Fingal Developments Pty Ltd v Nom De Plume Nominees Pty Ltd
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•20 February 2015
IN THE SUPREME COURT OF VICTORIA Not Restricted AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
LIST E
S CI 2012 1299BETWEEN
FINGAL DEVELOPMENTS PTY LTD (ACN 071 927 225) Plaintiff and NOM DE PLUME NOMINEES PTY LTD (ACN 006 750 090) First Defendant and ASCOT VALE SELF STORAGE CENTRE PTY LTD (ACN 092 643 939) (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) Second Defendant ---
JUDGE:
SIFRIS J
WHERE HELD:
Melbourne
DATE OF HEARING:
1-4 and 8-9 September 2014, 13 October 2014
DATE OF JUDGMENT:
20 February 2015
CASE MAY BE CITED AS:
Fingal Developments Pty Ltd v Nom De Plume Nominees Pty Ltd & Anor
MEDIUM NEUTRAL CITATION:
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MORTGAGES — Whether holder of second ranking mortgage debenture has standing to sue holder of first ranking mortgage debenture for amounts recovered in excess of the amount owing to first ranking mortgage debenture holder.
MORTGAGES ‑ Whether holder of first ranking mortgage debenture recovered amounts in excess of amount owing pursuant to its charge — Accounts between mortgager and mortgagee.
MORTGAGE AND MORTGAGEE in possession — Whether holder of first ranking mortgage debenture is liable to the holder of a second ranking mortgage debenture for wasting assets of chargor company where such assets would have been available to other creditors.
MORTGAGES —Whether second ranking mortgage debenture is valid and enforceable.
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APPEARANCES:
Counsel Solicitors For the Plaintiff Mr D J Williams QC with Mr N McAteer Jane Underwood Lawyers
For the First Defendant Mr P J Bick QC with Mr B Gibson SBA Law
For the Second Defendant Mr M N C Harvey Piper Alderman TABLE OF CONTENTS
A...... Introduction.......................................................................................................................... 1
B...... Relevant background.......................................................................................................... 3
(a)....... Holdings in the AVSS Trust................................................................................... 3
(b)...... Richard Leggo becomes a unitholder in AVSS Trust........................................ 4
(c)....... Property converted into self-storage facility....................................................... 4
(d)...... Robert McNab becomes a unitholder................................................................... 4
(e)....... Unit holding equity and loan position at December 2001................................ 5
(f)....... $20,000 funds advanced by Leggo in 2002.......................................................... 6
(g)...... Decision to convert property into residential apartments................................ 6
(h)...... Funds required for residential conversion.......................................................... 7
(i)....... Structure established for new investors............................................................... 7
(j)........ Albury Investors...................................................................................................... 8
(k)...... Events during 2004-2006......................................................................................... 9
(l)....... Changes to structure of Paringa Loans to AVSS............................................... 12
(m)..... Albury Investors position in 2006....................................................................... 12
(n)...... Construction finance............................................................................................. 14
(o)...... Fingal Charge......................................................................................................... 15
(p)...... Events from October 2007 to March 2008........................................................... 17
(q)...... Financiers suspend funding facilities................................................................ 19
(r)....... April 2008 Agreement........................................................................................... 21
(s)....... Dispute regarding April 2008 Agreement......................................................... 23
(t)....... Settlement negotiations in early 2009................................................................. 24
(u)...... Priority deed prepared by Leggo....................................................................... 26
(v)...... Deed of Settlement – Executed 23 March 2009.................................................. 27
(w)..... The Deed of Settlement......................................................................................... 28
(x)....... From the Deed of Settlement (23 March 2009) to the appointment of Receivers and Managers (21 June 2010)....................................................................................... 29
C...... The issues in the case........................................................................................................ 29
D...... Validity of the Fingal Charge.......................................................................................... 30
E...... The amount secured by the NDP Charge...................................................................... 35
(a)....... The Rebate Payments of $487,000 to Hughes Kennedy.................................. 36
(b)...... The Ferguson Loan................................................................................................ 40
(c)....... NDP Consultancy fees.......................................................................................... 41
(d)...... The Undrawn Fees................................................................................................. 42
(e)....... The apartment 112 Hughes Kennedy payments of $57,906.50....................... 44
(f)....... The Hughes Kennedy Overpayment of $48,611.50.......................................... 46
(g)...... $200,000 Woodhouse repayment........................................................................ 48
(h)...... GST........................................................................................................................... 49
F...... Fingal’s standing................................................................................................................ 50
G...... Conclusion and disposition............................................................................................. 52
HIS HONOUR:
A Introduction
1 Ascot Vale Self Storage Centre Pty Ltd (‘AVSS’) is in receivership and liquidation. It is trustee of the AVSS Trust (‘the AVSS Trust’). In this capacity it is the registered proprietor of the land situated at 8-11 Burrowes Street, Ascot Vale (‘the Property’). AVSS developed and constructed residential apartments on the Property (‘the Project’).
2 Funding for the Project was obtained from various sources. For present purposes the following loans and securities are relevant ‑
(a)Suncorp-Metway Limited Bank (‘Suncorp’) loan ($14,031,091) ‑ First registered mortgage over the Property and first registered mortgage debenture over the assets and undertaking of AVSS.
(b)DBR Corporation Pty Ltd (‘DBR Corporation’) loan ($1,620,000) ‑ Second ranking mortgage debenture over the assets and undertaking of AVSS (‘NDP Charge’) assigned to the plaintiff (‘NDP’).
(c)Fingal Developments Pty Ltd (‘Fingal’) loans ($1,896,538 as at 5 October 2007) ‑ Third ranking mortgage debenture over the assets and undertaking of AVSS in favour of Unitholders and other lenders (‘Fingal Charge’).
3 This dispute is between the second (NDP) and third (Fingal) ranking mortgage debenture holders.
4 On 21 June 2010, acting pursuant to the Fingal Charge (third ranking), Fingal appointed Stirling Lindley Horne (‘Horne’) and Peter Vrsecky (‘Vrsecky’) as Receivers and Managers of AVSS (‘the Receivers and Managers of AVSS’).
5 The next day, on 22 June 2010, acting pursuant to the NDP Charge (second ranking) NDP appointed Avitus Thomas Fernandez (‘Fernandez’) as receiver and manager of AVSS. Fernandez retired in December 2010.
6 Having recovered the full amount allegedly owing pursuant to the NDP Charge, Fernandez made payment of the sum of $1.9 million to Horne and Vrsecky as the Receivers and Managers of AVSS (appointed by Fingal), in reduction of the amount secured by the Fingal Charge. Fingal alleges that a substantial amount is still owing and is secured by the Fingal Charge. The amount owing is yet to be determined.
7 Fingal claims that not all of the funds that NDP recovered and allocated to the NDP Charge were in fact subject to and fell within the NDP Charge and that in such circumstances the excess amount recovered and not subject to the NDP Charge should be paid directly to Fingal as the next ranking security holder. Other claims are also made.
8 NDP denies that it recovered and allocated any amounts that were not properly the subject of its charge and contends that the Fingal Charge is a sham and is not valid and enforceable. Further, NDP contends that Fingal does not have standing to make such a claim.
9 Fingal denies this assertion and contends that the Fingal Charge is valid and enforceable and that in any event both AVSS and NDP are estopped from challenging the Fingal Charge.
10 The main legal and factual issues that arise are as follows –
·The validity of the Fingal Charge.
·What amount did the NDP Charge secure.
·Did NDP recover more than the amount secured by its charge.
·Did NDP (either as mortgagee in possession or by instructing Fernandez) sacrifice or waste any assets that would otherwise have been available to allocate to secured creditors.
·Was NDP under any obligation to account to Fingal and does Fingal have standing to make this claim.
B Relevant background
11 In order to properly understand the factual and legal issues that arise it is necessary to engage in a detailed analysis of the relevant background and history of the Project.
(a) Holdings in the AVSS Trust
12 At the time the Property was purchased, the Unitholders in the AVSS Trust (‘the Unitholders’) were as follows:
(a)Crozier Nominees Pty Ltd (‘Crozier Nominees’), a company controlled by John Crozier (‘Crozier’) as trustee for the B J Crozier Settlement - 600 units (60%);
(b)Crocpot Pty Ltd (‘Crocpot’), a company controlled by Tony Melville (‘Melville’) - 200 units (20%); and
(c)Rincon Constructions Pty Ltd (‘Rincon’) a company controlled by Geoffrey Turner (‘Turner’) - 200 units (20%).
13 The issued units had a value of $1 each but were intended to reflect the contributions to be made by the parties.
14 Melville had said he would progressively lend $200,000 (through his company Crocpot). Accordingly, Crocpot was allotted a 20% equity interest in the AVSS Trust. At that stage, Turner said he was not in a position to lend any funds to the venture. However, his company Rincon was allotted a 20% equity interest in the AVSS Trust in return for Turner finding the Property and agreeing to manage its conversion into a self-storage operation and providing ongoing management.
15 Crozier Nominees was allotted the remaining 60% equity interest in the AVSS Trust. This reflected the financial contribution it intended to make (directly or indirectly) to the venture and the role of Crozier as initiator of the Project and ongoing manager and sole director of AVSS.
(b) Richard Leggo becomes a unitholder in AVSS Trust
16 In May 2001 Richard Leggo (‘Leggo’) became a 15% unit holder in the AVSS Trust.
17 Crozier and Leggo agreed that units held by Crozier Nominees in the AVSS Trust would be transferred to Leggo or his nominee which would amount to Leggo or his nominee receiving 15% of the units in the AVSS Trust. Crozier Nominees also arranged for an assignment of part of the loan account of Paringa Pty Ltd (a Crozier company) (‘Paringa’) to be transferred to RJ Leggo Pty Ltd (‘RJ Leggo’) (a Leggo company) in the sum of $128,750. The ledger printout of AVSS as at 30 June 2001 records a loan from R J Leggo to AVSS of $128,750 on 30 June 2001. The ledger also shows a corresponding transfer to R J Leggo and a reduction in the Paringa loan account.
(c) Property converted into self-storage facility
18 Work on converting the Property into a self-storage facility began almost immediately after the deposit and licence fee were paid (late November 2000). The works were undertaken in two stages. The first stage predominantly comprised the fit out of the ground level of the storage facility. These works were completed and the self-storage business commenced around June 2001.
19 Stage 2 works on the Property began soon after the facility commenced operating. These works comprised the fit out of the first level of the storage facility and took about four months to complete. Further loans from Crocpot and Paringa to AVSS were made around this time. Crocpot loaned a further $90,000 and Paringa a further $50,000.
20 In September 2001 the Property acquisition settled with a facility from the National Australia Bank (‘NAB’) of $1.61 million. Crozier was the sole guarantor of this facility.
(d) Robert McNab becomes a unitholder
21 Around November 2001 Crozier determined that AVSS required further funds, partly to cover the cost of the Stage 2 works that had just been completed. Crozier decided to approach another good friend of his from his school days, Robert McNab (‘McNab’), about investing in AVSS. McNab and Crozier had been involved in several property projects in the past.
22 Crozier provided McNab with a brief investment proposal which he had prepared and a copy of a preliminary valuation advice he had received for the Property dated 1 March 2001. The investment proposal involved an investment of $100,000 in the form of a loan to be used to pay part of the costs of the stage 2 works. The loan would be repaid as and when surplus funds allowed. In addition, equity in the AVSS Trust would be issued on the basis of 1% for every $10,000 loaned to AVSS.
