Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Injunctions - Interlocutory injunctions - Equitable charges and securities - Injunction to restrain chargee from exercising powers under instruments of security - The general rule in Inglis - Exceptions to the general rule in Inglis - Interlocutory injunction granted by the primary judge - Whether the primary judge erred in granting the injunction on the condition that the indebtedness secured by the instruments of security be paid into court

Appellants' application in the appeal for an interim order that the interlocutory injunction granted by the primary judge be continued until the hearing of the appeal dismissed

Allfox Building Pty Ltd v Bank of Melbourne (1992) NSW Conv R 55-634

Apache Northwest Pty Ltd v Agostini [2009] WASCA 147

Bank of New South Wales v O'Connor (1889) 14 App Cas 273

Bayblu Holdings Pty Ltd v Capital Finance Australia Ltd [2011] NSWCA 39; (2011) 279 ALR 166

Eastland Technology Australia Pty Ltd v Whisson [2003] WASCA 307; (2003) 28 WAR 308

Forsyth v Blundell [1973] HCA 20; (1973) 129 CLR 477

Glendore Pty Ltd v Elders Finance & Investment Co Ltd [1984] FCA 407; (1984) 4 FCR 130

Harvey v McWatters [1948] NSWStRp 58; (1948) 49 SR (NSW) 173

Inglis v Commonwealth Trading Bank of Australia [1972] HCA 74; (1972) 126 CLR 161

Ladang Jalong (Australia) Pty Ltd v Callander [2005] WASCA 203

Milton Park Country Club Pty Ltd v Yasuda Trust Australia Ltd (Unreported, NSWSC, 8 March 1991)

Paringa Mining & Exploration Co Plc v North Flinders Mines Ltd [1988] HCA 53; (1988) 165 CLR 452

Town & Country Resorts (Holdings) Pty Ltd v Partnership Pacific Ltd (1988) 20 FCR 540

1 REASONS OF THE COURT: The first appellant (Welldog), the second appellant (GSTC) and the third appellant (Blue Sky) have appealed against an interlocutory injunction granted by Kenneth Martin J on 3 March 2017 in pending action CIV 2859 of 2016 in the General Division of the Supreme Court.

The parties to the pending proceedings in the General Division

2 The pending proceedings are between the appellants as plaintiffs and the respondent and others as defendants.

3 Welldog is a company which was incorporated in Australia on 3 December 2010. Since that date it has been engaged in the business of providing energy-focused technical products and services, including down well hole technical products and services to the coal, steam and gas industry in Queensland.

4 GSTC is a corporation constituted in the State of Wyoming in the United States of America. It holds 100% of the issued shares in Welldog. GSTC provides significant capital by way of loans to Welldog and also provides Welldog with management services for which Welldog, in the ordinary course of business, pays management fees.

5 Blue Sky is a corporation constituted in the State of Wyoming in the United States of America. It is a substantial shareholder of GSTC.

6 The respondent is a company which was incorporated in Australia on 31 October 2000.

(a) three promissory notes made by Welldog and evidencing loans by the respondent to Welldog (Note 1, Note 2 and Note 3);

(b) a letter dated 11 May 2016 (the Letter of Comfort) signed by Simon Ashton, in his capacity as the managing director of the respondent, and addressed to Kim Colyer, the auditor of Welldog;

(c) an extension and variation agreement in respect of Note 1, Note 2 and Note 3 executed in or about July 2016 (the Extension Agreement) which provided for, relevantly, an extension of the maturity dates of Note 2 and Note 3 and the variation of the terms and conditions of Note 1, Note 2 and Note 3;

(d) a general security agreement dated 1 August 2016 (the GSA) pursuant to which Welldog granted to the respondent a security interest over specified personal property and a fixed charge over all of its other property to secure, amongst other obligations, indebtedness owing from time to time by Welldog to the respondent; and

(e) a fixed charge executed on or about 1 June 2011 (the Fixed Charge) pursuant to which Welldog granted a fixed charge in favour of the respondent over specified equipment to secure all amounts (including damages) that are payable, owing but not payable, or that otherwise remain unpaid by Welldog to the respondent in respect of the secured promissory note entered into by Welldog and the respondent on or about the date of the Fixed Charge.

