VAC Group Holdings Pty Ltd v Cliplyn Pty Ltd

Introduction 1 The action before the Court today has been brought by VAC Group Holdings Pty Ltd (VAC) and Cosbea Pty Ltd (Cosbea). Specifically, VAC's action is brought against Cliplyn Pty Ltd (Cliplyn) and Mr Max Pearson. By an interlocutory application filed on 16 September 2019, VAC seeks certain injunctive relief against Cliplyn in relation to the occupation of premises which it has leased from Cliplyn.

Background 2 It is necessary to mention some detail about the background to this matter. Cliplyn is the owner of a certain property at Yatala in the State of Queensland and Mr Max Pearson is its director. 3 The property has been leased to VAC, but Cosbea is also a party to the lease. VAC conducts an extensive business providing services such as soil disposal, non-destructive vacuum excavation and utility locating as well as the provision of equipment adapted to those tasks. Cosbea is corporately related to VAC. 4 As at May 2016, the applicants were carrying on their business from premises (the original premises) and at around that time, Cliplyn was seeking to sell the property which was subsequently leased to VAC. 5 Cliplyn's property had two buildings on it. Building A consisted of an office and factory, and building B was a four-storey office building. Cliplyn had constructed both of these. Issues have been raised on the pleadings as to whether the buildings so constructed complied with relevant building or construction laws, or complied with the requirements of the local town planning legislation. In general terms, it is alleged that the buildings were not fit for occupation, or at least for the occupation by VAC for the conducting of its business, by reason of their construction not complying in several respects with a number of regulations. It should be said that these allegations are denied by Cliplyn. 6 It is also alleged that in or around April or May 2016, VAC made it known to Cliplyn that it was looking to lease or purchase a site which it could use as its corporate headquarters and from which it could conduct its business. It is alleged in the statement of claim that Cliplyn made various representations to VAC to the effect that the property was fully established, well-maintained and ready for immediate occupation with nothing to spend, such that VAC could move in immediately and commence operating its business. 7 Various representations were also said to have been made by a video produced by Cliplyn's selling agents. Negotiations followed for some time. VAC indicated a desire to acquire the property. Questions were raised as to whether the property could be purchased outright or leased and then purchased. Ultimately, it was determined, and it need not be presently ascertained how, that VAC would lease the premises with an option to purchase it, and Cosbea would become party to that arrangement such that it might exercise the option. 8 VAC alleges that the rent under the lease is much greater than market rent. This was said to have been agreed to on the basis that the additional rent would constitute a "down payment" on the purchase price payable on the exercise of the option. It is alleged by the applicants that, in the course of negotiations, numerous other representations were made by Cliplyn to the effect that the property and the building on it were complete and operational in every way. Various alleged representations were said to arise by omission and were to the effect that Cliplyn and Mr Pearson failed to disclose matters which were within their knowledge. In other words, there are a number of allegations of misrepresentation by silence. That, it is said, arose because there was a reasonable expectation that those matters would be disclosed. 9 It is alleged at paragraph 49 of the amended statement of claim that reliance on the representations caused VAC to execute the lease into which it entered. It is also said that Cosbea, which intended to exercise that option, was also induced to enter into it. Further, VAC and Cosbea allege that they would not have executed the lease - and VAC would have leased or purchased other premises or remained at their existing premises - but for the belief that they could purchase and obtain vacant possession of the property on the exercise of the option. In particular, they point to the inflated rent, which was intended to be used as a set-off against the purchase price. 10 By paragraph 51 of the amended statement of claim, it is also said that VAC and Cosbea would not have executed the lease, and that VAC would have leased or purchased other premises or remained in their existing premises, had the representations not been made. 11 In any event, the lease was entered into in mid-2016. The option to purchase had to be activated by exercising the right and paying a deposit on 1 June 2017, with settlement to be completed by 30 June 2017. 12 The applicants allege that the representations to which I have referred and the conduct engaged in by Cliplyn and Mr Pearson were misleading or deceptive in contravention of the Australian Consumer Law (Competition and Consumer Act 2010 (Cth), Sch 2) (ACL). Various reasons are identified as to why that is so, but in general terms, although not exclusively, it is alleged that there are several defects in the building which rendered it incapable of being used by VAC's business or occupied by its staff.