23 In December 2001, McNab’s wife, Susan McNab (‘Mrs McNab’), invested $100,000 in the venture by way of a loan to the AVSS Trust. At this time McNab received a 10% unit holding in the AVSS Trust from Crozier Nominees at a cost of $100. The $100,000 loan advanced by Mrs McNab was made by way of a direct payment to Advance Storage Systems (a creditor of AVSS) of $74,800, with the balance of $25,200 paid directly into the AVSS Trust’s bank account at NAB. The total of $100,000 paid and advanced by Mrs McNab was recorded as a loan in the books of AVSS.
(e) Unit holding equity and loan position at December 2001
24 Following Mrs McNab’s investment, the loan account and Unitholding in the AVSS Trust as at December 2001 was as set out in the table below.
Unitholding in the AVSS Trust as at December 2001
Lender Loan Funds Unitholder Equity
Referred to as Crocpot Pty Ltd $200,000 Crocpot Pty Ltd 20% Melville Susan McNab $100,000 Robert McNab 10% McNab R J Leggo Pty Ltd $128,750 Richard Leggo 15% Leggo Paringa Group Pty
Ltd
$170,262 Crozier Nominees Pty Ltd 35% Crozier Rincon Constructions Pty Ltd Nil Rincon Constructions Pty Ltd 20% Turner Total $599,012 100% 25 There were no further changes to the Unitholder equity percentages after this date. However, the names of the lenders changed as did the amounts recorded in the loan accounts during the remainder of the Project.
(f) $20,000 funds advanced by Leggo in 2002
26 In May 2002 AVSS required funds to assist in meeting the interest charges on the NAB mortgage. Crozier proposed to Leggo that he advance $20,000 to AVSS as a loan, for a 3 month period, with an interest rate of 10%. Leggo agreed and the money was transferred at the end of May 2002 and recorded in the books against the loan account of RJ Leggo. This was the first actual advance Leggo caused to be made to AVSS and increased the amount of the loan account of RJ Leggo from $128,750 to $148,750.
(g) Decision to convert property into residential apartments
27 In early 2003 it became clear to Crozier and Turner that the Ascot Vale self-storage facility was not performing at the levels they had anticipated. During the first 12 months of its operation the facility had met anticipated targets. However, in the following months the letting of units had slowed considerably. This was primarily due to the construction of a number of purpose built self-storage facilities in the surrounding area, which were more aesthetically pleasing. As they were unable to compete effectively with these other facilities Crozier and Turner began looking at alternative, more profitable, uses for the Property.
28 Around mid-2003, after discussions with Turner, Crozier decided that the best option was to close the self-storage facility and accelerate plans for the construction of a residential development. A major factor in the timing of this decision was that a substantial amount of the fit-out could be sold.
29 Crozier does not recall when he informed the other Unitholders about his decision to close the self-storage facility. He gave evidence that he usually updated Melville, McNab and Leggo about any major issues associated with their investment in the AVSS Trust on an informal basis. He was good friends with all three and they met socially and spoke regularly by phone.
(h) Funds required for residential conversion
30 As a first step in the plan to construct a residential development, the Property needed to be rezoned from an industrial to a residential use under the local Council scheme. Once this was achieved, an application for a town planning permit to build a multi-level residential apartment block could be submitted to the local Council. It was not possible to run these two applications in tandem. The local Council required the residential zoning to be in place before they would consider the town planning application for residential use.
31 Crozier was aware that AVSS would require funds to meet the costs of procuring the rezoning and town planning permits. In addition, funds were required to meet the ongoing interest payments on the existing NAB loan. The proceeds from the sale of the fit out were available to assist in the short term in meeting these costs. However, as AVSS no longer had an income stream from the self-storage business, further funds would be needed to get the Project to a stage where financing from a bank or other financial institution could be secured.
32 Crozier decided to raise additional funds for the venture from new private investors. He believed that there would be investors interested in lending money to the proposed development in exchange for the right to purchase an apartment off the plan on advantageous terms.
(i) Structure established for new investors
33 In early August 2003 Crozier instructed Melville to prepare loan documents which could be used for new investors lending money to AVSS on the basis referred to above. Melville advised Crozier that if AVSS was required to grant security over the new loans it would be preferable to use a nominee company as a conduit between the new investors and AVSS. Under this arrangement, investors could loan money to the nominee company who would on-lend the money to AVSS. In turn AVSS, as trustee, would grant the nominee company security of a second mortgage over the Property.
34 The benefit of this structure was that AVSS would only be required to grant one security instrument (for a maximum loan amount) which would cover loans made by a number of different investors. This avoided the creation of multiple security instruments, which could create difficulties for future funders and/or become the subject of priority disputes.
35 On Crozier’s instructions Melville prepared the necessary loan documents, using an existing company called Stead Street Developments Pty Ltd (ACN 071 927 255) as the new nominee company. The company name was changed to AVSS Nominees Pty Ltd on 2 September 2003 (‘AVSS Nominees’). This name was changed on 24 June 2008 to Fingal Developments Pty Ltd, the plaintiff in these proceedings.
36 Crozier became the sole shareholder and director of AVSS Nominees.
(j) Albury Investors
37 In late August 2003, Turner and Crozier travelled to Albury to meet John and Sandra Woodhouse, friends of Turner. Turner told Crozier that the Woodhouses might be interested in investing in the Project. At the meeting Turner and Crozier ran through the details of the proposed residential development and the terms on which they could invest in the Project.
38 The proposal Crozier put to them involved an investment of $100,000 in the form of a loan. In return, the Woodhouses would be entitled to purchase an apartment, off-plan, at a price $100,000 less than its market value and the return of their initial investment. If the proposed development did not proceed within the next 3 years for any reason then the Woodhouses would receive their initial $100,000 investment along with interest calculated at a rate of 20% per annum.
39 The Woodhouses decided that they would invest $100,000 on the basis outlined by Crozier. A loan agreement was signed between the Woodhouses, AVSS Nominees (later Fingal) and AVSS on 1 September 2003 for a 3 year term (‘Loan Agreement’). The Loan Agreement provided for the money invested by the Woodhouses to be on lent by Fingal to AVSS. Clause 2.1 of the Loan Agreement required the Woodhouses to provide the loan to Fingal on the condition that AVSS grant security to Fingal for the loan. In addition, the contract provided that Fingal would pay interest on the loan at the rate of 20% per annum. Attached to the Loan Agreement was an executed copy of the Principal Loan Agreement between Fingal and AVSS.
40 The Woodhouses told Crozier and Turner that they had some friends who they thought might also be interested in investing in the proposed development. Turner went ahead and met with these people. As a result of this meeting two further loan agreements, each for $100,000, were entered into with Fingal. One was with Ronald Noel Ferguson (‘Ferguson’) (‘the Ferguson Loan’) and the other with Maureen and Dean Preston as trustees of the Preston Super Fund (together, ‘The Albury Investors’).
(k) Events during 2004-2006
41 Obtaining a rezoning of the Property and a town planning permit took considerably longer than Crozier and Turner had expected. In June 2004, the local Council approved the rezoning of the Property for residential use. In August 2004, AVSS submitted a town planning application for 49 residential apartments to the local Council. This was later amended to 50 residential apartments. The application was referred to VCAT and final approval to build a multi-level residential apartment block consisting of 50 apartments was granted on 20 April 2005.
42 The process involved and the time it took to achieve the above result was far more expensive than envisaged by Crozier. In addition, NAB decided sometime in July or August 2004 that it did not wish to continue with its facility to AVSS. In September 2004 Crozier was obliged to refinance the Property with Australia and New Zealand Banking Group Ltd (‘ANZ’) for a lesser amount of $1.5 million. As a result of these factors AVSS required additional funds during 2004 to assist with the payout of the NAB facility and to meet ongoing interest holding costs on the ANZ facility.
43 Crozier approached the Unitholders around August 2004 with a request that they advance further loan amounts to AVSS to assist with the above expenses.
44 In September and October 2004 further loan amounts were advanced to AVSS as follows:
(a)Crocpot - $70,000;
(b)Mrs McNab - $36,000;
(c)RJ Leggo - $54,000; and
(d)Paringa - $257,697.
45 This meant that the loan account and Unitholding in the AVSS Trust at the end of October 2004 was as set out in the table below.
Loan account and unitholding in the AVSS Trust as at 31 October 2004
Lender Loan
FundsUnitholder Unit
EquityCrocpot Pty Ltd $228,000 Crocpot Pty Ltd 20% Susan McNab $136,000 Robert McNab 10% R J Leggo Pty Ltd $202,750 Richard Leggo 15% Paringa Group Pty Ltd $407,297 Crozier Nominees Pty Ltd 35% Rincon Constructions Pty
Ltd
Nil Rincon Constructions Pty
Ltd
20% Total $959,047 100% 46 The Unitholders continued to advance further funds by way of loans to AVSS during 2005 to meet ongoing expenses. This included interest payments and later the costs associated with progressing the Project to the construction funding stage. The following loans were made during this period:
(a)Paringa -
• $4,000 on 7 January 2005;
• $14,000 on 29 March 2005; and
• $2,500 on 14 April 2005.
(b)Mrs McNab - $7,000 on 6 December 2005.
(c)RJ Leggo - $10,000 on 14 December 2005.
47 At the end of December 2005 the loan account and Unitholding in the AVSS Trust was as set out in the table below.
Loan account and unitholding position as at December 2005
Lender Loan
Funds
Unitholder Unit
Equity
Crocpot Pty Ltd $228,000 Crocpot Pty Ltd 20% Susan McNab $143,000 Robert McNab 10% R J Leggo Pty Ltd $212,750 Richard Leggo 15% Paringa Group Pty Ltd $427,797 Crozier Nominees Pty Ltd 35% Rincon Constructions Pty
Ltd
nil Rincon Constructions Pty
Ltd
20% Total $1,011,547 100% 48 In late 2005 Crozier decided that from 1 December 2005 the Unitholder related party loans should accrue interest at 15% per annum. He made this decision based on a number of factors.
(a)First, the nature of the investment entered into by the Unitholders had changed from a self-storage facility to a multi storey residential development. As a result of this change Unitholders were required to lend more money to AVSS than envisaged at the time they had made the investment and also wait longer than envisaged before funds would be repaid to them.
(b)Second, the additional advances made by the various Unitholders meant that the amount of loan funds to equity held in the AVSS Trust had become disproportionate.
(c)Third, Rincon held 20% of the units in the AVSS Trust but had not advanced any loan funds to AVSS at that time.
49 Based on these factors, Crozier considered that his decision to charge 15% interest on loans made to date to AVSS was fair in the circumstances.
50 Crozier informed Leggo of this decision in an email dated 5 December 2005. He could not recall why he did not also send this email to McNab and Melville as well.
51 In the email Crozier sent to Leggo he stated that the total loan funds were $1,294,788. After deduction of the Albury loans this equated to $994,788. This is an aggregate difference compared to the amounts recorded in the table above of $16,759. This difference was due in part to the $10,000 Leggo contributed on 14 December 2005. The balance of $6,759 would be due to movements in Crozier’s current account and minor adjustments in the accounts.
(l) Changes to structure of Paringa Loans to AVSS
52 In August 2006 Paringa (a Crozier related company) restructured its borrowings with the NAB. Essentially Paringa repaid a loan of $400,000 to the NAB. This was undertaken by way of a $400,000 loan from the NAB to Sabina Chard (‘Chard’), Crozier’s de facto partner, who on-loaned this money to Paringa, who then repaid the NAB. In return Chard took an assignment of $400,000 of the loan Paringa had made to AVSS. This transaction did not result in any net change to the Crozier loan to AVSS.
