Devmun Pty Ltd v Ed's Food Pty Ltd
[2022] VCC 21
•19 January 2022
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
Case No. CI-21-03475
| DEVMUN PTY LTD AS TRUSTEE FOR THE DEVMUN DISCRETIONARY TRUST and Ors | Plaintiffs |
| v | |
| ED'S FOODS PTY LTD and Anor | Defendants |
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JUDGE: | Lauritsen | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 10 January 2022 | |
DATE OF RULING: | 19 January 2022 | |
CASE MAY BE CITED AS: | Devmun Pty Ltd and Ors v Ed’s Food Pty Ltd and Anor | |
MEDIUM NEUTRAL CITATION: | [2022] VCC 21 | |
RULING
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Subject:COMMERCIAL LAW
Catchwords: Summons – Order sought that the Third Plaintiff execute security documents – a Freezing Order or Mareva relief sought in the alternative – Solvency a focus of the Application – inappropriate to grant any of the relief sought
Cases Cited:Lanhai Pty Ltd v 7-Eleven Stores Pty Ltd [2021] VSC 587; Morris v Redland Bricks Ltd [1970] AC 652
Ruling: Application refused.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J. Korman | Barry Moshel Legal |
| For the Defendants | Mr D. Bycroft (Summons) Mr H. McAveny (Ruling) | Merton Lawyers |
HIS HONOUR:
Introduction
1The Applicants (the Defendants) seek orders against the Third Plaintiff, Munire Kara (‘Ms Kara’):
(a) that she execute any further security or documents supporting such security as required by Ed’s Foods Pty Ltd (the First Defendant) in accordance with the terms of the contract of business sale, dated 27 September 2018;
(b) further or in the alternative, restraining her from disbursing or distributing the proceeds of the sale of 14 Purcell Street, North Melbourne except for any amount owing under the first mortgage and the reasonable costs of the sale. This proposed injunction is subject to the Defendants giving the usual undertaking as to damages.
2The application is supported by the affidavit of the First Defendant, Jack Rennex. I have also had regard to the affidavit of Daniel Bycroft.[1] Ms Kara swore an affidavit in opposition. I will refer to the property at 14 Purcell Street, North Melbourne as the “the property” and the contract of business sale as “the contract”.
[1] The last affidavit was sworn on 10 December 2021.
3The principal proceedings involve three Plaintiffs and two Defendants. The plaintiffs are: Devmun Pty Ltd (‘Devmun’); Ozkar Pty Ltyd (‘Ozkar’); and Ms Kara. The Defendants are: Ed’s Foods Pty Ltd (Ed’s Foods); and Mehmet Gundem (Gundem).
4There is a claim and counterclaim. The proceedings are listed for trial on 22 August 2022. The Plaintiffs have until about 14 January 2022 to file and serve any reply to the defence to the claim and a defence to the counterclaim. It appears the counterclaim seeks to recover at least $594,785.78.
5Devmun is the trustee of the Devmun Discretionary Trust. Ms Kara is the sole director and shareholder of Devmun and the sole director of Ozkar. She is also the sole owner of the property. The property has been sold and settlement of the sale occurred on 10 January 2022.
6Although Ozcar was not the purchaser of the business, special condition 1.1(b) required it to enter a Mortgage Linked Loan Agreement, which it did.
7On 13 December 2021, the first defendant filed an application for costs against the first and second Plaintiffs seeking security for costs. This application is listed for hearing on 30 January 2022.
8In December 2021, Osborn J ordered the removal of a caveat lodged by the Defendants in respect of the property. I am told by counsel the caveat has been removed. Although Osborn J delivered oral reasons for his ruling, a transcript of those reasons is not available at present. Both counsel were present when the reasons were delivered. According to their memories, the reasons focussed on the mortgage linked agreement and not on certain special conditions of the contract of sale. Nevertheless, Osborn J must have decided the defendants did not have a caveatable interest in the property.
9Ms Kara owns 14 Purcell Street, North Melbourne. It has been sold and the sale settled on 10 January 2022. The net proceeds of the sale will remain in her solicitors’ trust account until today.
10This application seeks, first, a mandatory injunction to compel Ms Kara to execute a security document or security documents. Second, a prohibitory injunction preventing her from distributing the proceeds of the sale of the property. Although not formally described as such, this second order is a freezing order or an order seeking Mareva relief.
Circumstances
11On about 27 September 2018, Ed’s Foods contracted to sell its restaurant business to Devmun (‘contract of sale’). Ms Kara is a guarantor of Devmun’s obligation under the contract of sale. On about 18 October 2018, two other agreements were executed. First, a document entitled “General Security Agreement” was executed by Devmun, Ozkar and Ed’s Foods. Second, a mortgage linked agreement was executed by Ed’s Foods, Oskar, Devmun and Ms Kara.
12Under the contract, a deposit of $5,000 was paid. The balance of the purchase price was financed by the vendor with payment due on 1 April 2019.
13Relevant to this application, there are two special conditions of the contract of sale: 1.1(c); and 2.3.