The appellants' application to the primary judge for the interlocutory injunction

8 The appellants applied to the primary judge for the grant of an interlocutory injunction in the pending proceedings to restrain the threatened appointment by the respondent of a receiver and manager in respect of Welldog's assets and undertaking pursuant to the GSA and the Fixed Charge.

9 The hearing before the primary judge took place against the background that:

(a) another entity, known as Baker and Hughes, had applied in the Supreme Court of Queensland to wind up Welldog, following Welldog's failure to comply with a statutory demand served by Baker and Hughes; and

(b) the winding up application will be heard in the Supreme Court of Queensland on 12 April 2017.

10 The primary judge found, in effect, that there was 'a respectable argument in terms of the serious question or prima facie case which [the appellants need] to establish' in relation to whether:

(a) the variation of the terms and conditions of Note 1, Note 2 and Note 3, pursuant to the Extension Agreement, should be set aside;

(b) Welldog was obliged, in its personal corporate capacity, to pay the indebtedness secured by Note 1, Note 2, Note 3, the GSA and the Fixed Charge or any of those documents; and

(c) the respondent was entitled to appoint a receiver and manager in respect of Welldog's assets and undertaking pursuant to the GSA and the Fixed Charge (ts 8).

11 His Honour also found that the balance of convenience was 'obviously in [the appellants'] favour' in that the appointment of a receiver and manager in respect of Welldog's assets and undertaking 'would deliver outcomes which would be potentially destructive [of] or, indeed, even catastrophic to the ability of Welldog to continue to trade' (ts 7).

12 However, the primary judge held that the interlocutory injunction granted in order 3 of the orders made by his Honour on 3 March 2017 should be conditional upon Welldog paying into court, in accordance with Inglis v Commonwealth Trading Bank of Australia [1972] HCA 74; (1972) 126 CLR 161, the amount of the indebtedness in question.

In my view, this is not a case where there's an exception to the general rule [in Inglis]. In my view, what has occurred here, perhaps somewhat opportunistically but that is the way the mortgage instrumentation is drawn, is that the occurrence of the event of insolvency by reference to the unanswered or uninterrupted 21 day statutory demand has met the definition under the security instrumentation of an event of default, the consequence being that this has accelerated the amount due and otherwise payable in July of this year, that is, on 14 July 2017, of about US$2 million under note number 1. That amount currently falls due.

Had it been the case that the lender was given the option of calling for the payment of that amount ... in the wake of an event of insolvency, then the situation might have been somewhat different, but, it's quite clear from the terms of the mortgage documentation that I reviewed thoroughly during argument that the full amount of the debt has fallen due by way of acceleration in consequence of that insolvency event occurring for the purposes of the definitions under the promissory notes and the security documentation.

The consequence is that there is a situation at present which has evolved somewhat from 13 December as regards the existence of that insolvency event and now the accelerated falling due of the amount under note number 1 of US$2 million or thereabouts. The [respondent] has sought to, in effect, give notice of that insolvency event under its notice which was handed up by [counsel for the respondent] and dated 28 February 2017.

...

In the present circumstances then, it seems to me that what's necessary in order for the court's equitable intervention is for the amount of the $2 million ... plus the enforcement costs, to be secured, either by a payment into court or by a payment into a trust account upon acceptable terms (ts 12 - 14).

14 The interlocutory injunctions granted by his Honour are embodied in orders 2 and 3 made by his Honour on 3 March 2017.

