Sunny Capital Group Pty Ltd v Stamford Bridge SW6 Pty Ltd

Determination

There was no dispute in relation to the principles to be applied by the Court on the present application to extend the operation of the caveat. The principles relevant to an application for an extension under s 74K of the RPA are well established. The Court applies the same approach as it does to determining an application for an interlocutory injunction. First, the Court considers whether the caveator has established that there is a serious question to be tried as to the plaintiff having an interest in the land to support the maintenance of the caveat. Assuming this requirement is satisfied, attention is then directed to the balance of convenience.
There was no dispute in the present case in relation to the first limb - it was accepted that Sunny Capital, as an equitable mortgagee, arguably has a caveatable interest in the Land: see Furlong v Wise & Young Pty Ltd [2016] NSWSC 1839 at [204] per Sackar J.
The principal dispute at the hearing on 22 October 2024 related to whether the balance of convenience favoured an order being made extending the operation of the caveat or whether the caveat should be permitted to lapse.
The gravamen of Sunny Capital's contention on balance of convenience was that, on the evidence, it was likely that the sale to Experience DNA for $1.7 million was at an undervalue and, as such, if Sunny Capital's caveat was not extended and permitted to lapse, Sunny Capital would suffer prejudice in that it would lose its security interest by reason of a sale at less than market value in circumstances where Sunny Capital would then potentially have a priority fight with the other caveators and could potentially receive less than it otherwise would if the sale was at market value.
Sunny Capital placed heavy reliance on the decision of Darke J in Kitanovski v Ibrahim [2022] NSWSC 1232 (Kitanovski).
Kitanovski concerned an application to relevantly withdraw two caveats to allow a sale to complete in circumstances where there was likely to be a priority fight between the two caveators and the valuation evidence established that the market value of the land being sold was $3.5 million and the sale price was $2,805,000. The caveators contended that they had a legitimate interest in maximising the amount of surplus funds that would be available upon a proper sale of the Land. The caveators contended they would suffer irremediable prejudice to the extent of the under value.
Darke J held that there was a significant difference between the sale price and the market value (at [44]) and that the removal of the two caveats to facilitate completion of the sale would cause substantial prejudice to be suffered by whichever of the two caveators could assert priority next after payment of land tax etc and Westpac as the registered mortgagee. It was clear that the quantum of the claims of each of the caveators exceeded the $700,000 difference between the sale price and the market value.
Darke J held (at [46]) that the balance of convenience would be in favour of the continuation of the caveats, as that would avoid the prejudice that would be suffered by the caveators. Towards the end of closing submissions in reply, however, counsel for the purchaser indicated that the purchaser would consent to a condition being imposed to a grant of relief that the caveats be withdrawn to the effect that the purchaser pay into Court the difference between the market value and the contract price. In these circumstances, Darke J held (at [51]-[53]) that the caveators would be in no worse a position than if the land was sold at market value and thus the caveators would not suffer practical detriment if their caveats were removed.
Counsel for Sunny Capital recognised that central to the decision of Darke J was that the sale was occurring at below market value. Sunny Capital contended that in the present case I should be satisfied that the market value of the Land was $1,825,000 based on the Marchese Valuation and as such I should be satisfied that a sale at $1.7 million was at an undervalue. Absent an undertaking by either of the defendants to pay into Court an amount to cover the shortfall, Sunny Capital would suffer substantial prejudice in its caveat being removed to enable the sale to complete. This is in circumstances where there was a risk that Sunny Capital would be in a priority fight with the other caveators whose interests were purportedly created before Sunny Capital's although their caveats were lodged after.
Mr Hegarty for the liquidator contended that the liquidator did nothing wrong in selling to Experience DNA in the circumstances, particularly where it offered the same price as Sunny Capital's last and final offer and accepting its offer did not involve having to seek the leave of the Court to disclaim the earlier contract that had been entered into between the first defendant and Experience DNA. Mr Hegarty also undertook, on behalf of the liquidator, that if the sale completed the liquidator would deal with the sale proceeds in the manner stated in the letter dated 25 September 2024 as extracted above.
Counsel for Experience DNA raised a number of arguments as to why the Court should not extend the caveat, including that Sunny Capital had not established that there is a risk that it would be involved in a priority fight with the other caveators and also that the Court would not be satisfied that the property was in fact being sold at an undervalue. The $125,000 difference between the Marchese Valuation and the $1.7 million purchase price was within the margin of error. Issues were also raised by Experience DNA with the Marchese Valuation in a letter dated 18 July 2024 which have not been dealt with.