14Special condition 1.1(c) reads:
“This Contract is subject to and conditional upon:
(c) the parties (including the Purchaser’s Guarantor) entering into a binding General Security Agreement for the purposes set out in Special Condition 2 hereto.”
15Reflecting the opening words of special condition 1.1, special condition 1.2(b) provides:
“If:
(b) Special Conditions 1.1.(b), 1.1.(c) and 1.1.(d) are not satisfied by the Settlement Date, the Vendor may cancel this Contract by giving written notice to the Purchaser.”
16Special condition 2.3 reads:
“The Purchaser must execute all securities in the form required by the Vendor to secure the obligations of the Purchaser under this Agreement and any ancillary agreement to this Agreement. The Purchaser must procure that any associated entity party to any ancillary agreement to this Agreement execute all securities in the form required by the Vendor to secure the obligations of the Purchaser under this Agreement.”
17It is the second sentence of that special conditions which Ed’s Foods relies upon.
18At the requirement of Ed’s Food, the first and second Plaintiffs entered a General Security Agreement. Ms Kara was not then required to enter that agreement. By letters dated 29 December 2021 and 6 January 2022, Ed’s Foods required Ms Kara, as guarantor to the purchaser’s obligations under the contract, to enter into a General Security Agreement and to provide security over the residual proceeds of the sale of the property. She did neither.
19Ed’s Foods places its present entitlement under the contract at $594,785.78. To the principal balance of $315,000, it adds interest and reasonably foreseeable costs, losses and expenses for its legal and recovery fees under the vendor finance facility. Apart from the principal balance, how it arrives at those figures is not disclosed.
20Ed’s Foods has appointed a receiver to Ozkar.
21On 17 November 2021, Ed’s Foods lodged a caveat in respect of the property. On 30 November 2021, she sold the property. A deposit of $139,500 was paid. Settlement of the sale occurred on 10 January 2022 and was only able to do so because, on 20 December 2021, Osborn J ordered the removal of the caveat.
Solvency
22The Applicants fear that if they are successful in the principal proceedings, they will find insufficient funds available to the Respondents to satisfy their success. Accordingly, the affidavits focussed on the financial positions of the Respondents.
23Devmun has a paid-up capital of $10. Far from owning no assets, its owns the business the subject of this dispute. Ms Kara estimates its value at about $300,000. To the allegation of the limited trading of the business, she says the business is actively trading to 3pm and enjoying enhanced business because of the closure of neighbouring restaurants. She expects the business will shortly re-open for dinner service.
24Devmun is the subject of a Final Order in the Magistrates’ Court of Victoria for $8,974.80. This order has not been satisfied because Ms Kara has no knowledge of the claimed debt or the order. She says she will investigate. This is interesting but offers no basis for inferring Devmun has any defence to the claim or any prospect of having the Final Order set aside.
25On 30 November 2021, a creditor’s statutory demand was issued and, presumably, served by Koseli Holdings Pty Ltd. The demand claimed a debt of $30,130. Again, the demand has not been satisfied because Ms Kara has no knowledge of it. Whether the demand is based on a Final Order or judgment or is an elaborate form of debt collection is unknown to me. Nevertheless, the demand has been served, is unsatisfied and exposes Devmun to a winding up application.
26In this proceeding, an order for costs was made against Devmun. Assuming the amount of the costs has been established, then it has not been satisfied.
27Oskar owns units 1 and 2 at 484 Nepean Highway, Chelsea (‘the Chelsea units’). According to the Applicants, they have a combined value of $1,115,000. Those units are subject to mortgages where the present amounts owing total $724,077.29.[2] After deducting this figure together with the estimated costs of sale, Ed’s Foods expects to realise about $310,000. However, based on the managing agents’ advice, Ms Kara estimates the value of the units at between $1,200,000 and $1,300,000. If that estimate is more accurate, then the realisable amount is between about $400,000 and $500,000.
[2] To Perpetual Corporate Trust Ltd. These loans have been in default for some time.
28The Applicants allege Oskar owes the Australian Taxation Office $283,344.25 for RBA deficit debts and employee superannuation guarantee charges. Ms Kara denies Oskar owes the Australian Taxation Office that amount but says it owes $13,932.20, representing the superannuation guarantee charges. Since Mr Rennex does not say where he obtained the figure of $283,344.25 and Ms Kara denies it and annexes documents to her affidavit evidencing the lesser amount, for the purposes of this Application, I accept her figure.
29Ms Kara discloses that Oskar owes an additional $78,000 to La Trobe Finance. This debt is secured by a mortgage over the Chelsea units.
Legal considerations
30The parties approached the injunctive aspect of the relief sought as an exercise of the ordinary principles governing interlocutory injunctions: a serious question to be tried; the balance of convenience; and whether the plaintiff should be confined to damages. The applicants relied on passages from the judgment of Riordan J in Lanhai Pty Ltd v 7-Eleven Stores Pty Ltd[3]. In his written submissions, the solicitor for Ed’s Foods acknowledged the mandatory nature of the relief sought in that I am asked to compel Ms Kara to execute a document or documents.
[3] [2021] VSC 587.
