was itself an event of default under clause 7.18 of the loan agreements, entitling the lender to require the borrower and the guarantor to pay all advances and interest. It seems to me plain beyond argument, from the language of clause 7, that it is the very lodgement or "registration" of the caveat that gives rise to the default, regardless of whether the caveat might be open to removal or other challenge. That construction is hardly surprising, since a commercial lender is likely to be more concerned about the fact that there is a caveat on the title to the secured property than that the caveat might at some future time, perhaps after litigation, be removed. To the extent that Perpetual relies upon lodgement of the caveats as a default entitling it to require payment of all advances and interest, I cannot see that there is any substantial basis for disputing its claim.
60 I am not able to reach the same conclusion with respect to the "material adverse change" ground under the mortgages. Clause 16.1(17) of the mortgages seems to require that the mortgagee form a reasonable opinion that there has been a real change in the assets, financial position or business of the mortgagor. The mere fact that caveats have been lodged would not, in my opinion, form a reasonable basis for the mortgagee to form this opinion, without some inquiry as to whether the caveats were sustainable.
61 My conclusion is that the amount claimed by Perpetual in the two statutory demands is an amount which cannot be disputed on any substantial ground, having regard to the effect of lodgement of the two caveats under the terms of the loan agreements. No challenge has been made to the calculation of the amounts in the statutory demands. Taking into account Perpetual's claim, the conclusion that the defendant companies are insolvent becomes irresistible. But as I have said, I would have reached that conclusion even if Perpetual's claim were disregarded.
Discretion
62 Mr Wily's reports referred to a proposal received by the directors of the companies for a deed of company arrangement. Under the proposed deed, the directors would fund the legal costs of obtaining an opinion on whether there may be a claim against the secured creditor in relation to the damage that the companies may have suffered due to alleged changes made to the funding agreement during the course of the funding. Under the deed proposal, funding would be provided for litigation if the legal advice was that there was a sustainable claim against the secured creditor. The proceeds of any recovery would be made available for the benefit of the companies' creditors. In his reports, Mr Wily expressed the opinion that it would not be in the creditors' interests for the company to be wound up, and that it would be in the interests of the creditors for the companies to execute deeds of company arrangement as proposed.
63 In my opinion orders should be made for the winding up of the two companies, notwithstanding Mr Wily's opinion. Liquidation will not prevent the companies from obtaining legal advice, and then pursuing any claims they may have against Perpetual or the MFS Group, providing that funding can be obtained. If the directors are not prepared to fund the process, it will be open to the liquidator to seek other kinds of funding including, if there is a good enough prima facie case, litigation funding.
64 I am sceptical about the deed proposal. It does not identify the cause of action which is to be investigated. The nature and source of the funding for the litigation is not specified. Nor is it clear how the proceeds of litigation would be made available to the creditors. By any standard, the deed proposal is extremely and unsatisfactorily vague. The directors have had ample time to put forward a more specific proposal, and every indication that they should do so, after my rejection of the s 440A application on 7 June. I do not see any adequate discretionary basis for declining to make winding up orders.
The just and equitable ground
65 Although Perpetual relied, in final submissions, on this ground as well as the insolvency ground, it seems to me that the arguments advanced related to the discretionary considerations that arise once the insolvency ground is established, rather than to the separate just and equitable ground. In my opinion the facts would not support the making of an order on the just and equitable ground, if the insolvency ground were not available.
Conclusions
66 I am persuaded by the evidence that the two companies are clearly insolvent, and therefore that I should make orders winding them up on the ground of insolvency.
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