SUPREME COURT OF QUEENSLAND
PARTIES: | |
FILE NO/S: | |
Trial Division | |
PROCEEDING: | Originating Application |
ORIGINATING COURT: | |
DELIVERED ON: | 16 August 2002 (order) |
DELIVERED AT: | Brisbane |
HEARING DATE: | 16 August 2002 |
JUDGE: | White J |
ORDER: |
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CATCHWORDS: | MORTGAGE – MORTGAGES AND CHARGES GENERALLY – REMEDIES OF THE MORTGAGEE – SALE UNDER POWER – MODE OF EXERCISE OF POWER – REMEDIES OF MORTGAGOR – INJUNCTIONS TO RESTRAIN SALE – where secured creditor exercises power of sale of company – where applicant claims sale is at undervalue – where injunction would impact third party purchaser CORPORATIONS – RECEIVERS, MANAGERS AND CONTROLLERS – POWERS – where receivers and managers appointed under mortgage debenture – exercise of power of sale Corporations Act 2001 (Qld), s 419, s 420A, s 423, s 424, s 434A Property Law Act 1974 (Qld), s 84 Waring (Lod) v London & Manchester Assurance Company Limited [1935] 1 Ch 310, considered Forsyth v Blundell (1973) 129 CLR 477, considered Costa Del Mare Pty Ltd v Bank of Western Australia No 4306 of 2002 unreported decisions of 31 May 2002, considered |
COUNSEL: | Mr A C Wrenn for the applicant Mr I Perkins for the respondents |
SOLICITORS: | Direct briefing by the applicant Minter Ellison for the respondents
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[1] This matter came before Dutney J in Rockhampton on 9 August 2002. He made procedural orders and adjourned the application to Brisbane. The matter came before me on 16 August and because of a contract of sale due for imminent settlement I made orders dismissing the application with my reasons to be published subsequently and I now publish those reasons.
[2] The first respondent (“the Bank”) on 19 June 2002 appointed the second respondents, Messrs Park and Clout, receivers and managers to the applicant (“the company”) pursuant to a registered mortgage debenture.
[3] By its further amended originating application filed in Rockhampton on 13 August 2002 the company seeks orders
● for the removal of the receivers pursuant to s 423, s 424 and s 434A of the Corporations Act 2001 because they are in conflict with and/or contravention of s 418(1)(b), s 418(1)(c), s 418A and s 420A of the Corporations Act;
● pursuant to s 423 and s 424 of the Corporations Act the receivers be restrained from completing the sale of the company’s business known as RockNet under contract to iiNet Limited as the sale would contravene s 420A of the Corporations Act and there is no power or basis for the receivers to proceed with the sale;
● that the contract of sale be declared void ab initio and/or alternatively voidable on the basis of notice being given to iiNet Limited of the company’s interest in RockNet;
● that the receivers be responsible for their own costs of their duties as receivers pursuant to s 419 of the Corporations Act as they are in conflict and/or contravention of s 418(1)(b), s 418(1)(c), s 419 and s 420A of the Corporations Act;
● a declaration that the respondents had no basis to proceed to receivership of the company and that the receivership is invalid and that the Bank has not complied with the provisions of s 84 of the Property Law Act 1974.
[4] The company, whose sole director is Mrs R Rodgers, entered into negotiations with the Bank in September 2001 to take over the financing of the businesses which it operated, namely, the Baroona Computer Centre and RockNet which is an internet provider. The Bank granted the company four facilities totalling $419,000 including an overdraft facility of $25,000.
[5] These loans were secured by a mortgage debenture given over the undertakings and assets of the company which was executed on 6 September and registered on 22 January 2002, a first mortgage over real property given by Mr and Mrs Rodgers, a personal guarantee by Mr Stephen Rodgers limited to the amount of $419,000 and a general guarantee by Mrs Rodgers.
[6] The company went into default in respect of all of these facilities. The Bank wrote to the company by letter dated 21 February 2002 asking about the financial position of the company and to develop an “Action Plan” to address the defaults. This letter has played an important part in the company’s appreciation (through Mr and Mrs Rodgers) of the validity of the Bank’s conduct in appointing receivers. Relevantly it states:
“Standard ANZ policy is to increase interest rates when there is a deterioration in account conduct and/or profitability to reflect the additional work and risk involved. Effective immediately the margin on the overdraft facilities will increase by 2.08% and the margin on the two business loan accounts will increase by 1.83%. In addition a further risk premium may be added to all current rates (refer attached Schedule for the Risk Premium that applies to your loan accounts). However, I am able to keep the interest rates for your loan facilities at their current level, provided that an ‘Action Plan’ is agreed to and implemented within the 3 months at which stage the position will be reviewed.”
[7] As part of the action plan the Bank required certain information by 21 March 2002 to review “the present position”:
1. Interim management profit and loss accounts for the main trading entities as at 31/12/2001.
2. Final accountant prepared financial statements for all trading entities as at 30/6/2001. Information to include profit and loss accounts and balance sheets.