53 In August 2007 the Crozier borrowings were further reorganised and Chard’s loan account to AVSS increased by a further $100,000 with a corresponding reduction occurring to other Crozier member loan amounts. This transaction did not result in any net change to the overall Crozier loan to AVSS.
(m) Albury Investors position in 2006
54 At the beginning of 2006 the Project had reached the stage where apartments could be sold off plan to purchasers. In January 2006 John Woodhouse, as Trustee for the Joanne Woodhouse Trust, executed a sale and purchase contract for apartment number G.05.
55 Around the same time the Woodhouses decided to advance a further loan of $200,000 to Fingal and purchase two more apartments in the Project. John Woodhouse as Trustee executed two more sale and purchase agreements for apartments 2.07 and 2.08. All three apartments were sold at their current market value.
56 A second loan agreement for the additional $200,000 loan was entered into between Fingal and the Woodhouses on 6 February 2006. In addition, the Woodhouses signed a letter Crozier had prepared and dated 6 February 2006 (‘Albury Letter’). The Albury Letter contained the key elements of the investment which had been agreed between the parties but which were not contained or reflected in the written loan documents executed by the parties.
57 The terms, as set out in the Albury Letter, varied slightly from the terms discussed with the Albury Investors in 2003. Although the Albury Investors continued to receive a $100,000 discount on an apartment purchased off the plan it now took the form of a reduction on the sale price at settlement rather than a reduction on the list price at the time the sale and purchase contract was entered into. In addition, receipt of the $100,000 reduction at settlement was made subject to repayment by AVSS of any mortgage finance entered into to complete the Project.
58 Although the Albury Letter did not address the issue of interest payable on the loan Crozier told the Woodhouses prior to executing the Albury Letter that no interest would be payable on their loan if they received a reduction of $100,000 on the price of each apartment they had purchased at the time of settlement.
59 A copy of the Albury Letter was also provided to Ferguson and Dean Preston who each signed and returned the Albury Letter to AVSS. Subsequently, Ferguson and Dean Preston each executed a sale and purchase contract for an off the plan apartment in the Project.
(n) Construction finance
60 By late 2006 the Project was ready for construction. Crozier approached ANZ to see if they were prepared to provide construction funding for the Project. After many months of negotiations the ANZ declined. Crozier then mandated Ashe Morgan Winthrop (‘Ashe Morgan’), finance brokers, to procure loan facilities, which they were able to achieve in a relatively short time frame.
61 In March 2007 a letter of offer was provided to AVSS for a first mortgage facility of $14,031,091 with Suncorp. In April 2007 a second mortgage facility of $1,620,000 was offered to AVSS through DBR Corporation. This facility was to be managed by Ashe Morgan and is referred to as the DBR Corporation.
62 The key elements of the Suncorp facility required that construction drawdowns would only commence when the DBR Corporation facility was fully drawn. Once draw downs commenced, interest on the Suncorp facility would be capitalised. Prior to that point, interest on the Suncorp facility had to be funded by AVSS.
63 The Suncorp facility was to be secured by a first mortgage over the Property and a first ranking fixed and floating charge over AVSS. The DBR Corporation facility was to be secured by a second mortgage over the Property and a second ranking fixed and floating charge over AVSS. In addition, Crozier was required to act as sole guarantor of both facilities.
64 Both loan facilities had a presale precondition. The Suncorp facility required a minimum of 19 (approximately 40% of the total) apartment presales, with an aggregate value of $6,653,442, be obtained. These sale contracts had to be arm’s length transactions. The DBR Corporation facility required a further $8,907,578 worth of apartment sales, which could be related party transactions if necessary. Both of the presale conditions had been met at the time the letters of offer were issued to AVSS.
65 In May 2007 the Suncorp and DBR Corporation finance facilities were settled and the relevant securities as outlined above executed by AVSS. Turner was appointed Project Manager with approval of the financiers and demolition works commenced immediately.
(o) Fingal Charge
66 Around August 2007, Golf Club Properties Limited (‘GCPL’) a company associated with Crozier was experiencing financial difficulties. With the aim of addressing these difficulties Michael Dwyer (‘Dwyer’) an experienced insolvency practitioner, was engaged as a consultant to GCPL.
67 The advice provided by Dwyer focussed Crozier’s attention on the need to provide security for existing and incoming investors in AVSS.
68 Around this time Crozier was approached by Turner who told him that he was concerned that the financial difficulties of GCPL could detrimentally impact on AVSS and the Project. Turner said he was particularly worried, as his company Rincon had recently loaned $312,788 to AVSS. He sought assurances from Crozier that his money and the Albury Investors loans were not at risk. He also reminded Crozier that the Albury Investors loans were meant to be secured under the terms of their loan agreements with Fingal.
69 Shortly after this conversation, Turner and Crozier met with Melville, in his capacity as solicitor, for AVSS. Crozier told Melville that the loan agreements executed by the Albury Investors required AVSS to grant security over the amount of the loans. Crozier also told Melville that AVSS would require further loan funds from the Unitholders and that, consistent with Dwyer’s advice, these existing and future loans should also be secured.
70 Crozier explained to Melville that the additional funds were required due to a delay in the construction commencement date caused by the discovery of extensive site contamination during the demolition phase.
71 The delay to the commencement of construction meant that AVSS was unable to commence to draw-down on the Suncorp facility. Accordingly, interest on the facility would not be capitalised and AVSS would have to continue to fund monthly interest payments.
72 During the meeting Turner also raised his concerns about the loan Rincon had made to AVSS and the possible impact of GCPL’s problems on AVSS and the Project. At that stage the amount Crozier had loaned to AVSS through the Crozier group was much greater than the amounts loaned by the other Unitholders. Crozier also considered that the change in the nature of the investment from a self-storage facility to a residential property development had resulted in Unitholders having to lend AVSS additional money and accept a much greater level of risk than had been envisaged.
73 After some discussion regarding these matters, there was general agreement between Crozier, Turner and Melville that the security AVSS was required to grant the Albury Investors should also extend to cover past Unitholder loans and any future Unitholder loans as and when advanced.
74 At the end of the meeting, Crozier instructed Melville to prepare the relevant documents. The security documents prepared by Melville and provided to Crozier comprised a loan agreement and a debenture charge. The parties were Fingal and AVSS. Crozier signed the loan agreement (‘Fingal Loan Agreement’) and the debenture charge on behalf of both entities, as he was sole director of both companies. The documents were dated 5 October 2007. The debenture charge was lodged with ASIC by Aitken Partners on 25 October 2007 (‘the Fingal Charge’). The schedule attached to the loan agreement recorded the amount of the Unitholder loans as $1,896,538 as at 5 October 2007. This amount was secured by the Fingal Charge.
75 Crozier does not remember telling McNab or Leggo about the decision to include Unitholder loans under the Fingal Charge at the time the charge was created. He said that he had a lot going on with GCPL during that time and it is quite likely that he forgot to update them.
76 Crozier gave evidence that at the time he executed the Fingal Charge it was expected that the decontamination works on the Property would be complete by the end of October 2007. Construction was scheduled to commence almost immediately thereafter. AVSS was operating within its loan facilities. It had the ability to borrow further funds through the Fingal Charge arrangement, and the underlying Project was demonstrably profitable.
(p) Events from October 2007 to March 2008
77 Between October 2007 and March 2008 the Unitholders made further loans to AVSS. The Crozier interests made the following loans:
• $100,000 on 8 October 2007
• $1,000 on 26 October 2007
• $22,000 on 2 November 2007
• $18,500 on 4 December 2007
78 These loans were recorded in the AVSS accounts as loans from Chard and Saiwai Pty Ltd (‘Saiwai’) (formerly Crozier Nominees) in its capacity as Trustee of the Saiwai Unit Trust.
79 In 2008 the Unitholders or related parties made further loans as follows:
(a)Mrs McNab made the following loans:
• $4,000 on 14 January 2008
• $5,000 on 15 January 2008
• $5,000 on 16 January 2008
• $5,000 on 17 January 2008
• $21,000 on 29 February 2008
(b)RJ Leggo made the following loans:
• $15,000 on 8 January 2008
• $15,300 on 15 January 2008
80 Crozier recorded the total indebtedness between AVSS and Fingal in a loan acknowledgement document dated 31 March 2008 as $2,116,135 (‘Loan Acknowledgment’). The position was as follows:
| Individual Lender | Amount Lent |
| John & Sandra Woodhouse | $300,000 |
| Maureen& Dean Preston as trustees of the Preston Super Fund | $100,000 |
| Ronald Noel Ferguson | $100,000 |
| CrocPot Pty Ltd | $228,000 |
| Rincon Constructions Pty Ltd | $312,788 |
| Susan McNab | $183,000 |
| Sabina Chard | $555,000 |
| Saiwai Pty Ltd | $ 94,297 |
| R J Leggo Pty Ltd | $243,050 |
| $2,116,135 |
81 This compares with the balance of loans, details of which were provided to Unitholders by email on 28 February 2008, which aggregated to $2,095,035. The difference of $21,100 is the $21,000 advanced by Mrs McNab and a $100 adjustment to the Saiwai loan.
82 The additional funds provided by the Unitholders to AVSS were required to continue meeting the interest payments on the Suncorp facility which by March 2008 had still not been drawn down. In addition, funds were required from the end of 2007 to pay for site clean-up and associated consultant costs, which had been much costlier than expected and took longer to complete.
83 Initially Crozier had met the increasing cost of the decontamination works by drawing down on the DBR Corporation facility. However, around 12 December 2007 Wayne Etchells (‘Etchells’) of Ashe Morgan advised Crozier that Suncorp would not permit any further drawdowns on the contingency sum until building construction works had reached 25% completion. This meant that the ongoing site clean-up costs had to be funded from outside the Suncorp or DBR Corporation facilities.
(q) Financiers suspend funding facilities
84 At the start of 2008 GCPL was experiencing severe financial difficulties. This was due to the withdrawal of support from its major financier, Capital Finance Limited.
85 The problems of GCPL were well publicised at the time. During the latter part of January and February 2008 Crozier met several times with Etchells of Ashe Morgan to discuss the problems facing GCPL and the steps that were being undertaken to address them. Initially, they met to explore the possibility of Ashe Morgan assisting GCPL to obtain alternative finance whilst the latter meetings were more to inform Ashe Morgan of any progress.
86 At Etchells’ request, Crozier and Leggo met with him on 27 February 2008 regarding the position of AVSS. Etchells told them that he wanted to discuss the impact on AVSS of GCPL appointing an Administrator. Crozier recalls that in substance they discussed AVSS’s finances and Ashe Morgan’s concerns about Crozier’s financial position given he was sole guarantor of the facilities. Crozier gave evidence recalling that Etchells told him that Ashe Morgan may be required to write formally to AVSS suspending the facility pending a review. Etchells also said that the Fingal Charge should not have been registered without the consent of Suncorp and Ashe Morgan who were the prior charge holders.
