Elks v Melgear Pty Ltd

Case [2023] QSC 150

SUPREME COURT OF QUEENSLAND

CITATION:

Elks v Melgear Pty Ltd & Ors [2023] QSC 150

PARTIES:

ALEXANDER JASON ELKS

(applicant)
v
MELGEAR PTY LTD
ACN 056 330 646
(first respondent)
DARRYL EDWARD KIRK AND MATTHEW LESLIE JOINER IN THEIR CAPACITY AS RECEIVERS FOR MRV METALS PTY LTD ACN 610 100 402 (IN LIQUIDATION) (RECEIVERS APPOINTED)
(second respondents)
PHILIP ANTHONY FEITELSON
(third respondent)

FILE NO:

BS No 12986 of 2021

DIVISION:

Trial Division

PROCEEDING:

Originating Application

ORIGINATING COURT:


Supreme Court at Brisbane

DELIVERED ON:

14 July 2023

DELIVERED AT:

Brisbane

HEARING DATE:

17 April 2023, 18 April 2023, 20 April 2023

JUDGE:

Cooper J

ORDER:

1.   The originating application is dismissed.

2.    I will hear from the parties as to the form of the direction to the Receivers referred to in these reasons and to any other orders the parties consider necessary to give effect to these reasons, as well as to costs.

CATCHWORDS:

CORPORATIONS – RECEIVERS, CONTROLLERS AND MANAGERS – PRIORITY OF DEBTS – GENERALLY –  where Moreton Resources Ltd, MRV Metals Pty Ltd (as guarantor), First Samuel Ltd (as debenture holder and as security trustee) and others including the applicant and the third respondent entered a secured debenture deed – where Moreton Resources Ltd and MRV Metals Pty Ltd granted a security interest in secured property to First Samuel Ltd as security for the payment of all outstanding monies owed to the debenture holders – where First Samuel Ltd held that security on trust for the benefit of all debenture holders but later gave notice of its resignation – where liquidators were appointed to Moreton Resources Ltd and MRV Metals Pty Ltd – where the third respondent, acting on behalf of First Samuel Ltd, appointed the second respondents as receivers – where the third respondent purported to exercise power as majority beneficiary under the deed to act in the name of the security trustee – where the third respondent appointed the first respondent as security trustee – where the receivers sold MRV Metals Pty Ltd’s interest in a silver mine which formed part of the secured property – where the proceeds of the sale of the silver mine remain with the receivers – whether the secured debentures held by First Samuel Ltd were paid out and replaced by unsecured debt – whether a subsequent agreement altered the priority of creditors of Moreton Resources Ltd and MRV Metals Pty Ltd – whether an assignment of the debt owed to First Samuel Ltd was effective to assign the indebtedness of MRV Metals Pty Ltd and the benefit of the security provided under the secured debenture deed to the applicant – whether the first respondent was validly appointed as security trustee – whether the first respondent should be removed as security trustee

Corporations Act 2001 (Cth), s 9, s 283AA, s 283DA, s 708
Property Law Act 1974 (Qld), s 99
Trusts Act 1973 (Qld), s 80(1), s 82(2)

Australian Securities and Investments Commission v Letten (No 17) (2011) 286 ALR 346

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AGLC
Elks v Melgear Pty Ltd [2023] QSC 150
Case
[2023] QSC 150
Decision Date

CaseChat Overview and Summary

Elks v Melgear Pty Ltd is a case that revolves around the dispute of the priority of debts and the validity of appointments as security trustee. The parties involved are the applicant, Mr Elks, who holds secured debentures, and the respondents, Melgear Pty Ltd and others, who were appointed as receivers and security trustees. The central legal issues in this case concern whether the secured debentures held by First Samuel Ltd were paid out and replaced by unsecured debt, if a subsequent agreement altered the priority of creditors, if an assignment of debt was effective, and if the appointments of security trustees were valid. The court examined these issues by considering the documentary evidence, including the Secured Debenture Deed, the Security Trust Deed, the February 2020 Agreement, and the subsequent assignment of First Samuel Ltd’s rights.

In its reasoning, the court found that the advances made under the 2019 Unsecured Note Deed were indeed used to redeem the debentures issued to First Samuel Ltd under the Secured Debenture Deed. The court rejected the applicant's argument that the redemption was not effective as it did not comply with the specific payment requirements outlined in the Secured Debenture Deed. Furthermore, the court concluded that the February 2020 Agreement did alter the priority of payments under clause 8.3 of the Security Trust Deed, but not in the manner argued by Mr Elks. The court also dismissed Mr Elks’ claims regarding the validity of the appointments as security trustee, finding that the respondents did not breach their obligations and that Mr Elks' future welfare as a beneficiary was not opposed to the continuation of Melgear Pty Ltd as security trustee.

