Spendright v Classfact [2009] NSWSC 317 | Case summary

6192/08 Spendright Pty Ltd & 1 Or v Classfact Pty Ltd & 1 Or: Application of Pino Fiorentino, administrator of the second defendant JUDGMENT 1 HIS HONOUR: This application is urgent and complex. It is not made any easier by the absence of any formal written process by which the application is brought. Because of the urgency with which the problem has arisen, that is not a criticism. 2 The applicant is a company in administration. By an interlocutory process filed in proceedings 6192 of 2008 the administrators sought leave pursuant to s 442C(2)(c) of the Corporations Act 2001 (Cth) to dispose of a property owned by the applicant (which I will call "Gracelands") at 46 Tennyson Road, Mortlake pursuant to a contract of sale of land dated 30 March 2009. By that contract Gracelands agreed to sell and Kert Group Pty Limited agreed to buy the Tennyson Road property for $3.6 million. The contract also provides for the purchaser to pay what I am told is a sum of $148,000 for GST. 3 Clause 39.3 of the contract provides in its effect that if the purchase is not completed by 5 p.m. this afternoon, either party can rescind. Whilst the purchaser, who is represented before me, tells me that it wishes to complete the purchase this afternoon, its legal representative does not have instructions to give an undertaking that no notice of rescission will be given if the purchase is not completed this afternoon. Understandably, the administrator is anxious that the sale not be at risk. I am told, without dispute by those who are represented before me, that the sale price is somewhat in excess of a valuation and a marketing opinion given this year in relation to the property. 4 Section 442C prevents the administrator from disposing of the property without the written consent of chargees over the property unless leave of the Court is obtained, where the disposal is not in the ordinary course of the company's business, which this is not. 5 I am told that there are two mortgagees of the property. The first mortgagee (which I will call "ING") has given its consent to the disposal of the property. The second mortgagee is Mr Buddy Bechara. He also holds a charge over the assets of Gracelands. I am told that the sale price was struck after a course of bidding between the administrators on the one hand and Mr Bechara and Mr Kertebani on the other. Mr Kertebani through his company has made the higher bid. At least initially it appears that Mr Bechara did not consent to the disposal of the property by the administrator. Hence the administrator's application brought on 1 April 2009 for leave under s 442C(2)(c). That application was disposed of by consent orders on 14 April 2009. Mr Bechara gave his written consent pursuant to s 442C(2)(b) in his capacity as mortgagee and chargee to the disposal of the property by Gracelands to the purchaser for the purchase price of $3.6 million with the special clauses in relation to the purchaser's obligation to discharge Graceland's liability for GST. The consent orders provided for the disposition of the net proceeds of sale after paying to ING the amount required by it to obtain a discharge in registrable form of its mortgage. It was noted in the consent orders that the administrators dispute the validity of Mr Bechara's mortgage and charge and the amount alleged by him to be owing to him by Gracelands and secured by those instruments. 6 I am told that prior to the consent orders being made, Mr Bechara, through his solicitor, sought confirmation that on settlement he would be provided with a discharge of a mortgage given by him and his wife to ING over a property at 40 Goodlet Street, Ashbury. That mortgage secures, or so it is contended, an obligation of Mr and Mrs Bechara to guarantee loans made by ING to a company called S & S Property Holdings Pty Limited. ING contends that Gracelands is also a guarantor of that liability and it requires that the debt owed or claimed to be owed to it by S & S Property Holdings Pty Limited be discharged from the proceeds of sale of Graceland's property at Tennyson Road, Mortlake. I am told that ING indicated that it would discharge the mortgage over the Ashbury property. It may well be, and I shall assume that it is the case, that Mr Bechara signed the consent orders to which I have referred on that assumption. 7 After the consent orders were signed the administrators, or their legal representatives, I understand, became concerned that a discharge of the mortgage over Ashbury might prejudice Graceland's rights against Mr Bechara. Gracelands contends that if it is liable under any guarantees given to ING it is entitled to contribution from Mr Bechara and Mrs Bechara who were also guarantors of the liabilities of S & S Property Holdings. Gracelands will contend that because the liability of S & S Property Holdings will have been discharged from assets provided by it, it is entitled to be subrogated to ING's Ashbury mortgage to the extent of its rights of contribution from Mr Bechara and Mrs Bechara. It is concerned that if the mortgage is discharged it may become unsecured, at least once the discharge of mortgage is registered. 8 In the urgency with which this application has been brought it is not possible to form any view as to whether Gracelands would be entitled so to be subrogated and, if so, whether that right might be lost on the mortgage being discharged. 9 The proposal which has been advanced by Gracelands and consented to by ING, but not as I understand it Mr Bechara or Mrs Bechara, is that the amount required to discharge the liability of S & S Property to ING be quarantined in a trust account of Gadens, solicitors, for ING, pending determination of the liability of Graceland's as an alleged guarantor and its asserted right to be subrogated to ING's mortgage to secure a right of contribution if it is so liable. 10 Although the lawyers for Mr and Mrs Bechara have been advised that this application would be made today, they have not appeared. Given the short notice, that is quite likely to be because Mr Bechara was unable to secure attendance today. 11 The Court has inherent jurisdiction to order judicial sale of Real Property Act land by analogy to the circumstances in which the power under s 103 of the Conveyancing Act 1919 (NSW) can be exercised in relation to old system land. The jurisdiction is reserved for special or exceptional cases (see generally New Beach Apartments v Epic Hotels Pty Limited & Ors [2007] NSWSC 474 and cases there cited). In the exercise of that jurisdiction the Court can direct a sale against the wishes of a second mortgagee whose debt would not be discharged from the proceeds of sale and can require a second mortgagee to discharge its mortgage. 12 I accept that the present is a special or exceptional case within these principles. The price is at least at market price and from what I am told, somewhat above the market price. But in any event, Mr Bechara has consented to the sale under s 442C and hence indicated that the sale itself is a proper one from his perspective. The present issue concerns the possible loss by Gracelands of security for its right of contribution if it is liable as a co-guarantor. 13 Because of the lateness with which that issue has arisen it is not possible for the parties' legal rights in relation to that question to be decided before the sale has to be completed. The proposals will not adversely affect any party's existing rights. All that will happen is that Mr Bechara will not, by withholding a discharge of mortgage, be able to secure an advantage to himself, or a possible advantage to himself, of converting whatever secured rights of contribution Gracelands might have to unsecured rights. 14 I, of course, express no view at all as to whether Gracelands would be entitled to security. But if it is entitled to security by way of subrogation it would be quite unfair for Mr Bechara to be put in a position where he could cause Gracelands to lose that right by withholding his signature to the discharge of mortgage and charge where he has consented to the sale. 15 It may be that no order is required under s 442C(2)(c) giving leave to the administrator to dispose of the property in the light of the consents which have been given. However, it is arguable that the consent of Mr Bechara has been withdrawn, and for abundant caution an order should be made under that section. Otherwise, orders should be made for the judicial sale of the property with directions being given for the discharge of Mr Bechara's mortgage and charge in so far as they are secured over the Tennyson Road property. 16 I will ask counsel to bring in short minutes of order. Given that the mortgages will be needed to be discharged very shortly and that Mr Bechara is not here and will not be amenable to an order, it will be necessary to adopt the unusual course of directing the Registrar or an officer of the court to sign the discharges of mortgages if Mr Bechara cannot be notified in time for them to be executed by him.

Spendright v Classfact

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