Consequences of the misleading or deceptive conduct 13 From paragraphs 71 to 75 of their pleading, the applicants identify their claim as to the consequences of their reliance upon the alleged misrepresentations. It is said: (a) VAC ceased making enquiries about alternative premises it could lease or acquire (at [71]); (b) because of the defects in the buildings, VAC and Cosbea were not able to obtain finance to pay the purchase price payable for the property on the exercise of the option (at [72]); (c) VAC and Cosbea did not exercise the option and VAC continues to pay rent in excess of the market rent (at [73]); (d) because of the defects in building B the applicants are not able to use it at all (at [74]); and (e) VAC has undertaken repairs and incurred costs on improving the property (at [75]).

Loss and damage 14 In paragraph 76, the applicants have set out what they assert to be their loss and damage. It is alleged that they "acted to their detriment" in: (a) ceasing to make the enquiries to which I have referred above; and (b) entering into the lease which required them to pay rent at above market value or alternatively entering into the lease at all and not remaining at their existing property. That is not the entirety of the damage alleged, but is sufficient for present purposes.

The relief claimed 15 In the originating application the applicants claim various relief, being: (a) compensation for damages pursuant to s 237 of the ACL; (b) an order under s 243 of the ACL that cll 28 and 29 of the lease between the applicants and the first respondent be varied to permit the applicants or the first applicant or second applicant to purchase the property on terms as such as the Court sees fit; (c) orders that the lease be declared void or rescinded ab initio with consequential orders; (d) damages pursuant to s 236 of the ACL; and (e) damages for breach of contract.

The interlocutory application 16 The application before the Court today is, as I have mentioned, one for injunctive relief, and in summary, VAC seeks orders that Cliplyn be restrained until judgment or further order from: (a) excluding VAC from the premises; (b) terminating the lease in respect of the premises; and (c) dealing with or threatening to deal with the assets of VAC. 17 For reasons which I will explain shortly, the form of the interlocutory relief now sought has changed, in that the injunctive relief is now sought for only a very short period of time, being until the end of January or February next year. When the interlocutory application was filed, VAC claimed an entitlement to possession of the premises pursuant to its lease from Cliplyn and the relief sought was intended to protect that continuing right of possession. However, on Friday 11 October 2019, VAC by its solicitors, Crafers Law, advised the solicitors for Cliplyn that, upon reading affidavit material filed in these proceedings, it had determined that Cliplyn had committed a fundamental breach of the lease, and that it, VAC, elected to terminate that lease. 18 The foundation of VAC's allegation that Cliplyn breached the lease was Cliplyn's alleged failure to maintain insurance in VAC's name with respect to its occupation of the premises as required by cl 13.6(a) of the lease. That may or may not be a valid termination by VAC, although before the Court today it is important to note that VAC has asserted that it was a valid termination. This purported termination is important in the context where VAC seeks an injunction to enable it to remain in possession of premises in respect of which it no longer has any lease entitlements. 19 Another important factor is that presently Cliplyn is restrained by an undertaking given by it to the Court on 19 September 2019, not to engage in certain conduct, as follows: The first respondent undertakes to the first applicant that it will not, before 5pm on the date on which the Court determines the first applicant's interlocutory application served on 16 September 2019, terminate the lease between the first applicant and the first respondent, otherwise re-enter and take possession or exclude the first applicant from the leasehold premises or take any other action under cl 19.3 under the said lease. 20 When the matter was called on for hearing, Mr O'Donnell QC for Cliplyn made an instanter application that his client be relieved from the undertaking, on the basis that VAC's purported termination of the lease has rendered the undertaking effectively nugatory and that, "as a matter of justice", if VAC purports to exercise a power to terminate the lease, then Cliplyn ought not be denied a reciprocal right. It was further submitted that, when Cliplyn gave the undertaking on 19 September, the right which it now seeks to rely upon to retake possession did not exist. That right is its claim that the purported termination by VAC was not effective but was, of itself, a repudiatory breach, entitling Cliplyn to now terminate. It was submitted that Cliplyn ought not be prevented from pursuing its claimed entitlement to terminate the lease for VAC's alleged breach. 21 Mr O'Donnell QC also submitted that the Court ought deal with his client's application to be relieved from the undertaking prior to dealing with the application for an injunction. He tendered to the Court a draft of a letter which Cliplyn wishes to give to VAC purportedly accepting the alleged repudiation and terminating the lease. I assume that, if Cliplyn is entitled to withdraw or be relieved from its undertaking, it will forthwith issue and deliver that letter.