3. Personal tax returns for Mr and Mrs Rodgers as at 30/6/2001.
4. Details of arrangements made to satisfy Writs issued by the Australian Taxation Office for moneys owing.
5. Evidence of current insurance cover over assets of the businesses and the properties held as security for the loans in the form of a copy of the policy schedules or latest renewal certificates.
Existing arrangements were to stand and the company was asked to maintain the balance of all current accounts in order and to continue to meet loan repayments. The overdraft was overdrawn by $44,534 and the other facilities in arrears by approximately $6,500.
[8] The schedule to the letter set out the status of the accounts, the interest rates and the risk premiums which might be imposed. The action plan was to be agreed to within three months of the date of the letter and implemented and complied with. In the meantime the conditions of use for each account continued in force and the Bank reserved its rights under the loan agreements.
[9] Contrary to the company’s assertion, the Bank was not, in effect, offering a three month moratorium before action. It was clear as to its terms.
[10] The company did not respond immediately but during April provided the Bank with some documentation about its financial position. By 1 May 2002 the company was still in default. The overdraft account was in excess by $28,073. Under the terms of the overdraft account agreement that sum was then due and payable. Each of the loan accounts was in arrears of the monthly repayments of principal and interest aggregating to about $26,000. By letter dated 2 May 2002 the Bank notified the company and Mr and Mrs Rodgers that since the facilities were in default they may receive notices of demand and notices of exercise of power of sale. Mr P Ashe, manager of the portfolio management department at the Bank who had now assumed control of the applicant’s accounts, sought details of the insurance held over the secured property, statutory declarations of assets, liabilities, income and expenditure and valuations of the security property. Any proposal would be considered by the Bank but Mr Ashe gave no undertaking that it would be accepted or that it would halt enforcement action.
[11] Pursuant to clause 5.7 of the mortgage debenture the Bank appointed Messrs Park and Clout as investigative accountants on 10 May 2001 who reported to the Bank on the financial position of the company as at 24 May 2002. The accountants concluded that the company was insolvent and had insufficient cash reserves to enable it to satisfy the arrears on the various loans and for the overdrawn portion of the overdraft accounts. The cash flow projections prepared by the company had made no provision for repayment of those arrears. A realisation of the company’s assets, they concluded, would be unlikely to provide sufficient funds to satisfy the indebtedness to the Bank. No taxation returns or formal financial accounts had been prepared since the financial year ending 30 June 2000 and, due to its financial difficulties, the company had entered into informal repayment arrangements with its creditors. The company was indebted to the Australian Taxation Office for in excess of $50,000 and had not made allowance for staff compulsory superannuation for three years.
[12] The company did not appear to the accountants to be under any immediate threat in the form of formal recovery action by any of the company’s creditors. They were of the view that the company would have an eroding cash flow position over the following six months and improved revenue from the operation of the business RockNet was dependent on a further cash injection of about $10,000. They noted that the company had been able to maintain its repayment arrangements with Telstra and when the debt was extinguished in December 2002 the cash flow was expected to improve substantially. The company had contributed significant funds to Wodda.com Ltd, a company associated with the Rodgers family, and an amount of $400,000 was owing from that company to the applicant company but Wodda.com had no resources, merely prospects.
[13] The accountants recommended that the company take immediate steps to pursue a sale of the businesses as a whole or in part by way of an equity investment from a third party.
[14] The Bank caused demands to be sent to the company and to the guarantors demanding payment of the total amount owing to the Bank pursuant to the facilities as at 8 May 2002 in the sum of $449,319.21. It appointed Messrs Park and Clout as the receivers and managers of the company pursuant to Part 11 of the mortgage debenture.
[15] On 12 July 2002 Mrs Rodgers notified the Bank that it had received an offer from some of the users of its internet service provider business to contribute the sum of $13,000 to a support fund for the company and an offer to reduce the level of debt by the sum of $50,000 dependent on the receipt of the fund from the users. The Bank did not accept this offer. There was further correspondence between the parties.
[16] After a tender process the receivers negotiated the sale of the RockNet business. An unconditional contract was entered into in August 2002 for $180,000. The sale is for the customer list, plant and equipment. The company contends that this is at an undervalue and has produced a valuation of $345,000 from Mr Andrew Tickner, an accountant. Mr Clayton Hollingsworth of Perth who is the chief financial officer of the purchaser, iiNet Limited, has deposed that his company has acquired 22 internet subscriber bases from third parties over the past few years. He deposes, and there is no challenge to this observation, that RockNet’s internet subscriber base would deteriorate each day that iiNet was not in possession of the base causing it to lose revenue. The settlement of the contract has been delayed by the applications made by the company in Rockhampton and in Brisbane. He challenges the basis upon which the valuation for RockNet’s business has been approached by the company’s valuer. He particularly noted that the expenses that the company incurred in operating RockNet were not relevant to the price which his company was prepared to pay since the internet subscriber base purchased fits it into its existing subscriber base.