1. Upon the undertaking of [each of the appellants], [the respondent] whether by itself, its officers, servants, agents or otherwise, is hereby restrained and an injunction is hereby granted restraining [the respondent] for the period until 4.00 pm on Friday, 17 March 2017, from taking any step, or any further step, in the exercise [of] any of [the respondent's] enforcement rights arising under the Transaction Documents as such documents are specified in the schedule to this order, and including but not limited to any enforcement rights under:

(a) clauses 5.2(a), 5.2(b), 5.3 and 11 of the GSA;

(b) clause 12.2 of Note 1, Note 2 and Note 3; and

(c) clause 8.1 of the Fixed Charge.

1. If [Welldog] pays into Court, or secures under an arrangement acceptable to [the respondent], the amounts of:

(a) United States Dollars $1,944,167.50, in the Australian dollar equivalent to such sum on the day that the funds are paid into Court; together with

(b) Australian Dollars $342,487.20,

(or such other amount as the parties agree) by 4.00 pm on Friday, 17 March 2017, then upon that event [the respondent] will be further restrained in the terms as articulated under order 2 above, save that the restraint will be until the trial of this matter, or until further order of the Court.

The appellants' appeal notice and their application for an interim order

16 On 16 March 2017, the appellants filed and served their appeal notice and a draft appellants' case.

17 The appellants allege, relevantly, that the primary judge was in error in deciding that the interlocutory injunction granted in order 3 should be conditional upon Welldog paying into court, in accordance with Inglis, the amount of the indebtedness in question.

18 The principal order wanted in the appeal is that this court vary the conditions on which his Honour granted the interlocutory injunction so that order 3 reads:

[The respondent] will thereafter be restrained on the terms set out in order 2 above, save that the restraint will be until the trial of this matter, or until further order of the Court, if [the appellants] either:

(a) pay into the trust account of [the appellants'] solicitors, Squire Patton Boggs (SPB), free and clear of any liens until further order of this Honourable Court, or secure under an arrangement acceptable to [the respondent] the amount of:

(i) United States Dollars $1,944,167.50, in the Australian dollar equivalent to such sum on the day that the funds are deposited to SPB's trust account; together with

(ii) Australian Dollars $342,487.20,

(or such other amount as the parties agree) by 4:00 pm on Friday, 17 March 2017; or

(b) alternatively:

(I) make available at 1525 Industry Drive, Laramie, Wyoming, to [the respondent] or its designated agent, the Collateral (as that term is defined in the Fixed Charge as at 13 July 2016) as was secured as at 13 July 2016 pursuant to clause 2.1 of the Fixed Charge;

(II) undertake and irrevocably direct that until further order of this Honourable Court any and all proceeds from the claim stated in paragraphs 9 to 52 of [the appellants'] statement of claim filed in this proceeding on 28 February 2017 shall be held in the trust account of SPB free and clear of all liens;

(III) undertake and irrevocably direct that until trial or further order of this Honourable Court the sums held in the trust account of SPB, in respect of Notes 2 and 3 be also held as assurance of the claims of [the respondent] in respect of Note 1; and

(IV) undertake and irrevocably direct that until trial or further order of the Court, no monies will be remitted from [Welldog] to GSTC by way or dividend, loan, repayment of borrowings or any other means, excepting only payments in the usual course by [Welldog] to GSTC for goods and services provided by GSTC to [Welldog] in accordance with that Transfer Pricing Agreement entered between them in 2013, which agreement shall not be amended until trial or further order of this Honourable Court; and

(I) on the 16th day of each month (or the next Business Day) principal repayments of United States Dollars $33,333.33 in respect of Note 1;

(II) in accordance with the terms of Note 1, interest pursuant to cll 4.1 & 4.2, calculated on the principal sum of United States Dollars $1,944,167.50 (as reducing pursuant to principal repayments);

(iii) thereafter, pay into the trust account of SPB free and clear of any liens until further order of this Honourable Court:

(I) in accordance with the terms of Note 2 and 3, interest pursuant to cll 4.1 & 4.2 (interest) calculated on the aggregate principal sum of United States Dollars $1,800,000.00; and

(II) in accordance with the terms of Notes 1, Note 2 and Note 3, interest pursuant to cl 4.4 applicable under each note (default interest) calculated on the aggregate principal sum of United States Dollars $3,744,167.50 (as reducing pursuant to principal repayments).