Serious question to be tried 22 Although there is some merit in pursuing Mr O'Donnell QC's suggested course, in the circumstances it is probably appropriate to first consider the veracity of the applicant's claim for an injunction. There is no doubt that the issue of whether Cliplyn ought be entitled to withdraw its undertaking and whether or not an injunction should be granted are separate issues, however, they are related to the extent that, if an injunction were granted, there would be no basis on which Cliplyn might be relieved of the undertaking, although there may be some doubt around that proposition. 23 In relation to the issue concerning the injunction, Mr O'Donnell QC for Cliplyn advanced a central argument that there was no serious question in this case which would warrant granting of it. He submitted that, as VAC had purported to terminate the lease, the injunction now sought is not for the protection of any legal or equitable right: Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199, 248 [105]. That is, the injunction seeks to protect the rights under the lease which, if VAC's termination is valid, will no longer be in existence. There is force in that submission in that it is the essence of an interlocutory injunction that the applicant must identify the legal or equitable rights which are to be determined at trial and in respect of which there is sought final relief, which may not be of an injunctive nature: Truth About Motorways Pty Ltd v Macquarie Infrastructure Investment Management Ltd (2000) 200 CLR 591, 628 [97]. 24 Somewhat contrary to its main argument, Cliplyn denies that VAC has validly terminated the lease and, if that is so, the necessary consequence is that the lease remains on foot. If that is true, on the state of the current pleadings, and the relief sought in the originating application, VAC seeks orders for the variation of the lease including by altering the terms of an option to purchase the demised premises. If that is the actual state of affairs, VAC, at present, retains an interest in the leasehold which it is entitled to protect to some extent. In that way, Cliplyn's argument that VAC did not effectively terminate the lease is contrary to the submission that interlocutory relief is not sought in protection of VAC's legal rights. 25 On the other hand, it was not suggested by VAC that its purported termination of the lease was ineffective, or that there was some doubt as to the efficacy of that termination. Its case is that it has terminated the lease and it was entitled to do so. If that submission be correct, then Cliplyn's submission that the injunction sought does not seek to protect any legal or equitable right has much force. 26 A significant difficulty with the interlocutory application is that the context in which it is being heard is substantially different to that which existed when it was filed. That context altered radically on Friday afternoon, being 11 October, on receipt of the letter from Crafers Law purporting to terminate the lease and, as a consequence of that, the written submissions filed do not directly address this important and difficult issue. If Cliplyn accepted that the lease was at an end, its submission that the proposed injunctions were not in aid of any legal or equitable right that would, I imagine, have been determinative. However, at present, on its case the lease presently remains on foot and the lease interests are sought to be enforced albeit in a varied form at the trial of this matter. That being so, Cliplyn's argument that the injunction is not sought in aid of any legal or equitable rights must be rejected. 27 I add that, if it were conclusively determined that the lease had been terminated by Cliplyn, VAC's right to the relief might well possibly dissipate. It was not the subject of any significant argument before the Court, but a question must arise as to the extent to which the lease, having been lawfully terminated, might subsequently be varied by the Court. To that extent, the applicants would have some legal right which they might protect. 28 Despite the above, it must also be kept in mind that VAC's case has altered significantly. It now accepts, or asserts at least, that it has terminated the lease. It now accepts that it has no right to possession and, to that extent, the relief sought does not reflect or accurately reflect the relief which it truly seeks in the action. 29 This, I think, has significant relevance when weighing up the balance of convenience. That is to say, whilst technically the rights of VAC would or might be protected by the grant of an injunction, those technical rights are not now the true rights which are sought to be pursued. The effect of that is that the assessment of the effect of the balance of convenience differs, in the sense that VAC's case must now be regarded as somewhat weak, given that it is unlikely to be pursued in its current form. 30 For present purposes, it might be accepted, therefore, that VAC has overcome the first hurdle, having established that there is some serious question to be tried, albeit one on which it has only succeeded technically.