In reply submissions, counsel for Sunny Capital accepted that leave of the Court would be required under s 568(1A) of the Corporations Act for the liquidator to seek to disclaim the contract between the first defendant and Experience DNA and that the cost of doing this was a relevant matter to consider.
In circumstances where the interests of the other caveators were apparently created prior to Sunny Capital's, but Sunny Capital's caveat was filed first, and the fact that the net proceeds will not be sufficient to pay out the claims of the caveators, it is likely that there will be a priority dispute between the caveators. Contrary to the contention advanced by counsel for Experience DNA, I do not place much weight in this regard on the fact that none of the other caveators have yet sought orders extending the operation of their caveats. The time for them to do so - having regard to service by registered post - has not yet expired. Further, given the most recent letter from the solicitors for the liquidator dated 25 September 2024 offering to pay any surplus into Court in the event of a dispute, it is at least possible, in my view, that the other caveators may be content for their caveats to lapse in the knowledge that they will then have the ability to assert their priority.
To my mind, the more important issue is whether the Land is likely being sold at an undervalue. In Kitanovski, the position was clear as to value and it was clear that the difference between the sale price and the market value was significant - a 25% undervalue.
I am not satisfied that the sale of the Land to Experience DNA for $1.7 million is occurring at an undervalue. The principal evidence of alleged undervalue is the Marchese Valuation. The Marchese Valuation is an estimate of market value on the basis of the matters set out in the valuation. It was not in dispute that valuation is more of an art and not a science and that there is not one correct valuation estimate but rather a range, or, as is often said, an acceptable margin of error: see for example Hann Nominees Pty Ltd v National Australia Bank Ltd [2000] FCA 454 at [26].
In the present case, putting to one side the Karvon valuation of $970,000 which seems to be an outlier, there are two other valuations in evidence - the Galanos valuation dated 12 March 2024 for $1.6 million and the Anderson valuation for $1.637 million. I accept that the Marchese Valuation is closest in time to August 2024 when the price of $1.7 million was struck, but there was no suggestion that there was any substantial movement in the market between March/April and June 2024.
If an average of the three valuations as taken - $1.6 million, $1.637 million and $1.825 million - the figure is $1,687,333.33 - quite close to the $1.7 million sale price.
One of the critical issues in relation to the value of the Land is that the dwelling on it is not yet complete and an estimate needs to be made of the costs to complete. Each of the valuations proceeds on a different basis in this regard and there was no reliable evidence before me of the cost to complete.
In light of this, even if the focus is only on the Marchese Valuation, I do not regard the difference between the valuation of $1,825,000 and the sale price of $1.7 million as outside the acceptable margin.
The sale process engaged in by the liquidator and Sunny Capital's subsequent offer of $1.8 million, does not suggest a sale at an undervalue. It is clear that Sunny Capital was asked to put its best and final offer and was told expressly that it would not get another bite of the cherry. In these circumstances, the most that it was prepared to pay was $1.7 million. Little reliance can be placed, in the circumstances, on Sunny Capital's subsequent offer of $1.8 million. This was made after Sunny Capital was informed that it had not been successful in its earlier best and final offer.
I am thus not satisfied that there is any sale at an undervalue.
In these circumstances, counsel for Sunny Capital accepted that there was nothing further that could be said in support of the caveat being extended, the liquidator having undertaken that in the event of any priority dispute in relation to the net proceeds, those proceeds would be paid into Court.
It was for these reasons that I declined to grant the interim relief.
Having determined not to grant interim relief, I requested the parties to formulate orders, which they did. I then made the following orders on 22 October 2024: 1. The Plaintiff is to pay the First and Second Defendants' costs of the Plaintiff's application for interlocutory relief, as agreed or assessed. 2. The proceedings are listed for directions before his Honour Pike J on 9 December 2024. The Court notes that: 1. The First Defendant undertakes to deal with the proceeds from the sale of 22B Ney Street Mascot to the Second Defendant in the following manner: 1. Firstly, payment of the costs of the sale (including GST, legal fees and the Liquidator's costs of realising the property). 2. Secondly, deduct the payment of all amounts owing to the ANZ which are secured by mortgage AQ276498. 3. Thirdly, place the remaining proceeds in their solicitor's trust account for two weeks, and notify all caveators, and the plaintiff, of the sum held by them and these orders. If the caveators and the plaintiff are able to reach agreement between themselves as to how the remaining proceeds should be distributed between them, the First Defendant will distribute the funds as agreed. 4. Fourthly, agreement cannot be reached between caveators and the plaintiff as to how the proceeds held in their solicitor's trust account are to be distributed, the First Defendant will pay those proceeds into the Supreme Court of New South Wales.

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Judgment (5 paragraphs)

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Legislation Cited (3)

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