19 On 16 March 2017, the appellants filed and served an application in the appeal.

20 The principal order wanted in the application was that '[a]s an interim order ... the Court vary [order 3 of the orders] made by [the primary judge] on 3 March 2017 such that the interlocutory injunction be continued on the undertakings [of the appellants] until the hearing of this appeal'.

21 On 17 March 2017, we heard the appellants' application in the appeal. Judgment was reserved. On 20 March 2017, the appellants' application was dismissed. We said that reasons for decision would be published later. These are our reasons.

The appellants' submissions in relation to their application in the appeal

22 Counsel for the appellants submitted that the primary judge failed to consider or apply the recognised exceptions to Inglis, and therefore declined to consider or mould any adequate protection for the respondent's claimed amount in any lesser measure than payment in full.

23 It was argued that 'at least four distinct exceptions to Inglis' were properly invoked by the appellants before his Honour.

24 First, two of the three appellants (namely GSTC and Blue Sky) were not 'on any contention putative mortgagors at all'. A non-mortgagor who seeks injunctive relief 'concurrently with a putative mortgagor' is not 'confined by Inglis'.

25 Secondly, Welldog sought 'to enjoin the enforcement of the putative mortgage' on the ground that, by reason of the respondent's assurances in the Letter of Comfort, the GSA and the Fixed Charge were not enforceable. There is 'a recognised exception to Inglis where there is doubt [as] to whether the mortgagor's power of sale has become exercisable'.

26 Thirdly, Welldog sought 'to impeach and overturn' the security allegedly held by the respondent, including by reason of the respondent's alleged misleading and deceptive conduct when the security was granted. There is 'a recognised exception to Inglis' where the applicant for injunctive relief seeks to impeach 'the root of the security'.

27 Fourthly, Welldog sought 'to impeach and overturn the alleged security' under the Australian Consumer Law and the Australian Securities and Investments Act 2001 (Cth). It is 'a recognised exception to Inglis' where relief is sought under those statutes.

28 Counsel for the appellants submitted that 'the respondent had the benefit of an undertaking from parties (namely GSTC and Blue Sky) who had no obligation under 'the putative mortgage'.

The merits of the appellants' application in the appeal

29 The exercise of this court's discretion to grant or extend an injunction pending the determination of an appeal requires an assessment to be made of the decision under appeal and also the balance of convenience, including whether refusal of the injunction would render the appeal nugatory. See Paringa Mining & Exploration Co Plc v North Flinders Mines Ltd [1988] HCA 53; (1988) 165 CLR 452, 460 (Mason CJ, Brennan & Gaudron JJ). The nature of the criteria which are ordinarily relevant to the exercise of this court's discretion to grant or extend an injunction, pending an appeal, are analogous to those which are relevant to the grant of a stay. Although it is ordinarily necessary to establish that the appellant has reasonable prospects of success on the appeal, the appellant's prospects are, to some extent, interdependent with the balance of convenience. See Apache Northwest Pty Ltd v Agostini [2009] WASCA 147 [10] (Buss JA).

30 The general principles which apply to an application for a stay are not materially different from those which apply to an application for a suspension order under s 15 of the Civil Judgments Enforcement Act 2004 (WA). Those principles were summarised in Eastland Technology Australia Pty Ltd v Whisson [2003] WASCA 307; (2003) 28 WAR 308 [9] (Murray & Parker JJ). See also Ladang Jalong (Australia) Pty Ltd v Callander [2005] WASCA 203 [3] (McLure JA).