[17] On the morning of the hearing an affidavit was produced from Mrs Rodgers who, inter alia, deposed that she challenges her alleged signature which appears on the mortgage debenture exhibited to Mr Ashe’s affidavit. Before her signature there appears a small dot which is not part of her usual signature. Mrs Rodgers exhibits her copy of the mortgage debenture signed by her which clearly does not have that dot. There are many documents exhibited which bear Mrs Rodgers signature and none of them appear to have a small dot in front of them. It is, of course, the case that the document exhibited by Mr Ashe is a photocopy and probably a photocopy of a photocopy. Mrs Rodgers deposed that when she executed the mortgage debenture where the date should appear the words “do not date” were written while on the Bank’s copy “22 January 2002” appears. Her name as printed on the Bank’s copy is not in her handwriting.
[18] The mortgage debenture was registered by the Bank on 22 January 2002. The company, through Mrs Rodgers, maintains that it was unconscionable of the Bank to register the mortgage debenture on 22 January 2002 when it had permitted the overdraft facility to exceed its limit by significant amounts. None of these concerns are relevant to this enquiry (although there are features about the Bank’s copy of the instrument which raise questions). This is because Mrs Rodgers admits to executing the mortgage debenture on or about 6 September 2001 and exhibits her copy executed by her to her affidavit. The date on the mortgage debenture merely relates to the date of registration and has relevance only for the purposes of priority and there is, so far as the material reveals, no other registered charge over the undertakings and assets of the company. There is no suggestion that the company did not take the benefit of the extended overdraft or that in some way the Bank made any representations which would not oblige the company to abide by the overdraft agreement terms.
[19] The relief sought in paragraphs 3 and 7 of the further amended originating application relates to the disqualification and invalidity of appointment of the receivers and managers pursuant to s 418(1)(b), s 418(1)(c), s 418A, s 420A, s 423 and s 424 of the Corporations Act. Messrs Park and Clout are not disqualified within the meaning of s 418. The evidence clearly supports the entitlement of the Bank to appoint receivers and managers under the terms of the mortgage debenture. The company was in arrears in respect of the overdraft and loans from the Bank. The letter of 21 February 2002 which the company contends operated as an estoppel against the Bank demanding repayment before three months had elapsed does not have that effect. The specific offer was with respect to the interest rate increase on the loan (not the overdraft). The existing arrangements were to stand pending the action requested occurring. The accounts were not brought to order. Although cover notes for insurance were produced the premium was not paid.
[20] There is no evidence that the receivers and managers have not exercised all reasonable care in selling the property of the company bearing in mind that there was an extensive advertising process and negotiations took place over time for the sale of the business. The company’s valuer has no experience in selling or attempting to sell an internet provider business. Mr Hollingsworth’s experience suggests that traditional approaches to the sale of a business may not be apt. The receivers and managers’ experience over this sale set out in Mr Park’s affidavit supports this conclusion. The cash flow projections, which Mr Tickner qualified, do not adequately or, in some cases, at all, provide for debt repayment. If there has been a sale at an undervalue as mentioned below, damages are the appropriate remedy not the restraint of the sale.
[21] The Bank as mortgagee, contrary to the assertions by the company, is not exercising power of sale pursuant to s 84 of the Property Law Act 1974. It is exercising power of sale pursuant to the securities.
[22] There is no evidence to suggest that the contract to sell the RockNet business has been exercised in bad faith, Waring (Lord) v London & Manchester Assurance Company Limited [1935] 1 Ch 310. In order to constitute fraud in this sense there needs to be a wilful or reckless disregard of the interests of the mortgagor, Forsyth v Blundell (1973) 129 CLR 477. A contract at an undervalue is insufficient to set the contract aside. Chesterman J in Costa Del Mare Pty Ltd v Bank of Western Australia No 4306 of 2002 unreported decision of 31 May 2002 observed at p 9 that where the rights of third parties will be affected a court would be most reluctant to grant an injunction restraining a secured creditor’s sale.
[23] The company also seeks an order by way of declaration that the contract of sale is void or voidable on the basis of notice being given to the purchaser of the company’s interest in the business being sold. It is hard to grasp this aspect of the application. It seems that after the entry into the contract of sale the company’s interest in the business owned by it was notified to the purchaser. The argument seems to be that the company, therefore, has priority. Under the mortgage debenture the receivers and managers are exercising the power of sale of the company to sell its business.
[24] The company seeks an order pursuant to s 419 of the Corporations Act that the receivers and managers be responsible for their own costs as receivers because they are in a position of conflict or contravention with s 418(1)(b), s 418(1)(c), s 419 and s 420A of the Corporations Act. As has been mentioned above those provisions are not applicable to these receivers and managers and, in any event, are not relevant to the facts which arise here because the appointment is a valid appointment.
[25] The company has sought to demonstrate to the Bank in the months since it has received the notice of demand that the businesses of the company are trading more profitably and, if they are supported, over time, there are real prospects that it and the other business interest, Wodda.com will be trading successfully. There is no obligation on these facts on a creditor to continue to support its debtor. The Bank has acted consistently with its entitlements under the security.
[26] There has been no undertaking as to damages.
[27] The company contends that there has been a failure to conform with the Consumer Credit Code but it applies only to credit provided to a natural person for essentially personal, domestic or household purposes. It is not relevant to these loans.
[28] The orders are that the further amended originating application be dismissed and the applicant pay the respondents’ costs of and incidental to the application to be assessed.
