Sunny Capital Group Pty Ltd v Stamford Bridge SW6 Pty Ltd

Overview of the facts

1. The first defendant is the registered proprietor of the Land. By Loan Agreement dated 16 May 2023, Sunny Capital loaned the first defendant the principal sum of $550,000. The Land is expressly provided for as security in the Loan Agreement. At the time the first defendant executed the Loan Agreement it acknowledged that the Land is held as security for all monies due. For the purposes of the Loan Agreement, the Land is "mortgaged property".
2. Despite a form of mortgage having been prepared, a mortgage was not registered on the title of the Land. Instead, caveat AT96185 (Caveat) was lodged by Sunny Capital on the title of the Land on 16 May 2023.
3. The debt which Sunny Capital contends is presently owing by the first defendant to Sunny Capital and is secured under the Loan Agreement is a little over $800,000.
4. There is a mortgage to ANZ registered on the Land. Then, after the Caveat, there are seven caveats to third parties also recorded on the Land. Although filed after Sunny Capital's Caveat, the interests pursuant to which each of those subsequent caveator's claim to hold their interest all appear to pre-date the Loan Agreement.
5. On 19 April 2024, the first defendant entered into a contract for the sale of the Land with Experience DNA Pty Ltd for a sale price of $1.42 million. It appears that the purchase price was struck pursuant to the terms of a joint venture agreement in relation to the Land pursuant to which the developer had the option to purchase one or more of the "Developed Products" as defined in the joint venture agreement for the "Market Value" of the selected "Developed Product Lot". "Market Value" was defined as the market value of the Land determined by taking the average of the independent valuation of three different valuers as chosen by the "Project Committee" as defined in the joint venture agreement.
6. Three valuations were apparently obtained as follows: 1. by Dean Galanos dated 12 March 2024 valuing the Land at $1.6 million; 2. by David Anderson dated 10 April 2024 valuing the Land at $1.637 million; and 3. by Peter Karvon dated 2 March 2024 valuing the Land at $970,000.
7. On 9 May 2024, the first defendant entered into a creditors' voluntary winding up. The sale to Experience DNA had not completed at that point in time.
8. By 17 July 2024, the liquidator of the first defendant had expressed concern that the sale of the Land to Experience DNA might not have been at arm's length because Experience DNA was a related entity to the builder of the dwelling on the Land. By this time, the liquidator had obtained his own valuation of the Land by Marchese Property Valuers which valued the Land "as is" at $1.825 million excluding GST (Marchese Valuation).
9. The liquidator wrote to Experience DNA on 17 July 2024 informing it of the concerns which the liquidator then had and putting Experience DNA on notice that he intended to make an "application to the Court with respect to the contract". The nature of that application was not identified in the letter. For the purposes of that application, the liquidator requested Experience DNA to provide its "final and best price" for the Land.
10. On 18 July 2024, the solicitors for Experience DNA responded. Experience DNA increased its offer to buy the Land to $1.5 million.
11. On 24 July 2024, the solicitors for the liquidator wrote to all the caveators, including Sunny Capital, advising of the amounts estimated to be owing to ANZ and each caveator. ANZ was said to be owed approximately $630,000 at the time. The amount estimated by the liquidator to be payable to the caveators other than Sunny Capital at the time was in the vicinity of $2.5 million. On this analysis and assuming the caveators are all entitled to payment of the estimated sums, if the Land was sold for $1.42 million there would not be sufficient funds to pay all caveators. In that letter, the liquidator set out the position as he saw it, including his concern about the proposed sale price of $1.42 million possibly being less than market value. The liquidator put forward a proposal to caveators that the net proceeds of sale after ANZ's registered mortgage is released be paid into Court so that the respective priorities of the caveators to the remaining funds could be determined by the Court.
12. It seems to be that at or about this time, negotiations commenced between the liquidator and Sunny Capital in relation to it purchasing the Land.
13. On 12 August 2024, Sunny Capital made an offer to buy the Land from the first defendant for $1.7 million. The liquidator sought clarification as to whether the offer by Sunny Capital was a "best and final offer".
14. Sunny Capital's solicitors responded relevantly: At this stage, this is our client's best and final offer. However, should the liquidator have any further information and clarification to provide, we remain open to continued discussions.