31 In Inglis, the appellants executed a mortgage of a property to the respondent to secure an overdraft. The appellants became indebted to the respondent under the mortgage. The indebtedness had not been repaid and the mortgage had not been discharged. The appellants brought proceedings against the respondent claiming damages for breach of contract, defamation, fraud and conspiracy. The appellants denied the existence of any indebtedness under the mortgage on the basis that any debt that did exist was more than counterbalanced by the damages which the appellants claimed. The appellants sought an injunction to restrain the respondent from taking any action pursuant to a notice of demand given under the mortgage and an injunction restraining the respondent, until judgment in the pending proceeding, from dealing in any way with the mortgaged property.

32 Walsh J dismissed the application for interlocutory injunctive relief. His Honour held:

A general rule has long been established, in relation to applications to restrain the exercise by a mortgagee of powers given by a mortgage and in particular the exercise of a power of sale, that such an injunction will not be granted unless the amount of the mortgage debt, if this be not in dispute, be paid or unless, if the amount be disputed, the amount claimed by the mortgagee be paid into court (164).

33 His Honour also held that 'nothing short of actual payment is regarded as sufficient to extinguish a mortgage debt' and, if the debt has not been actually paid, 'the Court will not, at any rate as a general rule, interfere to deprive the mortgagee of the benefit of his security, except upon terms that an equivalent safeguard is provided to him, by means of the plaintiff bringing in an amount sufficient to meet what is claimed by the mortgagee to be due' (164 - 165). His Honour elaborated:

The benefit of having a security for a debt would be greatly diminished if the fact that a debtor has raised claims for damages against the mortgagee were allowed to prevent any enforcement of the security until after the litigation of those claims had been completed (165).

34 The appellants' appeal against Walsh J's decision to the Full Court of the High Court was dismissed. Barwick CJ (Menzies and Gibbs JJ agreeing) said, in essence, that Walsh J's decision to refuse the interlocutory injunction, and the reasons he gave for that refusal, were correct (168). The case fell 'fairly ... within the general rule applicable when it is sought to restrain the exercise by a mortgagee of his rights under the mortgage instrument', namely failing payment into court of the amount sworn by the mortgagee as due and owing under the mortgage, 'no restraint should be placed by order upon the exercise of the respondent mortgagee's rights under the mortgage' (169).

35 The general rule in Inglis supplements the ordinary requirement that an applicant for an interlocutory injunction give an undertaking as to damages. See Harvey v McWatters [1948] NSWStRp 58; (1948) 49 SR (NSW) 173, 177 (Sugerman J).

36 The general rule in Inglis is not inflexible. There are exceptions.

37 For example, subject to the overriding discretion of the court as to the terms and conditions (if any) to be imposed on the grant of interlocutory injunctive relief, and depending on the facts and circumstances and overall justice of the particular case, payment into court may not be required where it is alleged that:

(a) the power of sale under the mortgage is not properly exercisable: Inglis (164 - 165); Bayblu Holdings Pty Ltd v Capital Finance Australia Ltd [2011] NSWCA 39; (2011) 279 ALR 166 [58] (Campbell JA, Tobias & Macfarlan JJA agreeing);

(b) the mortgage is invalid, or a breach of the mortgage has not occurred which engages the power of sale, or a notice required to engage the power of sale is ineffective: Allfox Building Pty Ltd v Bank of Melbourne (1992) NSW Conv R 55-634, 59,626 - 59,627 (Powell J);

(c) the power of sale is being exercised for an improper motive: Milton Park Country Club Pty Ltd v Yasuda Trust Australia Ltd (Unreported, NSWSC, 8 March 1991) (Bryson J) 11 - 15; or

(d) the mortgage or the power of sale is impugned pursuant to the Australian Consumer Law or the Australian Securities and Investments Act or equitable principle: Glendore Pty Ltd v Elders Finance & Investment Co Ltd [1984] FCA 407; (1984) 4 FCR 130, 133 - 136 (Morling J); Town & Country Resorts (Holdings) Pty Ltd v Partnership Pacific Ltd (1988) 20 FCR 540, 545 (Davies, Gummow & Lee JJ).