87 The following day the Unitholders met to discuss the status of the Project and the finances of AVSS. To assist the discussion Crozier emailed the Unitholders some financial information. The information he provided consisted of a Balance Sheet, details of ‘Unitholder loans’, Project costs to date, Projected Profit Projection and an Apartment Sales Listing. The item listed in the Balance sheet for ‘Unitholder loans‘ also included the Albury Investors loans. At the meeting Crozier gave a brief overview of where he saw the Project. In substance, he explained the information set out in the documents he had provided including the amounts secured under the Fingal Charge. The amounts secured at that stage were as follows:
Individual Lender Amount Lent as per Accounts Actual
PositionAVSS Nominees Pty Ltd $500,000 John & Sandra Woodhouse $300,000 Maureen& Dean Preston as trustees of the Preston Super Fund $100,000
Ronald Noel Ferguson $100,000 CrocPot Pty Ltd $228,000 $228,000 Rincon Constructions Pty Ltd $312,788 $312,788 Susan McNab $162,000 $162,000 Crozier Group $649,197 Sabina Chard $555,000 Saiwai Pty Ltd ATF The Saiwai $ 94,197 Unit Trust R J Leggo Pty Ltd $243,050 $243,050 $2,095,035 $2,095,035 88 Crozier also recalled that they discussed the funding situation with Ashe Morgan and Suncorp and the need for additional funds to cover ongoing costs until AVSS could draw down on the facilities again. They also discussed the potential need for additional guarantors if the existing Ashe Morgan/Suncorp loan facilities were suspended, and the registration of the Fingal Charge. Crozier told everyone that the Fingal Charge secured the Albury Investors loans and the Unitholder or related party loans made to date. According to Crozier no one raised any concerns about the granting of the Fingal Charge or the monies that it secured. His recollection was that, in substance, they all considered that it was a minor matter. Discussion was primarily focussed on the status of the works, the quantum of additional funds required and what was needed to keep Suncorp and Ashe Morgan on board.
89 Later that day, Ashe Morgan forwarded AVSS a letter dated 28 February 2008 informing it that Ashe Morgan had suspended its loan facility. The letter stated that the loan facility was under review as there had been a material adverse change in the facility. This consisted of a change in Crozier’s financial circumstances and the registration of the Fingal Charge without DBR’s consent. The letter stated that Suncorp had also suspended its facility pending a review. This letter was sent by email from Etchells to Leggo and Crozier. Crozier then forwarded it by email to McNab, Melville and Turner.
90 Following receipt of the letter there were several meetings between Etchells and other Unitholders. Crozier did not attend these meetings as the aim of them was, partly, to give Etchells confidence in the competence and credibility of the other Unitholders. In addition, Crozier was heavily involved in the problems of GCPL. However, he did respond to several requests for information from Etchells regarding the financial position of AVSS during March 2008.
91 During this period, the Unitholders canvassed, through emails, the possible options available to them if Ashe Morgan and/or Suncorp withdrew the loan facilities. The options included selling the Project to a third party, selling the assets to a new entity set up by existing Unitholders, cancelling existing purchase contracts and reselling the apartments for the current market value, refinancing with a third party, re-financing the second mortgage through Leggo and McNab and/or any other of the Unitholders. Crozier believed that the problem with Suncorp and Ashe Morgan would resolve itself by McNab, Melville and Leggo providing several guarantees to cover the interest and cost overruns for the Project. At the time he thought that these costs would be in the region of $350,000. Melville and Etchells canvassed some of these matters in emails, copied to Crozier, Leggo and McNab, dated 26 and 27 March 2008.
(r) April 2008 Agreement
92 On 1 April 2008 Crozier received an email from Leggo copied to all of the Unitholders. In the email Leggo stated that he had spoken to Etchells and he remained ‘... of the view that he will not accept anything less than an unlimited guarantee’. The email went on to detail a way forward for the project and the basis on which Leggo would be a ‘white knight’. Later that day Leggo, Melville, McNab and Crozier met at Melville’s office and discussed the ways they could move forward with the Project including the proposal put forward by Leggo earlier that day.
93 At that meeting Leggo was adamant that Suncorp and Ashe Morgan now required an unlimited guarantee and that this was something that McNab and Melville would not give. After the meeting Melville told Crozier that he was surprised that an unlimited guarantee was required as this seemed to be at odds with the discussions he had been having with Etchells. Crozier told Melville not to pursue it as they had more than enough to do in trying to negotiate solutions for the GCPL problems.
94 On 3 April 2008 Crozier believed that the Unitholders had agreed that:
(a)Leggo would cover all interest and cost overruns relating to the project;
(b)Any funds Leggo provided would earn the same rate of interest as those owing under the second mortgage;
(c)Leggo would provide an unlimited guarantee to Ashe Morgan and Suncorp for the facilities in return for a fee payable by AVSS (‘Guarantee Fee’);
(d)That the Guarantee Fee would be added to Leggo’s loan account and rank equally with other Unitholder and related party loans; and
(e)Leggo would become a director of AVSS.
95 At no stage during any discussions or email communications leading up to what Crozier understood to be the agreement did Leggo refer to the Fingal Charge or the protection it afforded Unitholders vis-a-vis unsecured creditors or indeed its validity. It was not a condition of Leggo becoming director and guarantor of the facility that Unitholder loans would rank behind unsecured creditors. According to Crozier, this was not even discussed.
96 From 3 April 2008 onwards, Crozier began acting as a director of AVSS. However, he was not formally appointed a director until 30 April 2008. Crozier continued as a director of the company until 1 June 2009, although he was not actively involved in the management of the company. During this period Crozier did not attend any meetings or have any direct correspondence with Suncorp, or the sales agent engaged by AVSS. Nor did he have any contact with the builders, Buckners Constructions, until they encountered financial difficulty towards the end of 2008. Crozier did attend some meetings with the subsequent builders, Galvins, prior to their appointment by AVSS in about June 2009 but he was not involved with the decision to appoint them.
97 Crozier did, however, continue to maintain the financial records of AVSS on the Quikbooks accounting system. He continued this role up until receivers and managers were appointed on 21 June 2010.
(s) Dispute regarding April 2008 Agreement
98 Sometime in May 2008 Leggo told Crozier that he was arranging with Etchells for the DBR Corporation Facility to be novated to NDP along with an assignment of the relevant security. Crozier was aware from Etchells’ email of 27 March 2008 that the DBR Corporation Facility still had an outstanding undrawn balance of $400,419.
99 Around mid-June 2008 Leggo raised concerns about the extent of the costs he had to cover. This came to a head in June 2008 when Buckner Construction’s May 2008 payment claim of $293,294 fell due. Leggo said that this amount was to be paid by Suncorp under its facility. However, Crozier explained in an email to Leggo and Turner dated 25 June 2008 that the payment should be made from the undrawn component of the DBR Corporation Facility which Leggo was taking over.
100 From this time on, relations between Leggo and Crozier began to deteriorate significantly. Crozier believed that under the April 2008 Agreement Leggo had agreed to fund all of the interest and cost overruns on the Project. As at April 2008 this amount had been calculated to be at least $350,000.
101 The obligation to meet the undrawn component under the DBR Corporation Facility, which Leggo, through NDP, had independently assumed, did not in Crozier’s view affect what had been agreed between the Unitholders in April 2008. The divergence of views about what Leggo had agreed to fund became even greater when Buckner Construction’s July 2008 claim of approximately $230,000 became payable.
102 A dispute also arose about the Guarantee Fee that Leggo was to receive in exchange for acting as guarantor for the Ashe Morgan and Suncorp facilities. Around June 2008 Crozier became aware that Leggo had not been required to give an unlimited guarantee to both financiers. Instead his guarantee only applied to the Suncorp facility and was limited to cost overruns up to a maximum amount of $2,500,000. Crozier remained as guarantor for the total amount of the Suncorp facility and sole guarantor of the DBR Corporation Facility.
103 Crozier’s understanding that Leggo was providing an unlimited guarantee over the loan facilities was the prime reason that he agreed in early April 2008 that Leggo should receive the Guarantee Fee.
104 By late August 2008 Crozier’s relations with Leggo were at breaking point. Around this time Leggo began claiming in emails to Crozier and Melville that the advances he had made prior to the assignment of the second mortgage were covered under that security. Leggo was adamant that this had been agreed to by the Unitholders at or around 3 April 2008. This did not accord with Crozier’s recollection or understanding of what the Unitholders had agreed.
105 Melville, Leggo and Crozier, with the help of McNab, agreed to try and resolve the areas of dispute via mediation. However, this process was overtaken when it became apparent that Buckner Constructions was experiencing financial difficulties. This was confirmed in November 2008 and in early December 2008 Buckner Constructions went into liquidation.
(t) Settlement negotiations in early 2009
106 In mid-January 2009, Melville and Crozier recommenced communications with Leggo with the aim of resolving the disputes that had arisen between them. This was carried out in conjunction with discussions between Unitholders about the best way to proceed with construction of the Project, which was approximately 47% completed at this stage.
107 In February 2009 Leggo instructed his barrister, Steven Palmer, to prepare a draft settlement agreement for the Unitholders to review. On 18 February 2009 Crozier received an email from Leggo forwarding him an email he had sent to Mr Palmer. It attached a draft settlement agreement prepared by Leggo. In the cover email Leggo noted that the draft agreement did not deal with the date at which Unitholder loan balances attracted interest along with a number of other matters.
108 On 23 February 2009 Crozier circulated an email to the Unitholders attaching a number of documents. One of these documents outlined his understanding of the current security position and proposed some options partly as a means of resolving Leggo’s concern to ensure that the money he had advanced to AVSS since April 2008 was secured. The other documents were a profit projection for the Project, a status sheet on apartment sales to date and a cost to complete analysis. Crozier circulated this information prior to a Unitholders meeting scheduled for later that day.
109 In the profit projection sheet an amount was shown for the ‘Balance of Interest to Unitholder Interests’ of $192,246. This was described as the ‘balance’ of the interest that was owed to Unitholders, as the proposal at that time was that interest owed to Unitholders would be taken partly (80%) as rebates on the purchase price of apartments and the balance (20%) as simple interest. The interest owed to Unitholders taken as rebate was shown in the document headed ‘Apartment Schedule’ attached to Crozier’s 23 February 2009 email. This amount was $768,983. The sum of these two figures - $961,229 - was the total amount of interest Crozier calculated would be owed to Unitholders at the end of the Project.
110 The Unitholders met later that day to discuss outstanding issues on the Project, including the appointment of a new builder and to canvass options for resolving the dispute between Leggo, Melville and Crozier. Afterwards Melville circulated minutes of the meeting, which he had prepared. This recorded, amongst other matters: ‘Agreed in general terms that interest on unitholder loans would be notionally calculated to provide a rebate on the contract prices.’ This reflects Crozier’s recollection.
111 By 27 February 2009, Crozier believed that there was an in-principle agreement between the Unitholders as to the way a deed of settlement could proceed.
112 On 2 March 2009 Leggo forwarded to Crozier an email he had sent to his barrister Mr Palmer attaching a further deed of settlement Leggo had prepared. His cover email asked Crozier to confirm current Unitholders loan entitlement and asked Crozier to let him know the date and rate of interest being applied to the Unitholder loan balances. On 6 March 2009 Leggo sent Crozier an email regarding the outstanding indebtedness between NDP and AVSS. As at that date the amount was $2,630,504.16. Crozier forwarded this email to McNab and Melville.
