Victor Seeto & Ors v Bank of Western Australia Limited

Victor Seeto - first plaintiff PARTIES : Nora Seeto - second plaintiff Peter Lean - third plaintiff Bank of Western Australia Limited - defendant

COUNSEL : M R Gracie/M Klooster - plaintiffs J R J Lockhart SC - defendant

SOLICITORS : Spinks Eagle Lawyers - plaintiffs Blake Dawson - defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

10/243684 Victor Seeto & Ors v Bank of Western Australia Limited JUDGMENT 1 His Honour: On 16 August 2010 I ordered the plaintiffs' notice of motion filed 22 July 2010 be dismissed with costs. These are my reasons. 2 The plaintiffs are co-owners of land at Glebe Point Road, Glebe (the Glebe Point Road property) where they conduct the hotel business known as the Ancient Briton Hotel. They are also the co-owners of land at Scottsdale Road, Robina, Queensland (the Dog and Parrot property) where they conduct the hotel business known as the Dog and Parrot hotel. 3 On about 30 January 2008 the defendant provided the plaintiffs and related parties finance facilities to a total limit of $22,765,000, the terms of which later became incorporated in new agreements made on 6 April 2009. Securities for the facilities included registered mortgages over each of the Glebe Point Road property and the Dog and Parrot property, and various charges and mortgages over the businesses of each hotel. The borrowers defaulted on a number of counts. On 8 July 2010 the defendant appointed receivers over the businesses, and on 9 July 2010 it appointed receivers over each of the real properties. 4 In the action yet to be tried, the plaintiffs seek to have the appointment of the receivers to each of the properties declared invalid, and an order that they deliver up possession of the properties. 5 The present application is by notice of motion filed 22 July 2010 in which the plaintiffs seek orders that the receivers hand over possession of each property to its registered owners. Background 6 On 6 April 2009 separate facility agreements were entered into between the defendant as financier, and the plaintiffs and related parties as borrowers, which replaced the terms of earlier facility agreements. These incorporated the terms contained in the defendant's document entitled General Terms for Business Lending dated December 2007 (General Terms). 7 One agreement was made with parties collectively described as Borrower 1 in respect of the Dog and Parrot property and the Dog and Parrot hotel business. Under it, the facilities advanced were:

(i) a commercial advance facility with a $12.7 million limit; (ii) a commercial advance facility with a $815,000 limit; and (iii) a business equity loan (the overdraft account) with a limit of $500,000 repayable on demand. 8 The other agreement was made with parties collectively described as Borrower 2 in respect of the Glebe Point Road property and the Ancient Briton Hotel business. Under it the facility advanced was a commercial advance facility with a limit of $8.75 million. 9 The required securities were interrelated, and provided collateral security for all of the borrowings. They included the real property mortgages earlier referred to. 10 The facilities included terms which required:

(a) that specified financial undertakings be met, including an undertaking concerning interest cover ratios (ICR), the trading performance measured by minimum EBITDA, and concerning a loan to value ratio (LVR); and