31The principles governing the grant of mandatory injunctions were stated by Lord Upjohn in Morris v Redland Bricks Ltd:[4]
“…The grant of a mandatory injunction is, of course, entirely discretionary and unlike a negative injunction can never be “as of course”. Every case must depend essentially upon its own particular circumstances. Any general principles for its application can only be laid down in the most general terms:
1. A mandatory injunction can only be granted where the plaintiff shows a very strong probability upon the facts that grave damage will accrue to him in the future….It is a jurisdiction to be exercised sparingly and with caution but in the proper case unhesitatingly.
2. Damages will not be a sufficient or adequate remedy if such damage does happen…
3. Unlike the case where a negative injunction is granted to prevent the continuance or recurrence of a wrongful act the question of the cost to the defendant to do works to prevent or lessen the likelihood of a future apprehended wrong must be an element to be taken into account…
4. If in the exercise of its discretion the court decides that it is a proper case to grant a mandatory injunction, then the court must be careful to see that the defendant knows exactly in fact what he has to do and this means not as a matter of law but as a matter of fact, so that in carrying out an order he can give his contractors the proper instructions.”
[4] [1970] AC 652 at 665-666.
Discussion
Special condition 1(c)
32Special condition 3.1 specifies the “settlement date” as being 1 October 2018. Settlement occurred. The contract was not cancelled at the instance of the vendor relying on special condition 3.2. Where the special condition provides its own remedy to Ed’s Foods and it did not use it then it is inappropriate for a court to use its injunctive powers to require this kind of action by Ms Kara.
Special condition 2.3
33In relation to special condition 2.3, Ms Kara submits that after the execution of the General Security Agreement, Devmun’s obligations under contract of sale were discharged and replaced by its obligations under the former agreement. Its obligations under special condition 2.3 were “spent” to use the language of its counsel.
34Strictly speaking, this is incorrect. Under the heading “Non merger”, condition 17 of the General Conditions of the contract provides that the contract continues to operate after settlement. However, the obligation imposed by this condition is upon Devmun and not upon Ms Kara. Since she has not executed the General Security Agreement, the obligation falls on Devmun to procure her signature. If it does not then it is breaches the contract. However, Devmun is not a Respondent to this Application, only Ms Kara is.
35Assuming Devmun was a party, then the first two factors identified by Lord Upjohn are not satisfied. First, on the evidence, Ed’s Foods has not shown a very strong probability that grave damage will accrue to it in the future. The financial position of Devmun is not as poor as is portrayed by Ed’s Foods. Implicitly, Ed’s Foods ascribes no or very little present value to the business it sold for $600,000 in 2018. Ms Kara attributes a value of $300,000. She arrives at that figure by making inquiries, with whom is unknown. Significantly, she denies the suggestion the business is not trading (and, implicitly, has little value) by pointing to its enhanced daytime trading due to the misfortunes of others. Moreover, she expects an early resumption of the provision of dinner at the restaurant.
36Implicitly also, Ed’s Foods expects the monetary side of its counterclaim will be entirely successful and the claims of Devmun and others for damages will not. On the material, I cannot say whether the claim of Devmun and others will succeed, and if they do, to what extent. I have read the amended statement of claim. I have read what Ms Kara says of the material facts and what Mr Gundem says through his solicitor. The amended statement of claim contains a fulsome statement of material facts but, as to the quantum of damages it is left to an expert report on three discrete issues.
37Although the claim of Ed’s Foods is likely to succeed to an extent on the material before me, if Devmun and others do succeed to any significant extent, then I cannot say what would be result of any set-off of one judgment against the other assuming each claim results in at least monetary awards. I cannot then say whether Devmun will have sufficient monies to satisfy Ed’s Foods net result assuming there is a net result in its favour.
38Second, as to the second factor identified by Lord Upjohn, damages may prove an insufficient or inadequate remedy if it is shown that an award of damages will not be satisfied at least to an appreciable extent. Although Oskar is heavily indebted, it may have between $300,000 and $400,000 available to it.
39It is speculative to say that by the time of the trial in August 2022 Devmun and Oskar will be in liquidation.
40As to the third and fourth factors, these were particularly relevant to the situation in Morris’ case. In this case, neither the cost nor the clarity of the order would present any difficulty. Executing a document prepared on behalf of Ed’s Foods would cause little cost to Ms Kara. An order requiring her to execute such a document is easily stated.
41However, on balance, even if Devmun were a party to this Application, it would be inappropriate to grant the mandatory injunction sought.
42Since the defendants do not have a caveatable interest in the property, I cannot see how otherwise they can secure any form of injunction to preserve the proceeds of the sale of the property to satisfy their expected success.
Freezing Order
43The Applicants also seek a Freezing Order or Mareva relief. Ordinarily, an Applicant for such relief must establish there is a prima facie case or real risk that Ms Kara will divest herself of the settlement monies or remove them from the jurisdiction to frustrate the Applicants’ anticipated judgment. There is no evidence to support such a finding. Accordingly, I cannot make a Freezing Order or grant Mareva relief.
Conclusion
44I will refuse the relief sought by the Applicants and hear the parties on the question of costs.
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