Ultimately, the court dismissed the originating application, noting that further discussions would be held regarding the form of the direction to the receivers and any necessary orders to give effect to the court's reasons, as well as the allocation of costs.

Orders

Orders of the court

1. The originating application is dismissed.

2. I will hear from the parties as to the form of the direction to the Receivers referred to in these reasons and to any other orders the parties consider necessary to give effect to these reasons, as well as to costs.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

Records prepared by First Samuel treated the restructuring of the debt facilities it provided to Moreton Resources in the same way as the company’s internal and audited accounts. Based upon those records, First Samuel issued a certificate to the auditors of Moreton Resources, signed by Mr Flinn as CEO, which stated:“The below details relating to the amounts payable agree with my records at 30 June 2019, with the following exceptions (if any):Unsecured Notes: A$ 10,449,918Interest accrued: A$ 201,657Interest rate: 12% per annum, paid quarterlyTerm: Multiple – 2 years, at callSecurity Nil, unsecured”Mr Elks’ evidence as to the character of the advances by First Samuel in 2019 Mr Elks did not address the 2019 Unsecured Note Deed in his first affidavit filed at the commencement of the proceeding, referring only to the Secured Debenture Deed and Security Trust Deed, the February 2020 Agreement, and the subsequent assignment of First Samuel’s rights.[27][27]Affidavit of Alexander Jason Elks filed 10 November 2021 (Court documents 7 and 8), [8] to [16]. He addressed the contention that the debentures were repaid in a subsequent affidavit,[28] in which he stated:(a)Moreton Resources never paid back the $4,800,000 owed to First Samuel under the Secured Debenture Deed, or the interest payable on the debentures;[29](b)the reconciliation of payments to and from the bank accounts of Moreton Resources did not show payments of $4,800,000 out of the company’s bank accounts to redeem the debentures;[30](c)from his review of the records of Moreton Resources, no documents were sent to the auditors of Moreton Resources to show that First Samuel gave up its rights under the Secured Debenture Deed;[31](d)he was involved in negotiations with First Samuel concerning the Secured Debenture Deed and, to his knowledge, there was no agreement reached with First Samuel to the effect that the $4,800,000 owed under the Secured Debenture Deed would be transferred to short-term loans so as to affect the rights of First Samuel under the Secured Debenture Deed;[32](e)if such a transaction had been agreed it would have been announced on the ASX and no such announcement has been made.[33][28]Affidavit of Alexander Jason Elks filed 24 November 2021 (Court documents 10 and 11).[29]Ibid, [8].[30]Ibid, [13] to [14] and [18].[31]Ibid, [15].[32]Ibid, [20](a) to (c).[33]Ibid, [22](b). I do not accept Mr Elks’ evidence about those matters. I accept the respondents’ submission that payment may be made by means of book entries where the parties agree, either expressly or by inference, to that course.[34] The communications which occurred prior to the various drawdowns of the facility provided under the 2019 Unsecured Note Deed are sufficient to infer that Moreton Resources and First Samuel agreed that part of those funds would be used to redeem the debentures without actual transfers of currency from First Samuel to Moreton Resources (being advances under the 2019 Unsecured Note Deed) and then back from Moreton Resources to First Samuel (being the redemption of the debentures under the Secured Debenture Deed).[35][34]Re York Street Mezzanine Pty Ltd (in liq) (2007) 162 FCR 358, 366 [26] citing Manzi v Smith (1975) 132 CLR 671, 674 and Equuscorp Pty Ltd v Glengallen Investments Pty Ltd (2004) 218 CLR 471.[35]I do not consider that cl 5.1 of the Secured Debenture Deed, which provides that Moreton Resources was required to make payments in Australian currency to the account specified by First Samuel, precludes me from inferring such agreement. The effect of the inferred agreement is that First Samuel waived its right to insist on payment in compliance with the requirements of cl 5.1. In those circumstances, payment by book entry pursuant to the inferred agreement, without complying with the requirements of cl 5.1, does not render Moreton Resources’ payment against the debenture debt ineffective.