(b) financial information including annual accounts, and management accounts. 11 The General Terms included: "20.1 Application We have adopted the Code of Banking Practice and relevant provisions of the Code apply to this Agreement if: (a) you are an individual or small business customer (as defined by the Code); or … 20.2 Compliance If: … (b) a provision of the Agreement would otherwise contravene a requirement of the Code of Banking Practice or impose an obligation or liability which is prohibited by the Code of Banking Practice, the Agreement is to be read as if that provision were varied to the extent necessary to comply with the Code of Banking Practice or, if necessary, omitted." 12 Clause 16.1 of the General Terms specified events of default which entitled the defendant to enforce its security, which included (sub-par (h)) a change in the financial circumstances of the borrowers which in the defendant's reasonable opinion has or may have a material adverse effect upon the borrowers' willingness or ability to meet their obligations, or on the value of any security. 13 The Code of Banking Practice (the Code) included: "1 Introduction 1.1 This Code is a voluntary code of conduct which sets standards of good banking practice for us to follow when dealing with persons who are, or who may become, our individual and small business customers and their guarantors. 2. Our key commitments to you: … 2.2 We will act fairly and reasonably towards you in a consistent and ethical manner. In doing so we will consider your conduct, our conduct and the contract between us. 2.3 In meeting our key commitments to you, we will have regard to our prudential obligations." 14 The mortgages over the properties contained similar terms. It is sufficient to refer to the following provisions in the mortgage over the Glebe Point Road property (the mortgage): "12.1 Circumstances when this document may be enforced The Secured Money will immediately become payable at the Bank's option (despite any delay or previous waiver of the right to exercise that option) without the need for any demand or notice, and this mortgage will immediately become enforceable (whether or not the Secured Money has become payable in this manner) if any of the following events occurs: (a) (non-payment) if a Relevant Person fails to pay any amount that is due and payable by it under any Facility Document when it is due; (b) (other Obligations) if the Mortgagor fails to comply with any of its Obligations (other than a failure referred to elsewhere in this clause) and: (i) the Bank considers that the failure cannot be remedied; or … (h) (cross-default) if: … (v) any condition, covenant, term or provision of any other Facility Document is breached or not complied with, or an event of default (however described) occurs under any other Facility Document; … 12.2 Enforcement despite earlier payment This mortgage may be enforced: … (b) without the need for any notice to, or of any consent or agreement of, the Mortgagor or any other person. … 13.1 Bank may exercise Powers without notice (a) To the full extent permitted by Law, the Bank is not required to give any notice or allow any time to elapse before: … (ii) appointing a Receiver; or … 14.1 Appointment If this mortgage has become enforceable (whether or not the Bank has entered into possession of all or any of the Secured Property) the Bank or any Authorised Officer of the Bank may at any time: (a) appoint any person or any 2 or more persons either jointly or jointly and severally to be a receiver or receiver and manager (or an additional receiver or receiver and manager) of the Secured Property; …" 15 By letter of 14 July 2009 the defendant informed the first plaintiff of breaches of the agreements in failing to provide management accounts for the businesses for April and May 2009, and in failing to comply with undertakings as to the ICR and minimum EBITDA. It advised the appointment of a person to investigate and report on the financial and trading condition of the borrowers and related parties. It advised, in effect, that the defendant reserved its rights to act under the agreements or supporting securities should it be considered necessary to do so to protect its position. (Similar statements were included in the subsequent letters from the defendant.) 