15. Later that day on 15 August 2024, the solicitors for the liquidator responded to the solicitors for Sunny Capital to the following effect: For the avoidance of doubt, our client is currently considering whether to proceed with your client's offer or the offer from the current prospective purchaser. Our client is proceeding on the basis that your client's offer is made on a best and final basis. There will not be any further opportunity for your client to increase their offer.
16. On 15 August 2024, the liquidator's employee, Jessica Webb sent an email to the parties who held caveats over the Land. The email stated, among other things, that: …the liquidator's solicitors are also in discussion with the current purchaser as to whether they are in a position to increase their offer, that is, completing with the current purchaser at a better price may be simpler, and more timely/cost competitive.
17. On Monday 19 August 2024, at 5.34 pm, the solicitors for the liquidator sent an email to the solicitors for Sunny Capital stating: We refer to the below email and your client's offer of 12 August 2024. We are instructed that your client's offer to purchase 22B Ney Street is rejected. Our client has instead decided to proceed with the original purchaser with an increased purchase price of $1,700,000. The new settlement date is 13 September 2024. We will be writing to all caveators shortly regarding the process for completion of the sale.
18. Approximately half an hour later, the solicitors for Sunny Capital wrote an email to the solicitors for the liquidator complaining about what had occurred. The email stated: We believe this is not a fair and proper transaction or decision making procedure. Your client disclosed our offer to other possible purchasers, whereas my client was not entitled to acknowledge any other offers until the decision has already been made with same purchase price. You requested us to promise giving a final and best offer, however, your client, at the same time, continues negotiating with other potential purchasers after our offer was made. Our client does not have an equal or fair opportunity to be considered in this matter. We kindly request your client to reconsider our new offer with increased purchase price of $1,800,000, together with same conditions in our previous offer.
19. About an hour later, the solicitors for the liquidator responded to this email to the following effect: Our client is not in a position to consider your client's offer as he has reached agreement with the original purchaser. Your client was asked to provide their best and final offer. In our email to your office of 15 August 2024 we stated that "There will not be any further opportunity for your client to increase their offer". Your client was never told that they would be informed of any other offers. Your client was also aware that negotiations were ongoing with the original purchaser as they had been informed of such by an email from our client's office. Despite being aware of all these matters your client chose not to provide an increased offer. In reaching agreement with the preferred purchaser our client has relied on your client's notification that the offer they provided was their best and final offer. There are clear and obvious reasons to take the approach adopted by our client, as proceeding with the existing purchaser does not require the expense of a court application to disclaim the current contract. Accordingly, we reject any assertion that the process adopted was unfair.
20. On 11 September 2024, the liquidator put forward another proposal, but only to Sunny Capital, that the net proceeds of sale after ANZ's registered mortgage is released, be paid into Court so that the respective priorities of the caveators, including Sunny Capital, to the remaining funds could be determined by the Court. Sunny Capital responded by its solicitors on 11 September 2024 that the liquidator had not taken all reasonable steps to obtain the best price for the Land, and that the liquidator might be perceived as giving favourable treatment to Experience DNA in the circumstances.
21. On 13 September 2024, the liquidator wrote to all caveators making a new proposal that ANZ and Sunny Capital be paid in full from the proceeds of sale of the Land before other caveators. On 16 September 2024, Sunny Capital responded to the liquidator, again expressing strong concerns about the process the liquidator had employed in relation to the sale of the Land, and seeking more information so that it could assess its position.
22. There was no evidence before the Court as to the attitude of the other caveators to the 13 September 2024 proposal. Subsequent correspondence would suggest that at least some of the caveators objected.
23. On 19 September 2024, Mr Hegarty applied through PEXA for the issue of six "Notice to Caveator for Proposed Lapsing of Caveat" (Lapsing Notices) in respect of the caveats in respect of the land held by: 1. Sunny Capital; 2. Crab & Fish One Pty Ltd; 3. Crab & Fish SMSF Pty Ltd; 4. Caroline Renee Parrott; 5. Evan Soulos; and 6. Mully Cabin Pty Ltd.
24. Mr Hegarty did not apply for a Lapsing Notice in respect of the caveats held by 21 Harry Pty Ltd and Dream Properties Aust Pty Ltd as he understood these entities are related in some fashion to Experience DNA.