113 The amount of $2,630,504.16 included amounts referred to as being for an ‘undrawn fee’. The ‘undrawn fee’ was a reference to a fee that was set out in the letter of offer for finance from Ashe Morgan Capital Pty Ltd to AVSS dated 23 March 2007 at Special Condition (a). To the extent that this letter had not been superseded by the Facility Agreement between AVSS and Ashe Morgan Capital Pty Ltd, the letter of offer formed part of the assigned securities to NDP. However, Leggo stated in his email to Crozier that NDP would not be charging the ‘Undrawn Fee’ of $5,000 per month from July 2008, being the date NDP took an assignment of the DBR mortgage, if a settlement agreement between the Unitholders was concluded.
114 Crozier understood from Leggo’s email that if they concluded a Settlement Agreement Leggo would not charge this fee. Subsequent NDP loan statements provided by NDP on 24 November 2009, 29 April 2010, 22 June 2010 and 7 July 2010 did not include the Undrawn Fee. The Undrawn Fee was only included on loan statements issued after 7 July 2010, following the appointment of Receivers and Managers by Fingal and then NDP.
(u) Priority deed prepared by Leggo
115 On 11 March 2009 Leggo emailed Crozier a draft priority deed between Suncorp, NDP and Fingal that he had prepared. This document referred to the amount secured under the Fingal Charge as the third priority amount. The figure Leggo recorded as the third priority amount was the sum of $1,896,538 as described in the Fingal Loan Agreement together with interest and all monies secured thereon. This figure was the amount of the loan secured by the Fingal Charge as at 5 October 2007 and contained in the Loan Acknowledgement attached to the Fingal Loan Agreement dated 5 October 2007 (as set out in paragraph 74 above). Later that day Crozier received another email from Leggo telling him that his barrister, Mr Palmer had approved the priority deed. Crozier responded by email advising Leggo amongst other things that the third priority amount he had listed in the priority deed had increased. His recollection is that shortly after he provided Leggo by hand with a copy of the Loan Acknowledgement dated 31 March 2008.
(v) Deed of Settlement – Executed 23 March 2009
116 On 13 March 2009, Leggo circulated a draft Deed of Settlement, which had been prepared by his barrister, to Crozier and the other Unitholders. Crozier recalls that he met with Melville and McNab to discuss this document. He cannot recall whether Turner also attended the meeting. He recalls that at the end of the meeting Melville said he would leave the final negotiations with Leggo regarding the terms of the Settlement Deed to Crozier and McNab.
117 That same day Crozier received another email from Leggo telling him that his barrister had advised him that all further advances by NDP must be paid to AVSS so he was setting up a new AVSS account to receive those advances. Leggo requested that Crozier sign and return an authority permitting him to set up this new account. This was done and the account (number 2528 68471) with the ANZ bank was opened around 19 March 2009. On 16 March 2009 McNab and Crozier met with Leggo and his barrister to discuss and finalise the draft settlement deed.
118 A Deed of Settlement was signed on 23 March 2009 by the Unitholders. Crozier also executed the Deed on behalf of Fingal and Saiwai.
(w) The Deed of Settlement
119 The relevant terms of the Deed of Settlement are set out below:
2.1It is acknowledged by all parties to this deed that Ascot Vale Self Storage Centre Pty Ltd is indebted to Nom de Plume Nominees Pty Ltd pursuant to the Facility Agreement and for other advances made to date by Nom de Plume Nominees Pty Ltd or on its behalf by Richard Leggo or companies associated with him together with interest on those amounts which in aggregate total $2,546,889.71 as at 28 February 2009 and that all amounts owed by Ascot Vale Self Storage Pty Ltd are secured by the second mortgage and the second debenture charge.
…
3.1As the request of the parties to this deed Nom de Plume Nominees Pty Ltd and Richard Leggo have agreed to advance further funds to or for the benefit of Ascot Vale Self Storage Centre Pty Ltd as and when required to meet the costs of building the apartments in the Burrowes Street Development Project (including but not limited to construction costs, consultants fees, advertising & marketing costs, legal costs, interest costs & charges to mortgagee, rates, land tax, lodgement fees, council fees, permits, agents commission and insurance premiums).
3.2It is agreed by all parties to this deed that the Advanced Funds shall, for the purpose of this deed, be deemed to have been made on and subject to the terms and condition contained in the Facility Agreement so far as such terms and conditions can apply and are still subsisting.
3.3For the sake of clarity it is acknowledged by all parties to this deed that the Advanced Funds and the Further Financial Accommodation shall bear interest at the rates stated in the Facility Agreement, namely:
(a)a lower rate being the aggregate of 13.25% and the base interest rated capitalized monthly in arrears and payable upon repayment of the amount; and
(b)a higher rate of 10% payable in the event of default and being 10% per annum above the lower rate,
and that all such interest will be capitalized.
3.4The Advanced Funds shall be repayable at the expiration of 4 months after the date due for settlement of the apartments in the Burrowes Street Development Project.
3.5It is agreed that all monies advanced to Ascot Vale Self Storage Centre by Nom de Plume whether before or after the date of this deed shall be secured money within the meaning of that expression as contained in the second mortgage and shall be secured by the second mortgage.
…
9.1Ascot Vale Self Storage Centre Pty Ltd shall also engage Nom de Plume Pty Ltd as a consultant to provide advice and assistance in relation to the Burrowes Street development project and Ascot Vale Self Storage Centre shall pay Nom de Plume Nominees Pty Ltd a fee of $5,500 per month (inclusive of GST) commencing on December 1, 2008.
(x)From the Deed of Settlement (23 March 2009) to the appointment of Receivers and Managers (21 June 2010)
120 After the Deed of Settlement, Leggo took control of AVSS and Crozier resigned as a director on 1 June 2009. It is not necessary to set out any details or events in relation to this period. Relevant events and matters are referred to and dealt with when dealing with the particular issue.
C The issues in the case
121 The first issue is the validity of the Fingal charge. Fingal’s claim is predicated on the validity of its charge. If the Fingal Charge is not valid (assuming NDP has standing to challenge the validity of the Fingal Charge) that is the end of the case. For reasons that follow, I am of the opinion that the Fingal Charge is valid and enforceable.
122 The second issue is the amount secured by the NDP Charge. The issue is whether certain amounts claimed by NDP to be advances to AVSS pursuant to the Deed of Settlement properly fall within the NDP Charge. The suggested advances comprise a number of different categories ‑
·Rebate Payments to Hughes Kennedy ($487,000)
·The Ferguson Loan ($25,000)
·NDP Consultancy fees ($134,306)
·The Undrawn Fees ($152,097)
For reasons that follow, I am of the opinion that none of these amounts properly fall within or are secured by the NDP Charge.
123 A related issue is whether NDP is responsible and liable directly to Fingal for causing the assets of AVSS to diminish or be wasted in circumstances when amounts would otherwise have been available to pay Fingal, a secured creditor next in line. These categories are as follows ‑
·Payment of $57,906.50 to Hughes Kennedy (Apartment 112)
·Payment of $48,411.50 to Hughes Kennedy (Apartments 3.09, 2.03 and 1.04)
·$200,000 Woodhouse Repayment
·GST ($30,000)
For reasons that follow, I am of the opinion that NDP is directly responsible and liable for the amounts of $57,906.50 and $30,000 paid by AVSS. I do not consider that it is liable for the other amounts.
124 The third and final issue, and perhaps together with the first issue properly considered as preliminary threshold legal issues, is the consequences of any over recovery by NDP and whether Fingal (and not AVSS as mortgagor) has standing to recover such amount. For reasons that follow I am of the opinion that Fingal has standing to recover and be paid directly amounts in excess of the amount owing under the NDP Charge and also any amount that has been wasted due to the conduct of NDP, either as mortgagee in possession or by providing instructions to its duly appointed receiver and manager, Fernandez.
D Validity of the Fingal Charge
125 The first issue is the validity of the Fingal Charge. This is the basis on which Fingal is suing. Although the Fingal Charge, a charge ranking behind the charge of NDP, is over the assets and undertaking of AVSS, the second defendant, the liquidator of AVSS took no part in the proceeding and consequently no submissions were made on behalf of the obligor or grantor company, AVSS, as to the validity of the Fingal Charge. Although this is not surprising in the circumstances it is not meant as a criticism.
126 There are two categories of loans secured by the Fingal Charge – the so-called Unit Holder Loans and the loans provided by the Albury Investors. In short, the Unit Holder Loans were advanced by individuals or entities associated with the Unitholders (and in one case – Crocpot – by the Unitholder). Initially the loans were intended to be of short duration, until the self-storage facility was operational and bank finance was obtained.
127 Once the decision was made by AVSS in early 2003 to proceed with the Project, that is to convert the self-storage facility into apartments, further loan funds were required. Some of the additional loan funds were provided by the Unitholders or their associates, again on informal terms and with no fixed duration. Accordingly, they were, again presumably repayable on demand.
128 By December 2005, however, AVSS recognised that it was fair that interest start accruing on the loans given the changed nature of the investment, the greater amounts loaned by the Unitholders and their associates, and the longer term nature of the investment (albeit that the loans presumably remained repayable on demand). Accordingly, interest at 15% began to be accrued.
129 At about the time that AVSS decided to proceed with the conversion of the Property to apartments ( in mid-2003) it obtained further funding from a small group of private investors, who became known as the Albury Investors, which included John and Sandra Woodhouse. Formal loan documents were drawn up for these loans, supplemented by oral agreement.
130 These loans were provided through a nominee structure, with the Albury Investors lending the money to a nominee company. The nominee company was Fingal. The key terms of the loans agreement with the Albury Investors were, for present purposes, that the monies were to be on-lent by Fingal to AVSS[1] and that the loans from Fingal to AVSS were to be secured by way of a second mortgage over the Property for the benefit of the Albury Investors.[2]
[1]Clauses 2.1, 2.2.
[2]Clause 2.1.
131 However, the security required by the Albury loan arrangements was not created until the creation and registration of the Fingal Charge in October 2007. A further loan agreement created at this time brought the Albury Investors and Unitholder loans under the one loan document, in the same nominee structure used for the original Albury Investors loans.
132 Leggo claims not to have known that the Unitholder loans were secured by the Fingal Charge until 23 February 2009. The evidence however establishes that Leggo was, at the very least, aware of the existence of the Fingal Charge from, at the latest, February 2008.
133 NDP submitted that the Fingal Charge was a sham and was invalid. The main thrust of the submission was that the Unitholders loans were never intended to be secured and that at least one of the Unitholders, Leggo, did not consent to the Fingal Loan Agreement and the Fingal Charge, which represented a variation to the original Unitholders agreement to the effect that the Unitholders loans would not be secured. Further, it was submitted that the only obligation was by AVSS as borrower to the Unitholders as lenders and not to Fingal. As a consequence it was not possible to simply and unilaterally interpose Fingal as the lender. In relation to the Albury Investors, it was contended that they were promised a second ranking property mortgage over the Property and not a third ranking charge. Again, it was submitted that it was not possible to simply unilaterally create the Fingal Charge, a different form of security.
134 NDP submitted further that both the Fingal Loan Agreement and the Fingal Charge were not Deeds and that because there was no consideration the agreements were unenforceable.
135 Finally, it was submitted that if the agreements were enforceable they secured a much lesser amount ($641,500) which had been repaid.[3]
[3]The amount comprises $500,000 from the Albury Investors plus $141,500 advanced by Crozier.
136 NDP also submitted (in response to Fingal’s submission) that Fingal was not entitled to rely on estoppel in relation to the Fingal Charge essentially because there was no detrimental reliance.
137 Fingal submitted that the Fingal Charge was valid and enforceable. It was properly executed and registered and was done so at a time when the company, AVSS, was solvent.