16 On 23 July 2009 a complaint of breach was made for the failure to provide the 30 June 2009 monthly management accounts for the hotel businesses. 17 On 12 October 2009 the defendant sent to Borrower 1 a notice of demand. It mistakenly alleged breaches by Borrower 1 of non-existent clauses of the facility agreement. However, it proceeded as follows: "… In addition to the above event of default, pursuant to clause 16.1(b) of the General Terms for Business Lending dated December 2007, a further event of default has occurred in respect of the Business Equity Line Facility (account number xxxx) as the Outstanding Amount in relation to the Facility (which is currently $674,363.01) exceeds its Facility Limit (being $500,000). In these circumstances, Bankwest HEREBY GIVES NOTICE AND DECLARES that pursuant to clause 12.2(a) of the Facility Agreement, the Principal Outstanding and all interest, fees and all other money payable to Bankwest under or in connection with the Facility Agreement is now payable on demand. The amount of the Principal Outstanding and all interest, fees and all other money payable to Bankwest as at 8 October 2009 is the total sum of $14,162,222.39 as particularised in Schedule A. Bankwest reserves all of its rights under the Facility Agreement including but not limited to its right to demand immediate repayment of the Principal Outstanding." 18 By letters of 23 November 2009 to Borrower 1 and Borrower 2, the defendant complained of breaches in failing to comply with financial undertakings to provide EBITDA information, and to provide the October 2009 monthly management accounts. 19 By letter of 7 January 2010 complaints of breach were made for failing to provide the November 2009 monthly management accounts. 20 By letters of 27 January 2010 complaints of breach were made for failure to provide the December 2009 monthly management accounts. It was stated that compliance with the financial undertakings was required for the future. 21 On occasions between November 2009 and June 2010 the first plaintiff informed the defendant of the steps he was taking to sell the Dog and Parrot hotel to reduce the facilities. 22 The situation of Borrower 1 and Borrower 2 as at 6 July 2010 was described by Mr Peter Ogilvy, the defendant's state manager of its credit and asset management department, (aff 3 August 2010) as follows: "52. As at 6 July 2010: (a) Borrower 1 was in default because the overdraft facility was in excess of its facility limit of $500,000 and had been so since 21 September 2009, and the balance on 6 July 2010 was $1,480,796.73; (b) pursuant to those management accounts that have been provided in respect of the period 1 July 2009 to 31 March 2010 (as analysed by Mr Notman and referred to at paragraph 50 above), the following financial undertakings had not been met: (i) ICR consolidated for the AB Hotel and Dog and Parrot Tavern was 0.83 times as measured on the financial reports provided to March 2010; and (ii) the annual EBITDA covenant for the Dog and Parrot Tavern was $760,000 and for the AB Hotel was $740,000; (c) Borrower 1 and Borrower 2 had failed to provide the defendant with the April 2010 and May 2010 monthly management accounts for the AB Hotel and the Dog and Parrot Tavern; (d) the first plaintiff granted or allowed a caveat to subsist in favour of Sule Arnautovic in relation to the first plaintiff's share of the AB Hotel Premises without defendant's prior approval … (e) the Dog and Parrot Tavern permitted the Quickstop Lease to be cancelled which caused the Quickstop Mortgage of Lease to become liable to cancellation, forfeiture, avoidance or loss … 53. In addition to the defaults referred to in paragraph 51 above, on 12 October 2009, the overdraft was in excess of its facility limit of $500,000 as the balance on that day was $712, 458.53 …" 23 On 6 July 2010 the defendant demanded repayment in full of the facilities provided to Borrower 1 and Borrower 2. 24 The notice to Borrower 1 included: "…3. We also refer to our letters dated 14 July 2009, 23 July 2009, 23 November 2009, 7 January 2010, 27 January 2010 and 12 October 2009 (the Notices) notifying Borrower 1 of a number of breaches under the terms of the Facility Agreement …"