The balance of convenience 31 Ultimately, the real issue on the hearing turns upon the balance of convenience, and in this respect, the central issue is that whilst VAC offers an undertaking as to damages, it has adduced no evidence that the undertaking is of any value. It has offered no security for the undertaking. 32 On 3 October 2019, the solicitors representing Cliplyn, Allens, sent a letter to Crafers Law mentioning the proposed application and identifying the damages which it considered it might suffer. The letter indicated that an undertaking as to damages in accordance with Practice Note GPN-UNDR in this Court in support of the claimed injunction was required. The letter made the rather relevant point that, at that time, VAC had failed to pay rent and outgoings in accordance with the terms of the lease for a number of months, and that correspondence from Crafers Law indicated that VAC may have difficulty paying rent and outgoings into the future. 33 Cliplyn's solicitors identified VAC's apparent impecuniosity gave rise to a significant concern that any undertaking as to damages would be effectively worthless. They sought advice as to how VAC might satisfy the Court that any undertaking proffered would be sufficient. Mr O'Donnell QC for Cliplyn made the submission that, having put the obligation upon VAC to demonstrate the value of its undertaking, it has failed to do so. That submission must be accepted. 34 No clear evidence of the current financial position of VAC is disclosed. No current profit and loss statements or cash flow analyses are reproduced in the applicants' material. No unencumbered assets are identified in the evidence as being available to support an undertaking or to provide security. These are the type of matters which a court would expect to be addressed when a party seeking an injunction wishes to establish the value of its undertaking. 35 Mr O'Donnell QC has referred me to a number of the authorities dealing with this topic. There is no need to consider them in detail. It suffices to say that it is now well accepted that where there is some evidence that a plaintiff is in a financially difficult situation and it seeks an injunction, it is of great significance that it establishes the value of any undertaking it offers. I refer to Campbell J's decision in Corporate Transport Services v Toll (2005) 214 ALR 644, and to the observations of Besanko J in Popeye Holdco Pty Ltd v Intermediate Capital Asia Pacific 2008 GP Limited [2017] FCA 369, and particularly [70] and [75]. 36 In this case, the respondent, Cliplyn, has established that, if the injunctions sought are granted, it may suffer damage, being the absence or the failure by VAC to pay the rent due, or the full amount of the rent due. 37 I pause here to observe that VAC has offered, as a condition of it being entitled to remain in possession, to pay an amount of rent which it says will satisfy Cliplyn's obligations to its financier, as well as its statutory obligations. But it must be kept in mind that the rent so offered is not the full amount of the rent for which it is liable for under the lease. It is only part and the amounts which are not proposed to be paid are not insignificant. As Mr O'Donnell QC submitted, on a rough calculation, the amount in question may total somewhere in the order of $1 million. 38 Although there was an absence of evidence from VAC as to the worth of its undertaking, Cliplyn issued a subpoena to a Mr Higgins. Mr Higgins is presently engaged through his firm by VAC to provide advice and other services in relation to restructuring or refinancing. The respondent, Cliplyn, also acquired upon subpoena a number of documents relating to the work by Mr Higgins with VAC which identified a number of financial failings of the business. Most recently the evidence shows that VAC has been required to enter into terms of payment arrangements with a significant number of creditors. 39 Further, despite a number of attempts, VAC has been unable to refinance its main operating facilities for some time. Presently, it has facilities with Westpac Banking Corporation which has provided some extensions to their terms over a period of time, but has now indicated that all the facilities must be repaid by 30 November. Although there have been attempts at refinancing that debt, which is in excess of $12 million, to date no refinancing has occurred, and there is no offer of finance in existence. Mr Higgins gave evidence as to the existence of a "term sheet" from an overseas financier, Balbec Capita, however, that term sheet seems to be an interim step along the way to finally determining whether or not finance will be provided. Although obviously some submissions have already been made to Balbec Capital for facilities, the process has not passed through that company's credit committee, and, as I understand it, no final offer has been made. I should also add that Mr Higgins gave evidence that there are no assets of VAC available to be offered as security for any undertaking as to damages. Although Mr Williams for VAC indicated from the Bar table that some other assets may exist, there was no evidence of that, and I must rely only on the evidence adduced and admitted into evidence. 