38 It must be remembered that, where the source of the court's injunctive power is not that of a court of equity but is supplied by statute, the court may (as a matter of power rather than as an exercise of discretion in the particular case) grant interlocutory injunctive relief that does not correspond with the relief that would follow from an application of the traditional rules of equity. See Town & Country Resorts (545).

39 In the present case, it is unnecessary to consider the correctness of those aspects of the primary judge's reasoning which are attacked in the appellants' draft grounds of appeal and submissions. It is sufficient to state that, in our opinion, his Honour's decision to refuse to extend the interlocutory injunction granted under order 2 of the orders made on 3 March 2017, unless Welldog paid into court or secured under an arrangement acceptable to the respondent the amount of the indebtedness in question, was correct. Our reasons for that opinion are as follows.

40 First, although the primary judge found that there was 'a respectable argument in terms of the serious question' to be tried, his Honour did not find that the appellants had a strong case in relation to the serious question; that is, his Honour did not find that the appellants had a strong case in relation to whether:

(a) the respondent's power to appoint a receiver and manager was properly exercisable;

(b) by reason of the respondent's assurances in the Letter of Comfort, the GSA and the Fixed Charge (or either of them) were not enforceable; or

(c) by reason of the respondent's misleading or deceptive conduct, the security conferred on the respondent by the GSA and the Fixed Charge (or either of them) should be impeached or overturned.

41 On the material before this court, there is no basis for concluding that his Honour was in error in failing to characterise the appellants' case in relation to the serious question to be tried as stronger than 'a respectable argument'.

42 Secondly, the material before this court demonstrates that the property secured under the GSA and the Fixed Charge is inadequate as security for the indebtedness in question. The GSA and the Fixed Charge are third ranking securities. Also, the appellants' statement of claim pleads that the audited financial statements of Welldog disclose that:

(a) as at 31 December 2013, Welldog's total liabilities exceeded its total assets by AUD$6,354,966;

(b) as at 31 December 2014, Welldog's total liabilities exceeded its total assets by AUD$7,964,613; and

(c) as 31 December 2015, Welldog's total liabilities exceeded its total assets by AUD$7,371,705 [54] - [55].

43 The material before this court does not disclose Welldog's financial position as at 31 December 2016 or currently.

44 Thirdly, in the circumstances, Welldog's undertaking as to damages is inadequate. Also, the material before this court does not demonstrate that the undertakings as to damages of GSTC and Blue Sky are, in the circumstances, adequate.

45 Fourthly, Inglis is a particular application of the equitable maxim that 'he who seeks equity must do equity' and, in a dispute between mortgagor and mortgagee, a court of equity has the power to do 'complete justice between the parties'. See Bank of New South Wales v O'Connor (1889) 14 App Cas 273, 283 (Lord MacNaghten delivering the advice of the Privy Council); Forsyth v Blundell [1973] HCA 20; (1973) 129 CLR 477, 505 (Walsh J). In our opinion, in the circumstances, the general rule in Inglis and its exceptions apply, by analogy, to GSTC's and Blue Sky's claims for interlocutory injunctive relief in that their claims in equity to restrain the appointment of a receiver and manager in respect of Welldog's assets and undertaking are based, to a significant extent, on Welldog's claims against the respondent.

46 Fifthly, the material before this court does not demonstrate that the alternative security offered by the appellants is, in the circumstances, adequate.

47 Sixthly, there was no finding by his Honour (and no challenge by the appellants to the absence of a finding by his Honour) that the respondent would be unable to satisfy an award of damages in the event that it was ultimately determined at trial that any receiver and manager appointed by it was not properly appointed.

48 Seventhly, although, as the primary judge found, the balance of convenience strongly favoured the appellants, that factor was decisively outweighed by the other considerations to which we have referred.