The notice proceeded to assert that Borrower 1 was in default by reason of its failure to pay interest as detailed in Schedule A thereto. It gave notice, inter alia, that under clause 16.2(b)(ii) of the General Terms the total outstanding amount ($13,107,000) was immediately due for payment, and demanded payment thereof by 12 pm 8 July 2010. It continued: "If you fail to pay on time the amount hereby demanded or any other amount payable by you under the Facility Agreement, and without prejudice to any of Bankwest's other rights, Bankwest may exercise any or all of its rights under the Facility Agreement and any securities it holds, including but not limited to enforcing its rights under the securities set out in Schedule C, immediately and without further notice. Please note: This notice is given without prejudice to Bankwest's rights to correct any error in the calculation of the sums due under the Facility Agreement and to make further demand in respect of any further monies which are or become payable to Bankwest either under the Facility Agreement or otherwise. Interest, fees, charges and enforcement expenses shall continue to accrue until payment of the Total Outstanding Amount in full." 25 The notice to Borrower 2 included: "…3 We also refer to our letters dated 14 July 2009, 23 July 2009, 23 November 2009, 7 January 2010, 27 January 2010 and 12 October 2009 (the Notices) notifying Borrower 2 of a number of breaches under the terms of the Facility Agreement …"

The notice proceeded to assert that Borrower 2 was in default by reason of its failure to pay the interest detailed in Schedule A thereto. It gave notice in terms similar to the notice given to Borrower 1, and demanded payment of the total outstanding amount ($8,750,000) by 12 pm 8 July 2010. It concluded with warnings in terms similar to those given in the notice to Borrower 1. 26 No payments were made in response to the demands. As earlier mentioned, the receivers were appointed to the businesses on 8 July 2010, and to the properties on 9 July 2010. 27 Since their appointment, the receivers have continued the management and operation of the hotels, and are taking steps to ready them for sale. Determination 28 Almost at the outset of submissions the plaintiffs demonstrated that the amounts of interest claimed to have been unpaid in the notices of 6 July 2010 had, in fact, been paid before the demands were made. In response, senior counsel for the defendant stated that these claimed defaults were not relied upon to justify the appointment of the receivers. 29 The defaults relied upon which enlivened the defendant's entitlement to appoint the receivers as identified by the defendant are listed in Ex 2 "Table of Defaults". They include failures to maintain the required EBITDA and ICR, and to provide monthly management accounts. Also included are failures to ensure that the outstanding amount under the overdraft facility for Borrower 1 did not exceed the facility limit of $500,000. I understood that these defaults were not disputed. In any event, Mr Ogilvy's evidence established their existence. 30 In essence, the plaintiffs submitted that the defendant was bound by clause 2.2 of the Code to act fairly and reasonably towards them, and in a consistent and ethical manner. It was not disputed that the plaintiffs were small business customers to whom the Code applied. In doing so, the defendant was to consider the conduct of each party, and the terms of the relevant contracts. It was put that, as the mortgages were entered into prior to 6 April 2009 when the parties agreed to the General Terms which incorporated the Code, the mortgages must be construed with regard to the obligations under the Code. 31 The plaintiffs' written submissions of 9 August 2010 included the following: "3. The Bank did not act fairly, reasonably or consistently because: 3.1 It now seeks to rely only upon earlier notified breaches (variously from 6 - 12 months prior to the appointment of the receiver) that it had consistently not relied upon to appoint a receiver. (a) Having consistently issued notices in relation to alleged past breaches, and then issuing a Notice on 6 July 2009 pursuant to which it purported to appoint a receiver, the Bank now inconsistently seeks to justify the appointment of the receiver without having to provide Notice of its intention to do so… (b) Having unreasonably issued a Notice alleging a breach which did not exist (alleged non payment of interest) and which is now expressly resiled from, the Bank now unfairly seeks to rely on breaches which in the past it had elected not to rely upon to either: (i) Issue a formal Notice of Demand stating a time within which the Bank required rectification of the default; or (ii) To appoint a receiver (with or without a prior Notice of Default). (c) The Bank has acted inconsistently and unfairly in now relying on the overdraft breach without issuing any Notice which was proximate in time prior to the appointment of the receiver in relation to that default. The Bank agreed with Borrower 1 on 6 April 2009 to renew the overdraft facility with a purported limit of $500,000 when the overdraft on that date was $788,391. It cannot be presumed as a matter of fairness that the bank intended Borrower 1 to be in default from the first day of the renewal of the existing facility. The Bank then elected not to appoint a receiver in October 2009, being the date when the first and only breach Notice was issued in relation to the overdraft (and only notified to Borrower 1 even though that default is now relied upon to appoint a receiver to the security of Borrower 2). Also, no demand for payment of the overdraft was made thereafter by any formal Notice even though there were 3 subsequent Notices served. Further, there was no written request for repayment of the overdraft by any email for at least a 5 month period prior before the appointment of the receiver. Yet that alleged default is now sought to justify the Notice of 6 July 2010 and the appointment of the receiver. The Bank always continued to allow the overdraft account to be debited to repay the interest on the Commercial Facilities: contrary to the express purpose of the overdraft and in a manner which could not suggest the Bank would - without prior notice and with reasonable time to rectify - appoint a receiver by reason of that overdraft being in default. " 32 Further submissions were made in respect of particular aspects of the defendant's actions said to be indicative of unreasonable, unfair, and unethical conduct, but for present purposes it is unnecessary to recite them. 33 In summary, it was submitted that in the circumstances the defendant's reliance upon defaults other than those specified in the notices of 6 July 2010 for the appointment of the receivers under the mortgages was in breach of clause 2.2 of the Code and, accordingly, orders should be made for their removal. 