40 Overall, the evidence discloses that VAC is, and has been for some period of time, in financial difficulties. Those difficulties arose from a lack of working capital, and it has sustained significant losses in the past year. Its main financier has called in its facilities, and its financial viability is uncertain. That, combined with the absence of any clear evidence as to the value of any undertaking, weighs heavily against granting the injunction. 41 Mr Williams for VAC submitted, and with some force, that the consequences of not granting an injunction to VAC would be much more significant than the consequences to Cliplyn. That is to say, the consequences of not granting the injunction may well have a dramatic and cataclysmic effect on VAC, whereas he submitted that the evidence does not show that any enduring or lasting damages would be suffered by Cliplyn. Although there is force in that submission, it does not take into account the full evidence before the Court. Whilst it is necessarily true that the ultimate consequences of financial loss may not be as great for Cliplyn, the fact that Cliplyn will be likely to suffer unremedied losses is significant. 42 Mr Williams submitted, and again with some force, that any losses might be more chimerical than real, because if VAC is not granted the injunction and insolvency follows, any payments made will be recovered. Whether or not that is true is difficult to ascertain. In any event, it would be a long way down the track. As the very least, VAC apparently cannot pay the rent which it agreed to do so under the lease and it offers no security for the shortfall if it is found liable to pay it. 43 It should be mentioned that there is very little doubt that overall commercial good sense might favour the granting of an injunction, in that if VAC remains in possession and pays rent - at least some rent - Cliplyn is likely to be in a better position than if the premises were vacant, awaiting sale. That involves a value judgment, but it also accords the position of VAC greater weight than that of Cliplyn. It must not be forgotten that VAC has purported to terminate the lease and is now asking the Court to allow it to remain in possession absent any obligations under a lease, and on the payment of a rent which it, VAC, determines it ought to pay. 44 Mr O'Donnell QC for Cliplyn made the appropriate submission that if VAC is entitled to remain, the terms on which it is entitled to remain are obscure. The Court would have to rewrite entirely a lease arrangement between the parties, including imposing obligations as to VAC's duty to protect the premises or exclude trespassers and the like. That, I apprehend, cannot occur. 45 In the result, the weight of the matters raised on the balance of convenience fall clearly on the side of refusing the injunction. Had VAC not terminated the lease, the matter might well be different, although that is far from necessarily so. But given the inability of VAC to provide any substance to its undertaking, it has not really passed the first hurdle on the balance of convenience test. In those circumstances, I refuse the application for an injunction. 46 It would necessarily follow that the respondent, Cliplyn, be relieved of its undertaking given to this Court on 19 September 2019. 47 In this matter, the respondents seek an order that they have the costs of the application. The application was interlocutory in nature, and an interlocutory injunction at that. In many cases, it is not appropriate to make an order for costs because it is likely that the issue the subject of the interlocutory injunction will be finally determined at trial, and after the rights have been fully ventilated. 48 In this case, however, where the circumstances have been radically altered by VAC's termination of the lease, there is no reasonable prospect that the issues the subject of today's application will ever be ventilated. That being so, I am of the opinion that the applicants should pay the respondent's costs of the application to be assessed or to be taxed. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Derrington.