Gregorich v Khouri (Ruling)

[2019] VSC 79

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL COURT

S ECI 2018 02363

THOMAS GREGORICH (AS THE TRUSTEE FOR THE ARCADIA ENGINEERING SUPER PLAN)	Plaintiff
v
JACQUES KHOURI (AS THE TRUSTEE FOR THE KHOURI FAMILY TRUST)	Defendant

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JUDGE:	Kennedy J
WHERE HELD:	Melbourne
DATE OF HEARING:	30 January 2019
DATE OF RULING:	30 January 2019 (revised on 7 February 2019)
CASE MAY BE CITED AS:	Gregorich v Khouri (Ruling)
MEDIUM NEUTRAL CITATION:	[2019] VSC 79

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PRACTICE AND PROCEDURE – Application to vary undertakings – Change in material circumstances which render enforcement of earlier undertakings unjust – Undertakings varied.  

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr T Mullen	Jem Lawyers
For the Defendant	Mr D Williams QC and Mr D Diaz	Altus Lawyers

HER HONOUR:

1. This is an urgent application to vary undertakings given to this Court on 5 December 2018. In particular, a variation is sought to enable an entity to obtain further security from Benthos Investments Pty Ltd (‘Benthos’) for a sum of no more than $1,725,000 to complete the settlement of the purchase of a property at 374 Nepean Highway, Frankston, VIC (‘374 Nepean Highway’), which settlement is due today at 2.00 pm.

Background

1. This matter first came before the Court in November 2018, at which time Airio Pty Ltd (‘Airio’), sought the removal of various caveats the plaintiff had lodged over the properties 10 - 12 Davey Street, Frankston, VIC (‘Davey Street Properties’). Airio (a trustee company) was the registered proprietor of the Davey Street Properties. Jacques Khouri as the trustee for the Khouri Family Trust (the defendant), has an interest in Airio as a unit holder.

1. At the time, the plaintiff claimed to have an interest on the basis of a constructive trust by reason of funds he had advanced to enable the development of the Davey Street Properties.

1. On 19 November 2018, Richards J removed the plaintiff’s caveats.

1. Then on 22 November 2018 the plaintiff issued a further application to freeze the proceeds of the sale of the Davey Street Properties which were due to settle shortly thereafter, and in circumstances where the defendant was otherwise intending to use the proceeds of purchase for developing a property at 374 Nepean Highway. In relation to this property, a contract of sale had already been entered into on 22  September 2017 in the name Jacques Khouri and/or nominees for an amount of $5,600,000. However, subsequently, on 1 September 2018 a related entity, Fiocchi Developments Pty Ltd (‘Fiocchi’), was nominated by the defendant as the purchaser of 374 Nepean Highway.

1. On 22 November 2018, the plaintiff, Mr Thomas Gregorich as the trustee for the Arcadia Engineering Super Plan (‘Arcadia’), also issued a writ and general indorsement of claim. In the indorsement of claim, the plaintiff alleged that Arcadia had entered into a contract with the Khouri Family Trust, whereby Arcadia offered to loan the Khouri Family Trust the sum of $1,327,000.

1. The relevant terms of the loan agreement included a term that, upon completion of the development project at the properties, the loan advance, interest and profit, in the total sum of $2 million (a further sum of $110,000 was subsequently advanced) were all to be paid back upon completion of the development of the project at the Davey Street Properties. The plaintiff alleged that the loan agreement had been frustrated and/or repudiated.

1. The plaintiff has now indicated that he seeks to pursue a statement of claim alleging a number of causes of action, including fraud and unconscionability. However the current form of the plaintiff’s pleadings makes a claim as an unsecured creditor only. 

1. The matter came before the Court a number of times and was ultimately resolved on 5 December 2018 by the dismissal of the application for the freezing order and the taking of various undertakings. In particular, the orders of 5 December 2018 record that:

(a)Fiocchi Developments Pty Ltd ACN 624 984 354, in its own capacity and its capacity as trustee of the Fiocchi Development Unit Trust ABN 14 375 651 487 undertakes to the Court that it shall do all things and sign all documents required to complete the contract for the purchase of the land known as 374 Nepean Highway, Frankston, and being the land in Certificate of Title Volume 9248 Folio 939 (‘Land’), in its own name as sole registered proprietor in fee simple.