138 Fingal submitted further that the Fingal Charge was executed as a Deed. It was submitted that there was nothing wrong with creating a security or secured position unilaterally or without the agreement of all parties in circumstances where Fingal was a bare trustee and AVSS had consented thereto.
139 Finally, and in any event, it was submitted that both AVSS and NDP are estopped from denying the validity and enforceability of the Fingal Charge because they had full knowledge of the Fingal Charge and what it secured for a long period of time and acquiesced in its continued operation.
140 I agree with Fingal. For reasons that follow I am of the opinion that NDP, AVSS and Leggo are estopped from challenging the validity and enforceability of the Fingal Charge. Further, and in any event, I consider that the Fingal Charge is valid and enforceable and secures an amount which remains to be determined.
141 In my opinion NDP, AVSS and Leggo are all estopped from asserting that the Fingal Charge is not effective to secure the loans it expressly purports to secure. The Deed of Settlement expressly acknowledges and accepts the validity of the Fingal Charge.[4] Further, prior to the execution of the Deed of Settlement, Leggo himself drafted a deed of priority showing the priority between Suncorp, NDP and Fingal, which recorded the Fingal priority amount as specifically including both the Unitholder loans and the Albury Lender loans.[5] At this time, Leggo was given a copy of an up-to-date Loan Acknowledgement dated 31 March 2008, showing the total of the Unitholder and Albury Lender loans secured by the Fingal Charge. Finally, on 29 October 2009, NDP executed a Deed of Priority, together with Fingal and Suncorp, in respect of the priority between the three securities.
[4]See clause 5.1.
[5]This was not executed at this time.
142 These documents, which clearly and unequivocally acknowledge the existence, validity and extent of the Fingal Charge, underpin the estoppel claim. Despite preparing and executing these documents, Leggo never at any stage suggested that the Fingal Charge was not valid and enforceable. In fact the contrary is clearly the position. By his conduct (and by the documents) Leggo (and NDP) led others to assume, which they did, that the Fingal Charge was valid and enforceable in all respects. NDP and Leggo cannot now, many years later, argue to the contrary and AVSS, the grantor of the security, does not seek to do so. It follows that I do not accept that there was no detrimental reliance. Clearly other steps could have been taken by Fingal to secure its agreed position. It is obvious why it chose not to do so.
143 It is strictly not necessary to deal with the other issues associated with the validity of the Fingal Charge and Fingal Loan Agreement as submitted by NDP. However, in my opinion and in any event the Fingal Charge and the Fingal Loan Agreement are valid and enforceable, substantially for the reasons given by Fingal.
144 I am satisfied, so far as it may be relevant, that the Fingal Charge and the Fingal Loan Agreement are Deeds. They were executed as Deeds and were intended to operate as Deeds. This clearly emerges from a consideration of the documents – as a matter of form and substance – and the circumstances known to the parties.
145 In any event the evidence establishes that consideration flowed both ways. Further loans were made and agreed to be made (and to the extent that loans were repayable on demand there was forbearance to sue) on condition that AVSS provide the necessary and agreed security.
146 I do not regard the varied arrangements as in any way being a sham. The variation was done at a time when AVSS was solvent and there were commercial reasons for doing so. There is no reason why the ‘unitholder’ lenders or related lenders should not be secured and earn interest on their loans given the fundamentally changed nature of the Project. Those that agreed are bound by and are entitled to the benefit of the arrangements. In relation to those parties it is relevant to note that all parties agreed, that is: lender, borrower (AVSS) and interposed bare trustee (Fingal). They were entitled to agree, that is, each individual lender was entitled to agree to vary the arrangements, unless there was some overarching agreement binding all parties. I find that there was no such overarching agreement. It is not necessary to discuss the position of those that did not agree, namely NDP. Insofar as it may be necessary I find in any event that in the circumstances referred to NDP did agree. If I am wrong NDP is in any event bound because of the estoppel finding.
147 Finally, it is not for NDP to advance the position or possible prejudice to the Albury Investors as a result of the inclusion of the investor or ‘unitholder’ loans in the Fingal Charge or the fact that they were given different security. None have complained.
E The amount secured by the NDP Charge
148 The critical issue in the case was the amount secured by the NDP Charge. Fingal submitted that not all of the monies claimed (and recovered) by NDP as being secured by the NDP Charge by virtue of the Deed of Settlement were so secured. In addition Fingal contended that NDP by its conduct (either as mortgagee in possession or as directing and instructing its receiver and manager, Fernandez) effectively wasted assets of AVSS to the detriment of Fingal as a subsequent security holder (‘the Wasted Assets’).
149 At the time the various sums were brought under the NDP Charge, Leggo was not only the principal of NDP but also the sole director of AVSS and the solicitor for AVSS responsible for managing the sale of the Project apartments. Fingal says that the actions taken by Leggo were directed to protecting his own interests, as merged with the interests of NDP and had the effect of impermissibly increasing the amount of NDP’s secured debt to the detriment of Fingal, as well as wasting the assets of AVSS.
150 Before examining each of the categories referred to in paragraphs 122 and 123 above it is convenient to first state some general propositions.
151 The starting point must be the Deed of Settlement. It sets out exactly what is to be secured by the NDP Charge. It is the amount owing under the Facility Agreement between AVSS and DBR Corporation dated 23 May 2007 (assigned to NDP on 23 July 2008) together with Further Financial Accommodation provided by NDP (clause 3 of the Deed of Settlement) and the sum of $330,000 (inclusive of GST) (clause 4).
152 Clause 2.1 of the Deed of Settlement records that as at 28 February 2009 the amount secured by the NDP Charge was $2,546,889.71. Clause 1(a) of the Deed of Settlement refers to this amount as the Advanced Funds. Clause 3.3 provides that interest is to be paid on the Advanced Funds and any Further Financial Accommodation provided in accordance with clause 3.
153 It is necessary to assess each of the categories in order to ascertain whether the payment or expenditure properly falls within the Facility Agreement or is properly regarded as Further Financial Accommodation and therefore within the NDP Charge. Save for the issue of GST there is no dispute that the sum of $330,000 falls within the NDP Charge.
(a) The Rebate Payments of $487,000 to Hughes Kennedy
154 Hughes Kennedy was engaged to act as a marketing agent for the sale of the Project apartments. At least four Heads of Agreement were entered into by AVSS with Hughes Kennedy. The first was executed by Crozier for AVSS and the other three by Leggo. With the possible exception of one,[6] each agreement required AVSS to pay a ‘marketing fee’ (‘the Marketing Fee’) (which varied between 3% and 5.5% of the sale price of an apartment) and what became known as a ‘rebate fee’ or ‘rebate amount‘. The latter was any amount above a sale price for an apartment stipulated by AVSS, albeit that in one of the agreements the rebate amount was capped at 5% above the stipulated sale price.[7]
[6]Dated 17 June 2008.
[7]The 7 May 2008 Heads of Agreement.
155 Regarding the claim by Fingal, there is no dispute that:
(a) The amount of $487,000 was paid directly by NDP to Hughes Kennedy;
(b) It was paid in two amounts comprising $330,000 on 29 June 2010 and $157,000 on 7 July 2010 and, therefore, after the appointment of the Receivers and Managers of AVSS;[8]
[8]Which occurred on 21 and 22 June 2010.
(c) At the time of both payments, AVSS had available to it the sum of $500,000 which had been advanced by NDP to AVSS expressly for the purpose of making rebate payments to Hughes Kennedy;
(d) AVSS could not access these funds to pay Hughes Kennedy, because the bank accounts of AVSS had been frozen;
(e) There was a dispute amongst the respective receivers and managers as to who controlled AVSS;
(f) An issue in the receivership was whether Hughes Kennedy ought to be paid as a preferential creditor;[9]
[9]The receivers and managers appointed by NDP had not resolved this issue some months later.
(g) From 1 July 2010, AVSS was prevented from paying Hughes Kennedy by court order; and
(h) Leggo was not asked by the receivers and managers of AVSS to make these payments. To the extent that this may not be common, there was no evidence of any such request by any receiver. It was a payment initiated by Leggo and NDP.
156 In these circumstances, NDP, it was submitted, did not make the payments on behalf of AVSS and, therefore, they could not be ‘Further Financial Accommodation’ or ‘secured money’ within the NDP Charge.
157 In addition, Fingal submitted that:
(a) Priority, therefore, had to be given by AVSS to ensuring secured creditors were paid, in the absence of agreement from the secured creditors;
(b) AVSS’s first priority at the time was to reduce the indebtedness of AVSS to its first and second mortgagees, Suncorp and NDP respectively;
(c) The amounts owed were unsecured debts of AVSS[10] and ought not to have been paid in advance of the debts secured by the Fingal Charge; and
(d) Payment of these fees was in breach of conditions Fingal had placed on releases given from its third-ranking security over apartment properties that were due to settle.[11]
[10]Leggo accepted the liability to pay the rebates was unsecured.
[11]Mr Leggo agreed in evidence that he was consciously overriding or ignoring the conditions imposed by Fingal.
158 Acting properly, therefore, AVSS, it was submitted, would not have made these payments. Rather, the payments were, it was submitted, made by NDP in fulfilment of an undertaking that NDP had earlier given to pay the rebates to Hughes Kennedy ahead of repaying AVSS’s indebtedness to NDP.
159 It was further submitted that the Court should also note the email exchange with Ferguson on 24 June 2010 at 6.10pm, in which Leggo recorded in plain terms how he saw things, namely that:
(a) Hughes Kennedy was only an unsecured creditor who would only get ‘80 cents in the dollar if I can avoid paying the investor related creditors protected by Fingal any money at all & that will be a big fight’;
(b) ‘the appropriate source’ for the payment to Hughes Kennedy was AVSS; and
(c) that he would pay the money to Hughes Kennedy from NDP if the Court said AVSS could not.
160 Leggo’s initial position during cross-examination was that he had carefully considered the risk of being able to get back moneys NDP paid directly to Hughes Kennedy, and formed the view that he was entitled to do so under the Settlement Deed. When confronted, however, with his earlier email at 3.47pm on 24 June 2010, in which he had told Ferguson of Hughes Kennedy that he (Leggo) had received advice from his barrister that the likelihood of getting the money back was remote if NDP paid the money directly, Leggo had some difficulty with his position. He first accepted he had received such advice and believed it to be correct, but upon it being put to him that this must mean therefore that his initial position was untrue, he performed a rapid backflip and said he did not recall getting such advice from his barrister.
161 From his email and evidence referred to, the Court was invited to conclude that Leggo well knew that NDP should not pay the money directly to Hughes Kennedy and that if he did so it would not be secured money that he could recover under the NDP Charge, but was determined to do so.
162 NDP contended that the funds advanced by NDP were properly to be regarded as Further Financial Accommodation secured under the Deed of Settlement.
163 In my opinion there is substance in the submission made by Fingal. The short point is that I am not satisfied that the payments were made by or specifically requested by the Receivers and Managers of AVSS. Fernandez was not called to give evidence and the evidence of Leggo in this regard was vague and unconvincing. Accordingly, I find that it is more probable than not that these amounts were not paid on behalf of AVSS. Rather Leggo, on behalf of NDP, chose to make the payments at a time when both the NDP Charge and the Fingal Charge had crystallised and there was no further work to be performed by Hughes Kennedy. In these circumstances facilitating payment directly to an unsecured creditor does not fall within the ambit of clause 3.1 of the Settlement Deed and the NDP Charge. If Leggo chose to make the payment that was a matter for him and NDP but the payment cannot properly be regarded as Further Financial Accommodation. Accordingly, to charge the assets of AVSS with such payment was in the circumstances and for the reasons given not proper or permitted.