34 The relief sought is in the nature of an interlocutory mandatory injunction. The first consideration is whether the plaintiffs have demonstrated there is a serious issue to be tried that there is, prima facie, a reasonably arguable case on both the facts and the law that the defendant was not entitled under the mortgages to appoint receivers to the properties. (Castlemaine Tooheys Ltd v South Australia [1986] HCA 58; (1986) 161 CLR 148; Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd [2001] HCA 63; (2001) 208 CLR 199.) In my opinion, in order to meet this test it is necessary for the plaintiffs to demonstrate, at least, that it is reasonably arguable that clause 2.2 of the Code operated to require notice be given of the appointment of a receiver although the express terms of the mortgage (clause 12.2(b); clause 13.1(a)(ii)) empower appointment without notice. 35 Clause 20.2(b) General Terms provides that the Code does not apply to these (or any) provisions of the mortgage unless it be shown that the provision(s) would "otherwise contravene a requirement of the Code … or impose an obligation or liability which is prohibited by the Code ...". If such is the case the relevant agreement is to be read "as if that provision were varied to the extent necessary to comply with the Code … or, if necessary, omitted". There was no attempt in this case to demonstrate that these or any other provisions of the mortgage fell within clause 20.2(b), or to articulate the variation necessary to comply with the Code, alternatively, to submit that their omission was necessary for compliance. In my opinion, no arguable case was established that the provisions which enabled the appointment of receivers without notice should be read down or varied in any way. 36 For the purpose of this interlocutory application, it is unnecessary to finally determine as a matter of construction the underlying intention of clause 2.2 of the Code. Although the issue was not fully argued in these proceedings, it is appropriate to express my preliminary view about it. According to well known principles the approach to be taken is that as it is a commercial document it should be given a commercially sensible and businesslike interpretation with regard to its language and the objects intended to be secured. Preference is to be given to a construction supplying a congruent operation to the various components of the whole (McCann v Switzerland Insurance Australia Ltd (Allens Case) [2000] HCA 65; Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28). 37 As clause 1.1 states, the Code is a voluntary code of conduct which sets standards of good banking practice to be followed when dealing with individual and small business customers. Clause 2.2 imposes a standard of behaviour in acting towards the customer which is fair and reasonable, consistent and ethical. In doing so, consideration is to be given to the conduct of both the customer and the bank, and to the contractual arrangements between them. Clause 2.3 states that in meeting the bank's key commitments to the customer (which include the commitments under clause 2.2) regard will be had to the bank's "prudential obligations". 38 These provisions impose standards of behaviour to be observed in the performance of contractual rights and obligations, including the exercise of contractual powers. The unambiguous language of clause 2.2 and clause 2.3 shows that the manner in which the bank is required to act in the performance of a contract with a customer is to be ascertained with regard to the conduct of the parties in the context of their contractual arrangements. Clause 2.3 recognises that the bank will have regard to its "prudential obligations" in adhering to the standards of behaviour. The effect of this provision, in my opinion, is to preserve the bank's entitlement to act with careful regard to its own interests under the relevant contract(s). 39 Accordingly, in my opinion, adherence to the Code does not require the bank to subordinate its own interests to those of the customer, or to prefer the interests of the customer. These clauses indicate the bank's commitment to have due regard to the interests of both parties in the course of its performance of the terms of the relevant contract. They are directed to the manner of exercise of the contractual right or power. They do not operate to qualify or vary such right or power. 40 In this case the mortgage provided a power of appointment without notice. In my opinion, the plaintiffs have not demonstrated an arguable case that the Code operates to prevent the defendant from exercising that power in the circumstances of this case. Furthermore, I accept the defendant's submissions that the principles in Canberra Advance Bank Ltd v Benny (1992) 38 FCR 427; McMahon v State Bank of New South Wales (1990) 8 ACLC 315; Bond v Hongkong Bank of Australia Ltd (1991) 25 NSWLR 286 are applicable in the circumstances of this case. 41 For the above reasons I hold that the plaintiffs' interlocutory application must be refused. 42 A further, and alternative, ground for refusing relief is that the balance of convenience is heavily weighted in the defendant's favour. The effects of orders made as sought by the plaintiffs would be to upset the status quo, and to grant at the interlocutory stage what, in substance, would be a significant measure of final relief. 43 The challenge is to the appointment of receivers to the properties. As there is no challenge to their appointments to the businesses and related assets, they will remain in place. It is common ground that the property and business of each hotel are to be sold as one, and that an early sale is desirable. Mr Ogilvy deposed that the value of a hotel is based on the trading performance of the business as opposed to the value of the freehold land on which it operates. He also said that, since their appointment, the receivers have continued the trading operations of the businesses, in addition to preparing them for sale, a process which is well underway. Submissions from selling agents for marketing and sales have been sought. 44 There is no evidence that continuation of the appointment of the receivers over the properties would be in any way detrimental to the plaintiffs' interests. There is no evidence which demonstrates that the plaintiffs would derive any advantage or benefit if they regained possession of the properties at this stage. It is not suggested that there is a risk that the receivers will eventually sell for an amount less than that which might be obtained if the plaintiffs were working with them. 45 On the evidence before me, I have come to the firm opinion that the present situation should be left undisturbed pending final determination of the proceedings. Conclusion 46 The Court orders:

(1) The plaintiffs' notice of motion filed 22 July 2010 be dismissed.

(2) The plaintiffs pay the defendant's costs. **********

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