…

(c)Fiocchi Developments Pty Ltd ACN 624 984 354, in its own capacity and its capacity as trustee of the Fiocchi Development Unit Trust ABN 14 375 651 487 undertakes to the Court that it shall not encumber or otherwise deal with the Land, save as follows: (a) to procure registration of the mortgage from Arch Finance for no more than $3,920,000 for the completion of the purchase of the Land; (b) otherwise, where notice in writing is first given to the Plaintiff …, or the Court’s approval is first obtained.

1. It was thereby implicit that the Davey Street Properties and 374 Nepean Highway were thereby to be finalised in accordance with the contracts previously entered into. Further, although the mortgage of $3,920,000 was not sufficient to procure the purchase of the land at 374 Nepean Highway, the rest of the funds to settle that property were to be obtained by way of distribution from the Davey Street Properties.

1. On 12 December 2018 the Davey Street Properties settled. However, the proceeds were not distributed to the unit holders. This was by reason of a dispute with Mr Rodney Goullet, one of the unit holders. Instead, the unit holders reached agreement (also on 12 December 2018), inter alia, as follows:

(a)        that amounts claimed as a loan by Mr Goullet would be paid into a trust account of Rigby Cooke Lawyers; and

(b)        that the balance of proceeds would be paid into a trust account of Kennedy Guy solicitors.

1. The result is that the defendant can no longer obtain access to the funds from the Davey Street Properties so as to complete the settlement at 374 Nepean Highway. Nevertheless, the defendant claims that he will receive the sum of $1,264,399.96 from the proceeds, even if Mr Goullet’s claims are to be accepted.

1. The defendant has therefore approached another lender and obtained an agreement from Benthos to advance the sum of $1,725,000. The Court has been provided with a letter which includes an indicative term sheet and a draft loan agreement from Benthos subject to certain conditions. Despite these conditions, senior counsel for the defendant, Mr Williams QC, stated that the transaction could settle today.[1]

   [1]Transcript of the Proceeding (30 January 2019) 1.

1. The terms sheet records an interest rate of 20 per cent with a funding rate of 25 per cent. The loan amount is $1,725,000 and the term proposed is five months. The security includes a second mortgage over 374 Nepean Highway. Further, cl 5.4 states that the borrower charges all its right title and interest in the money held in the relevant trust accounts cited above.

1. Ultimately, the defendant says that he cannot settle without the variation to the undertaking given on 5 December 2018 so as to permit the taking of the extra security from Benthos.

1. The defendant further denies the alleged loan in this case. In particular, he highlights that the plaintiff has admitted to signing a document on 15 November 2016, wherein he agreed to extend the loan for 60 months. The result is that the alleged loan is not due to be repaid until November 2021.

Legal Principles

1. In a decision of Adam P. Brown Male Fashions Pty Ltd v Phillip Morris Inc[2], the High Court stated as follows:

Considerable argument was directed to the question whether a court has power, otherwise than in the case of mistake operative at the time of giving it to release a party from an undertaking, at least in the absence of the consent of the other party. But in our opinion a court undoubtedly has such a power. Just as an interlocutory injunction continues “until further other”, so must an interlocutory order based on an undertaking. A court must remain in control of its interlocutory orders. A further order will be appropriate whenever, inter alia, new facts come into existence or are discovered which render its enforcement unjust.[3]

[2][1981] 148 CLR 170 (‘Adam P. Brown’).

[3]Ibid 177-8.

1. This passage was also cited in a decision of Mondous v Canzoneri[4], by Digby J of this Court. However, his Honour, also stated:

It remains open to the Court to reason that enforcement of an undertaking would be unjust in the circumstances and to vary an undertaking on that basis. In this regard, I do not consider there to be any rigid or confined rule or test in respect of the exercise of the Court’s discretion to variation or permit the withdrawal of an undertaking.[5]

[4][2018] VSC 194 (‘Mondous’).