(b) The Ferguson Loan
164 The next complaint concerns an amount added by NDP to its loan account secured by the NDP Charge, which had, it was submitted, no connection to the Project being managed by AVSS. This is the Ferguson Loan of $25,000.
165 Fingal contended that this was a personal loan by NDP to Rod Ferguson of Hughes Kennedy and not (as NDP asserts) a further approved advance of Marketing fees to Hughes Kennedy. This loan was, it was submitted:
(a) expressly and consistently stated by Rod Ferguson to be for his personal benefit and not for Hughes Kennedy;
(b) paid by NDP not (as with the approved $80,000 Marketing fee advanced) from AVSS;
(c) not recorded at the time in any of NDP’s loan statements as an advance to AVSS; and
(d) formed no part of the calculations undertaken by NDP and Hughes Kennedy that led to the application of the approved $80,000 Marketing fees advance being used for outstanding rebates.
166 NDP submitted that although Ferguson may have regarded the Ferguson Loan as a personal loan it was not paid on this basis. Leggo had no reason, it was submitted, to make a personal loan to Ferguson and consistently regarded the loan as a further advance.
167 In my opinion this loan had nothing to do with AVSS and its assets should not have been effectively charged with a voluntary unrelated loan or payment that Leggo elected to make and in fact did not take into account until much later. It should never have been taken into account.
(c) NDP Consultancy fees
168 The next complaint concerns the NDP Consultancy fees of $134,306 which were, it was submitted, unsecured liabilities of AVSS under clause 9.1 of the Deed of Settlement, and which had not been paid to NDP. Notwithstanding this they were added by NDP to its secured debt presumably, it was submitted, as if they had been paid by AVSS and funded by NDP under the Deed of Settlement.
169 These fees were not, contrary to the way in which NDP appears to have treated them, automatically part of the ‘secured money’ under clause 3.5 of the Deed.[12] They were, it was submitted, no different from any other debt or liability of AVSS and, in particular, no different from the obligations under clauses 7.1 and 8.1 to engage and pay Rincon and Saiwai as consultants. That is, absent the grant of a specific security interest, these were unsecured liabilities of AVSS.
[12]Compare with clauses 2.1 and 4.2, which deem the Advanced Funds and the Settlement Sum ($330,000) to be secured by the second mortgage and second debenture charge.
170 The evidence, it was submitted, established that after the receivers and managers were appointed to AVSS, NDP simply added its fees to its own loan statements as if it had been paid, and as if NDP had provided the money to AVSS to do so. This was done either as a lump sum,[13] or as monthly amounts of $5,500, apparently advanced each month from either 1 January 2009[14] or 31 December 2008.[15] Prior to the appointment of the receivers and managers, NDP’s loan statements did not show any advances for consultancy fees.[16]
[13]Loan Statement as at 7 July 2010.
[14]Loan Statement as at 22 June 2010.
[15]Loan Statements as at 20 October and 14 December 2010.
[16]Loan Statement as at 31 May 2010. See also email dated 11 November 2009 attaching ’detailed statement of all money paid by [NDP] to date’.
171 By this mechanism, NDP added $134,306[17] to its loan statements that had never been the subject of an advance by NDP to AVSS.
[17]Being the sum of the fees added to its final loan statement, dated 14 December 2010.
172 It is clear, in my opinion, that the NDP Consultancy fees were never intended to be secured and the complaint is justified. There is no basis to treat the amount as secured. The Settlement Deed is very specific as to precisely what was to be secured and what was not to be secured. Further, the amounts cannot properly be regarded as Further Financial Accommodation.
(d) The Undrawn Fees
173 The next complaint concerns the Undrawn Fees of $152,097, claimed by NDP under the NDP Charge. Fingal submitted that the Undrawn Fees were not payable at all by AVSS under the NDP Charge and, even if they were, they were in the nature of a penalty and, hence, unenforceable. Finally it was submitted that the fees had been waived by NDP.
174 Again it was submitted that these fees first appeared as charged by NDP on NDP loan statements provided after the appointment of the Receivers and Managers of AVSS.[18] That is, from the time that NDP took a novation of the DBR Corporation Facilities in July 2008, the loan statements prior to October 2010 had a line item ‘Undrawn Fee’ but, in each case, recorded that fee as ‘$0.00’. In the October 2010 statement, however, the fee is recorded each month from July 2008 as $5,000. A total of $152,097 was charged over 24 separate occasions.
[18]Compare NDP Loan Statement as at 7 July 2010 with NDP Loan Statement as at 19 October 2010.
175 The ‘Undrawn Fee’ is contained in Special Condition (a) of the letter of offer from Ashe Morgan dated 12 April 2007, which provided:
The Facility Amount is to be fully drawn within 5 months of initial drawdown. In the event that this does not occur, a monthly fee of $5,000 will accumulate and payable (sic) upon the earlier of repayment or the Maturity Date.
176 The Facility Amount was $1,200,000. The initial drawdown was made on 23 May 2007. The Facility Amount was not, however, fully drawn within 5 months and DBR Corporation began charging the Undrawn Fee from 31 October 2007, and charged it until 30 June 2008, which was when the Facility was fully drawn down.[19]
[19]That is, at that point the Facility Amount was exceeded.
177 Fingal submitted that the proper interpretation of the Special Condition was that the Fee was applicable only until the Facility was fully drawn down. Otherwise the Fee would operate as a penalty. Indeed, it was submitted that it was likely a penalty from the outset given that the facility, apparently, had two fees covering the same default under the agreement concerning not drawing down on the facility – the Unused and Undrawn Fees. They could not both have been ‘a genuine pre-estimate of the loss occasioned to DBR Corporation (and consequently NDP) by reason of AVSS failing to draw down the full amount of the facility’. However, certainly from the point in time in which the Facility had been fully drawn down it was submitted there was no loss to the lender to compensate. The fee, therefore, was a penalty and unenforceable.
178 Further, it was submitted by Fingal that upon the execution of the Settlement Deed the nature of the security held by NDP changed fundamentally. There was no longer any monetary limit on the facility that NDP provided. By necessary implication, therefore, it must have been the intention of the parties to the deed that the Undrawn Fee, which was premised on there being a fixed ‘Facility Amount’ that had to be drawn by a particular date, would no longer apply.[20] That is, there was no ‘Facility Amount’ that could be fully drawn. The Undrawn Fee could not, therefore, operate.
[20]Likewise for the Unused Fee, which was premised on the Borrower paying a fee calculated against the unused portion of the ’Limit’ of $1,200,000.
179 In any event this amount was, again, added to NDP’s loan account after the appointment of the Receivers and Managers of AVSS. Indeed, in NDP loan statements produced prior to the appointment of the receivers and managers, the Undrawn Fee is shown as ‘$0’ from July 2008, which is when NDP stepped into the shoes of DBR Corporation.
180 I agree with Fingal. This claim reflects badly on NDP and Leggo. It is for all the reasons given by Fingal a ridiculous claim. The short point is that the Undrawn Fee was no longer payable once the facility was fully drawn. Further, once the Settlement Deed was executed such a fee was in the circumstances and context of that Deed no longer relevant or applicable. The amount should not have been claimed by NDP. There was simply no basis to make such a claim. Finally, Leggo’s evidence on this aspect was contradictory, confusing and entirely unconvincing. It is neither necessary nor desirable to refer to this evidence.
181 Accordingly, the full amount of $152,097, added by NDP to its Loan Statements from October 2010, ought not to have been added and does not fall within the NDP Charge and ought to be paid by NDP to Fingal.
(e) The apartment 112 Hughes Kennedy payments of $57,906.50
182 This was, again it was submitted, not a sum required to be paid by AVSS and therefore did not fall within the NDP Charge by virtue of the Settlement Deed. That is:
(a)The receivers and managers had been appointed by Fingal on 21 June 2010 and by NDP on 22 June 2010;
(b)This transaction took place on 22 or 23 June 2010;[21]
(c)Neither receiver and manager was in a position to effect the settlement;
(d)The settlement was carried out by Trumble Szanto, Lawyers, at Leggo’s specific direction.
[21]Statement of adjustments and settlement statement for apartment 112 dated 22 June 2010, Transfer of Land for apartment 112 dated 23 June 2010.
183 In his witness statement, Leggo said that the revised settlement statement for apartment 112 was prepared, without his knowledge, by the receivers and managers appointed by Fingal. This allegation was not put to Horne.
184 In cross-examination however, Leggo accepted (albeit with some reluctance) that he had given instructions by email to one of his employees to prepare the revised settlement statement. Subsequently, however, he suggested it could have been authorised by the receiver and manager appointed by NDP, Fernandez. Fernandez, however, was not called by NDP.
185 In the circumstances, and having regard in particular to the contemporaneous documents, it was submitted that the Court should have no difficulty in concluding that Leggo directed how this settlement was to take place, not the receivers of AVSS. In particular, Leggo directed that, at settlement, Hughes Kennedy be paid the sum of $57,901.50 in rebates.[22]
[22]The $57,901.50 was comprised of $41,000 expressly stated to be for rebates, and $16,901.50 referred to as commission that was probably not, then, owing. Compare the earlier version of the settlement statement with the revised version, and the email exchanges between Hughes Kennedy and Leggo.
186 The amounts owing were, again it was submitted, an unsecured debt of AVSS that ought not to have been paid in advance of the debts secured by the first or second mortgagees or the Fingal Charge, and payment of which was in breach of the conditions Fingal had placed on the release it had given from its third-ranking security over the apartment.
187 Again, therefore, acting properly, AVSS, it was submitted, should not have arranged for or permitted these payments to be made. Rather, it was submitted the payment was authorised and permitted by NDP in fulfilment of the undertaking that NDP had given to pay the rebates to Hughes Kennedy ahead of repaying AVSS’s indebtedness to NDP. To this extent, it was submitted, that NDP was directly responsible for and caused funds of AVSS that should have been paid to the secured creditors to be wasted.
188 NDP contends that it was entirely appropriate to make this payment.
189 In my opinion the sum of $57,901.50 should not have been paid to Hughes Kennedy at settlement for the reasons given, in relation to the rebate payments of $487,000. However, as pointed out, unlike the rebate payments, no amount was actually paid by NDP and then sought to be added to the NDP Charge. Rather, as submitted by Fingal, the evidence establishes that NDP permitted part of the settlement funds to be used to discharge this unsecured debt. Although NDP has not received any amount in this regard the question is whether, by its conduct in permitting the payment to be made, it is liable not only to AVSS (the impoverished party unable to pay its debts in accordance with the respective priorities) but rather directly to Fingal.
190 In my opinion in such circumstances a duty was owed by NDP to Fingal not to sacrifice the assets of AVSS or interfere with or disturb the priorities arising out of the various securities. The direct involvement of Leggo and NDP is clear from the evidence. Consequently the relevant conduct and breach is established. Secured creditors were required to be paid first.