25. On 23 September 2024, Experience DNA filed proceedings in the Supreme Court of NSW seeking specific performance of the contract for the sale of the Land (Experience DNA proceedings). The Experience DNA proceedings were listed for return date on 4 October 2024.
26. On 25 September 2024, the liquidator wrote to the caveators again, noting that his inability to obtain the agreement of all caveators to release their caveats is impeding settlement of the sale to Experience DNA for $1.7 million, and proposing to pay the net proceeds from the sale after payment of ANZ (said to be owed $635,208) into Court for the caveators to claim. The letter concluded: Intended procedure post settlement of sale Assuming that all caveats lapse allowing for the sale to Experience to proceed, we are intructed [sic] to deal with the proceeds of the sale in the following manner: 1. Payment of the costs of the sale (these include GST, legal fees, and the Liquidator's costs of realising the Property). The costs of the sale are currently unknown in circumstances where we do not know if any party will file proceedings to avoid the lapsing of their caveat. 2. Payment of all amounts owing to the ANZ (as at 20 September 2024 the amount outstanding to the ANZ was $635,208.92). 3. We will then hold the surplus proceeds from the sale in our trust account for a period of two weeks. If all the caveators are able to reach agreement between themselves as to how the surplus should be distributed our client will distribute the funds as agreed. 4. If no such agreement is reached, we will seek to pay any surplus into the Supreme Court of New South Wales by way of an interpleader application pursuant to Rule 43.2 of the Uniform Civil Procedure Rules 2005 (NSW). This involves the money being paid into Court and any interested party then having fair opportunity to make their claim for it. To the extent necessary, the court could adjudicate on the extent of any claim for priority. We trust that the above approach is satisfactory to all caveators.
27. On 25 September 2024, the solicitors for the liquidator sent a copy of the documents served in the Experience DNA proceedings to the solicitors for Sunny Capital.
28. On 27 September 2024, the Lapsing Notices were served on the caveators by registered post. Mr Hegarty says that his understanding is that the Lapsing Notices served by registered post on 27 September 2024 will result in the relevant caveats being lapsed from the Land on 29 October 2024.
29. On or around 2 October 2024 the Lapsing Notice which had been sent to Sunny Capital by registered post was returned to sender. Later that day, an employed solicitor from the solicitors for the liquidator served the Lapsing Notice on Sunny Capital by hand.
30. Mr Hegarty deposed to the fact that he had not been informed by any of the caveators, other than Sunny Capital that they intended to seek orders extending the operation of their caveat.
31. Mr Hegarty estimates that, assuming the sale to Experience DNA settles at $1.7 million, there will be approximately $843,000 available for distribution.
32. It is against this factual background that Sunny Capital seeks an order extending an operation of the caveat until further order.

Leave to bring proceedings

1. As the first defendant is in liquidation, Sunny Capital accepted that it required the leave of Court to bring these proceedings against the first defendant pursuant to s 500(2) of the Corporations Act. No party objected to that leave being granted and I granted the leave at the commencement of the hearing: see Golden Goal Pty Ltd v Dapto Bowling Club (Ltd) (In Liq) [2018] NSWSC 1431 at [1] per Black J.

Determination

1. 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.
2. 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.
3. 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.
4. 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.
5. Sunny Capital placed heavy reliance on the decision of Darke J in Kitanovski v Ibrahim [2022] NSWSC 1232 (Kitanovski).
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.
11. 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.
12. 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.
13. 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.
14. 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.
15. 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].
16. 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.
17. 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.
18. 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.
19. 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.
20. 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.
21. I am thus not satisfied that there is any sale at an undervalue.
22. 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.
23. It was for these reasons that I declined to grant the interim relief.
24. 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.

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: 28 October 2024