Decision

Reasons for decision

The respondents made submissions about conduct which occurred after the debt restructure transactions as evidencing a clear intention by First Samuel and Moreton Resources to treat those transactions as having the result that First Samuel became an unsecured creditor.[46] Having regard to statements doubting whether resort may be had to subsequent conduct as an aid to construction of a contract,[47] I have not considered that conduct in reaching my conclusion on the construction of the definitions in the Secured Debenture Deed or the Security Trust Deed upon which Mr Elks’ argument was based.[46]Respondents’ outline of closing submissions, [137]-[152].[47]Ryan v Textile Clothing and Footwear Union [1996] 2 VR 235, 237-238, 261-262.Conclusion on the first issue I am satisfied that the advances made under the 2019 Unsecured Note Deed were used to redeem the debentures issued to First Samuel under the Secured Debenture Deed. Those advances were not covered by the security granted by MRV under the Secured Debenture Deed in circumstances where the effect of the redemption of the debentures was that Moreton Resources performed the repayment obligation it owed to First Samuel as debenture holder under the Secured Debenture Deed, and MRV was no longer liable to First Samuel as debenture holder under the guarantee and indemnity given in that agreement.Construction of the February 2020 Agreement Mr Elks submitted that the effect of the February 2020 Agreement was to alter the priority of payments under clause 8.3 of the Security Trust Deed. Relevantly, cl 8.3(d) provides that the Secured Money received by the Security Trustee would be paid to each beneficiary of the security trust (that is each debenture holder) rateably in accordance with its “Proportionate Exposure”.[48] Mr Elks’ submitted that, on the proper construction of the February 2020 Agreement, he is entitled to payment of all debts owed to him by Moreton Resources, including debts assigned to him, in priority to payment of the full debenture debt owed to Mr Feitelson.[48]“Proportionate Exposure” is defined to mean, for a beneficiary at any time, “the proportion which the Face Value of all the Debentures it holds bears to all Debentures on issue”. I accept Mr Elks’ submission that the February 2020 Agreement was effective to bind all parties to it and thereby alter their respective distribution entitlements under cl 8.3(d) of the Security Trust Deed. However, whether the agreement operates to alter the parties’ distribution entitlements in the manner for which Mr Elks contends requires consideration of the language used in the February 2020 Agreement, the circumstances surrounding the parties’ entry into that agreement and the commercial purposes or objects to be secured by it.[49] [49]Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104, 116-117 [46]-[52]; Cuzeno RVM Pty Ltd v Overton Investments Pty Ltd (2002) 10 BPR 19,425 [55] (upheld on appeal on this point: Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd [2003] NSWCA 27 [41]-[45].Events preceding the parties’ entry into the February 2020 Agreement

Ratio Decidendi

Legal Principle Established

Ultimately, I am not satisfied that Melgear’s conduct in approving the reimbursement of funds to Mr Feitelson indicates that Mr Elks’ future welfare as a beneficiary of the security trust is opposed to Melgear continuing as security trustee.Section 283DA(b) of the Corporations Act Section 283DA(b) provides that a trustee of a trust deed entered into under s 283AA of the Corporations Act must exercise reasonable diligence to ascertain whether the borrower or any guarantor has committed any breach of the terms of the debentures or the provisions of the trust deed. In order for the Security Trust Deed to be a trust deed entered into under s 283AA, Moreton Resources’ offer of debentures must be one that needed disclosure to investors under Chapter 6D of the Corporations Act, or did not need disclosure under that chapter because of either of two specific provisions: ss 708(14) which excludes the need for disclosure for debenture rollovers or 708A which addresses sale offers that do not need disclosure: see s 283AA(1)(a). I accept the respondents’ submission that the Security Trust Deed was not a trust deed entered into under s 283AA.[78] It did not need disclosure under Chapter 6D, but its exclusion from the requirement for disclosure did not arise under either of the two specific exclusions identified in s 283AA(1)(a). The exclusion from disclosure arises because the offer was made to individual persons:(a)First Samuel, which held an Australian financial services licence and for that reason was covered by the definition of “professional investor” in s 9: disclosure was excluded by s 708(11); Mr Elks did not address this aspect of the respondents’ submissions. In those circumstances, I am satisfied that s 283DA(b) did not apply to Melgear in its role as trustee under the Security Trust Deed. Even if s 283DA(b) did apply, having regard to the submissions made by the respondents about the various allegations of failing to exercise reasonable diligence,[79] I would not have been satisfied that Melgear breached its obligations or that the matters raised by Mr Elks indicate that his future welfare as a beneficiary of the security trust is opposed to Melgear continuing as security trustee.[79]Respondent’s outline of closing submissions at [327]-[341].Failure to provide notices and documents Mr Elks complained that the lien in favour of Mr Feitelson for funding the costs and expenses of the Receivers was granted without notice to him. It is difficult to understand the nature of this complaint in circumstances where the funds advanced by Mr Feitelson, which led to the sale of the mine at a significantly higher price than had been proposed by the liquidators, improved the position of all secured creditors including Mr Elks. In any event, as already observed, the Receivers provided notice of that lien to Mr Elks on 4 February 2022 before the funds were reimbursed to Mr Feitelson. As to the question of delivery of copies of documents, Mr Elks’ evidence went no further than listing documents provided to his solicitors and stating that he had not received any other documents. Mr Feitelson gave evidence that he:(a)caused the solicitors for Melgear to send copies of documents falling within the scope of consent orders made on 28 January 2022 to Mr Elks’ solicitors on a periodic basis;(b)is not aware of any other documents sent or received by Melgear which fall within the categories set out in that consent order.That evidence was not challenged in cross-examination.