(f) The Hughes Kennedy Overpayment of $48,611.50
191 This amount was paid to Hughes Kennedy as ‘commission’ on the settlement of apartments 3.09, 2.03 and 1.04, each of which took place before the appointment of the receivers and managers. The amount comprises $19,211.50 for 3.09, $12,705.00 for 2.03 and $17,286.50 for 1.04. The sum of these amounts is $49,203. However, as a result of $80,000 having previously been advanced to Hughes Kennedy for commission, as at the settlement of these apartments only $591.50 was actually owed in commission. Therefore, deducting the commission actually owing, the remaining $48,611.50 was paid as rebates. Leggo accepted that this was the effect of what he did and that, in fact, by these and other transactions, he caused the full $80,000 to be paid as rebates.
192 During cross-examination Leggo, for the first time, sought to assert that the $80,000 advanced to Hughes Kennedy in mid-2009 had been advanced for either marketing fees or rebates and, therefore, he was entitled to treat that as an advance for rebates. Not only do the contemporaneous documents demonstrate this to be a convenient revision of events, but it was submitted this evidence also directly contradicted his own statement, which carefully and consistently distinguished between the ‘marketing fees’ and the ‘rebates’ – the former being referred to by Leggo as ‘commissions’. Leggo even referred directly to Crozier’s statement in an email at the time, that he did not believe rebates should be paid until settlement. Nowhere in Leggo’s statement did he assert that he believed that the $80,000 advance was for either commission or rebates.
193 It was also not put to any of the plaintiff’s witnesses that they understood, and agreed, that the $80,000 advance was for marketing fees or rebates.
194 The new position that was adopted by Leggo in his oral evidence was, it was submitted, based on a proposition that the Heads of Agreement between Hughes Kennedy and AVSS did not distinguish between the commission and the rebates, and that both were ‘marketing fees’. A quick reading, however, of the Heads of Agreement demonstrates this to be wrong and that it is only what the parties referred to as the commission that is described as a ‘marketing fee’.[23]
[23]See clause 3.1 and 3.2.
195 It was submitted this was a further example of Leggo tailoring his evidence in the witness box to assist NDP’s case. The evidence in Leggo’s witness statement and the contemporaneous documents should, it was submitted, be preferred. That is, Leggo knew the previous advance of $80,000 was against commissions due to Hughes Kennedy, not rebates. It was submitted that his decision to continue paying ‘commissions’ at settlement, knowing such commissions were not actually owing, was part of fulfilling the undertaking that NDP had given to pay the rebates to Hughes Kennedy ahead of repaying AVSS’s indebtedness to NDP. That is, the decision to do so was NDP’s, not AVSS’s.
196 In addition, at this time:
(a)AVSS’s first priority was to reduce the indebtedness of AVSS to its first and second mortgagees, which Leggo understood and agreed to be the case; and
(b)Leggo knew that Fingal had made it a condition of its ASIC Form 312 releases that no rebates should be paid to Hughes Kennedy.
197 Acting properly therefore, it was submitted that AVSS should not have made these payments. Finally, it was submitted that Mr Leggo did not have his ‘AVSS hat’ on when making these arrangements. NDP was, in effect, in possession of and controlling AVSS in relation to these transactions.
198 NDP submitted that Leggo was at the relevant time acting in his capacity as a director of AVSS and if there was any breach of duty, which was denied, only AVSS could take action.
199 This part of the case is very confusing. In my opinion Fingal has not made out this aspect of its case. Although it is not entirely clear in what capacity Leggo was acting, on balance I consider that it is more probable than not that he was acting as a director of AVSS. If commission should not have been paid, because none was owing, and rebates should not have been paid, this may well be a matter for AVSS and its liquidator.
(g) $200,000 Woodhouse repayment
200 The next complaint concerns credits given by AVSS in the amount of $200,000 to a purchaser of apartments at the settlement of the purchase, at a time when NDP was, it was submitted, mortgagee in possession of AVSS. In short, these credits were, effectively, the repayment by AVSS of loans made by the purchaser (one of the Albury Investors) to Fingal, which Fingal had on-lent to AVSS. As such there was no contractual relationship or indebtedness between the Woodhouses and AVSS and, consequently, AVSS had no obligation to repay those amounts directly to the Woodhouses as purchasers. NDP, therefore, it was submitted, caused AVSS to waste assets (the extent of the deduction or reduction given) that should have been used to reduce the indebtedness of AVSS under its first and second mortgages.
201 This complaint self-evidently has nothing to do with the extent of the NDP Charge. As a claim directly against NDP, it is contended that it is misconceived because any claim should be made against Leggo as a director of AVSS for breach of his duty as a director. Of course, such a claim could be made but the liquidator has to date declined to do so. Any claim directly against NDP can only succeed, it was submitted, if NDP was in fact a mortgagee in possession at the relevant time and had a duty to Fingal to not, in effect, waste assets. NDP contends that there was no such duty and that NDP was not a mortgagee in possession.
202 In my opinion the complaint is not made out. On the evidence I do not consider that NDP was in possession at the relevant time. Of course, in a position like this Leggo was wearing two ‘hats’. However, he did continue to make decisions as a director of AVSS. Permitting settlement with a reduction of $200,000 was such a decision. It was in any event a decision that worked against NDP and probably in favour of Fingal, at least to the extent that the indebtedness of Fingal to the Woodhouses would reduce accordingly.
(h) GST
203 The final complaint is that, although not registered for GST, NDP has charged and retained $42,209.64 in GST, being the GST portion of the GST inclusive amounts payable under the Settlement Deed for the ‘settlement sum’ of $330,000 and the NDP Consultancy fees of $134,306.
204 It was submitted that if the Court accepted that the Consultancy fees should not have been added to NDP’s loan account, then Fingal only claims $30,000 against this head of claim, being the GST claimed by NDP for the ‘Settlement fee’ payable under clause 4.1 of the Settlement Deed.
205 During the trial, NDP produced an invoice dated 5 December 2010 for this Settlement fee for $330,000. Again, the invoice also contains the ABN of a company other than NDP and Leggo was not able to confirm whether it was ever sent to the Receivers and Managers of AVSS. In the circumstances, it is submitted that the court should conclude that this invoice was never sent to AVSS.
206 As such, AVSS would not have been able to claim the input tax credit for the GST on this fee, as Leggo acknowledged.
207 Accordingly, AVSS has, it was submitted, been impoverished by the GST amount, and that amount was not available to AVSS to pay Fingal.
208 I agree with Fingal. NDP is directly responsible for AVSS not recovering an amount of $30,000 which would have been available to secured creditors.
F Fingal’s standing
209 NDP submitted that only AVSS has standing to make the claims made by Fingal. For reasons that follow I do not agree.
210 NDP, as the prior ranking security holder, has a duty to account to Fingal as a subordinate security holder and assignee of the equity of redemption.[24] NDP’s security has been discharged and its loan paid out but Fingal says that NDP added to its secured loan account, and has therefore been paid, amounts that it was not entitled to under the relevant security documents and, accordingly, it must account to Fingal for those amounts.
[24]Westpac Banking Corp v Daydream Island Pty Ltd [1985] 2 Qd R 330, 331 [30]-[45]; Downsview Nominees Ltd v First City Corp Ltd [1993] AC 295; [1993] 2 WRL 86 (‘Downsview Nominees’).
211 In Downsview Nominees, the Privy Council (on appeal from the Court of Appeal of New Zealand) addressed the argument that a mortgagee owes no duties to any subsequent encumbrancer. The Board noted:
This argument is also untenable. The owner of property entering into a mortgage does not by entering into that mortgage cease to be the owner of that property any further than is necessary to give effect to the security he has created. The mortgagor can mortgage the property again and again. A second or subsequent mortgage is a complete security on the mortgagor’s interests subject only to the rights of prior encumbrancers. If a first mortgagee commits a breach of his duties to the mortgagor, the damage inflicted by that breach of duty will be suffered by the second mortgagee, subsequent encumbrancers and the mortgagor, depending on the extent of the damage and the amount of each security.[25]
[25]Downsview Nominees 311 [F]-[G].
212 The Board went on to note that:
In practice the encumbrancer who first suffers from the breach of duty by the first mortgagee and needs damages payable by the first mortgagee to obtain repayment of his own debt will sue the first mortgagee.
…
In Tomlin v Luce (1889) 43 Ch.D. 191 the Court of Appeal held that the first mortgagees were answerable to the second mortgagee for the loss caused by a misstatement made by the auctioneer appointed by the first mortgagees to sell the property comprised in their security. The court directed that there should be an enquiry as to damages and that the first mortgagees should be allowed in their accounts the amount of their debt less the actual proceeds of sale from the property and the amount of the damages.[26]
[26]Ibid 312 [F]-[G].
213 More generally, the Board noted:
A mortgagee owes a general duty to subsequent encumbrancers and to the mortgagor to use his powers for the sole purpose of securing repayment of monies owed under his mortgage and a duty to act in good faith.[27]
[27]Ibid 317 [D].
214 As is well known receivers and managers are in a curious position. They are agents of the company, in this case AVSS, and have certain duties in this regard. However, they also owe duties to the secured creditor, their appointor, in this case NDP.
215 This curious position requires them to discharge the secured debt and no more. Any balance is to be paid to the company as principal or to a subsequent encumbrancer entitled to the residue.
216 According to Company Receivers and Administrators, and in relation to any surplus ‘[t]he clear answer is that the surplus should be paid to the second or subsequent encumbrancer or, if none, to the company’.[28]
[28]Lawbook Co, Company Receivers and Administrators, ‘Who is entitled to the surplus?’ vol 1 (at 11 June 2014) [11.5770]. Citations omitted.
217 If the surplus has already been paid by the receivers and manager to the appointor – as alleged in this case – the excess amount is properly recoverable from the holder of such security. It is open to a second or subsequent encumbrancer or mortgagee to challenge whether and to what extent there is money owing under a first or prior mortgage.[29]
[29]Re Otway Coal Co Ltd [1953] VLR 557.
218 In relation to the Wasted Assets, NDP or the holder of the charge will only be liable if it gave the necessary instruction or direction or was in effect a mortgagee in possession. Further, if Leggo was the person responsible, NDP will only be liable if Leggo was acting on its behalf and not as a director of AVSS.
G Conclusion and disposition
219 In the result the Fingal Charge is valid and enforceable and Fingal has standing to recover[30] amounts in excess of the amount secured by the NDP Charge as well as amounts that NDP, by its conduct, caused to be wasted or not paid in accordance with the relevant priorities. The amounts are as follows ‑
[30]Subject of course to the amount owing under the Fingal Charge, a calculation yet to be determined.
(a) $487,000 Rebate Payments to Hughes Kennedy ‑ Neither AVSS nor NDP was legally obliged to pay this amount to Hughes Kennedy, an unsecured creditor. By paying this amount directly to Hughes Kennedy after the appointment of the receivers and managers (and as I have found without their specific instructions) NDP could not add this to the amount secured by the NDP Charge.
(b) $25,000 Ferguson Loan – This loan had nothing to do with AVSS and the amount paid by NDP is not secured by the NDP Charge.
(c) $152,097 of Undrawn Fees – The Settlement Deed and the fact that the relevant facility was fully drawn precluded NDP from claiming this amount, and accordingly it was not secured by the NDP Charge.
(d) $134,306 of NDP Consultancy fees – These fees were never intended to be secured by the NDP Charge.
(e) $57,906.50 apartment 112 payments to Hughes Kennedy – NDP should not have given a direction that this amount be paid at settlement. The payment was to an unsecured creditor after the appointment of the receivers and managers.
(f) $30,000 claimed as GST – this amount is not recoverable.
220 I will hear from the parties as to the appropriate form of order, if any, at this stage, the further disposition of the proceeding, costs and any other relevant matter.
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