[5]Ibid at [18].

1. The balance of convenience has also been identified as a material consideration.[6]

   [6]Adam P. Brown (n1); Mondous (n3) at [19].

Submissions

1. The defendant submits that the circumstances have changed because, at the time of giving the original undertaking, it was not realised that the extra security would be needed.

1. The defendant has also highlighted the serious losses that will flow if the transaction cannot be completed today, or at least in the near future. They will include the forfeiture of the $500,000 deposit (as well as the property) together with penalties of $60,000, and exposure to a potential claim for damages.

1. The defendant submits that the plaintiff stands to gain the value of the new property. He further submitted that the funds from the Davey Street Properties are not being further dissipated, but are rather being held in a trust account to be allocated solely for the benefit of the settlement of 374 Nepean Highway.

1. The plaintiff submitted that the defendant has long been aware of the dispute with the unit holders and challenged the alleged “change”, highlighting that Mr Goullet had previously lodged a caveat.

1. The plaintiff submitted that it was not clear that there were no other options, including, for example, waiting for a rescission notice, and/or increasing an existing facility.

1. The plaintiff also raised serious concerns about the servicing of the new facility, particularly in circumstances where the funds from the trust account (not the subject of dispute) will be insufficient to discharge the mortgage. The plaintiff highlighted that, in the event of default, Benthos, will be able to take control of 374 Nepean Highway and that interest costs could reduce any recoverable amount.

1. Finally, the plaintiff emphasised that fraud allegations are to be pursued and the claim is to be expanded, highlighting that the plaintiff is a non-English, 79 year old man who has put all his retirement funds towards this advance.

Resolution

1. In terms of the fraud allegations, I am unable,  in the time given, to form any definitive views about those matters.

1. I do have serious concerns about the serviceability of the security to be taken with Benthos. However, against this must be weighed the very high probability of loss if the undertakings are not amended.

1. A further extension of the settlement may be theoretically possible, but there seems to be little benefit in putting the matter off, as suggested by the plaintiff. The objective evidence in this case also suggests that an extension of settlement will only be granted by the incurring of significant further costs. Thus, as highlighted by senior counsel, at paragraph 14 of the affidavit of Jacques Khouri sworn 24 January 2019, a letter was exhibited which contained the (most significant) grant of extension of the date of settlement by the vendor.  That extension was only granted where the vendor charged  penalty interest of 12 per cent and an additional $100,000 deposit.

1. In such circumstances, even if a rescission notice is not given shortly, I am satisfied that there is a very high probability of serious loss if this transaction is not to proceed. More particularly, there is no evidence that anyone else would be likely to fund the settlement, nor do I consider that further delay is an appropriate response and/or a commercially desirable one.

1. I accept that 374 Nepean Highway will be exposed to the interests of Benthos as a new mortgagee. However, by reason of the undertakings given on 5 December 2018, the plaintiff had effectively already agreed for the proceeds of the Davey Street Properties to be utilised to purchase 374 Nepean Highway. The funds will still be effectively allocated to 374 Nepean Highway by reason of their retention  in the trust account.

1. I also accept that circumstances have changed since 5 December 2018.  Thus it was only on 12 December 2018 that the Davey Street funds became unavailable by reason of the agreement cited earlier.

1. I also consider, for reasons given above, that a substantial loss is almost certain if I do not accede to the defendant’s application. This includes the significant deposit amount of $500,000.  In terms of balance of convenience factors, there is hence a very high degree of prejudice to the defendant, as well as the third-party vendor, if the application is refused.

1. Although I am concerned that loss may also result if the transaction with Benthos goes ahead, it therefore appears, in the balance, that a greater injustice would result if the undertaking was enforced. It is, hence, preferable to allow the transaction to complete as was anticipated by reason of the undertakings given on 5 December 2018.

1. Overall, then, I am satisfied that a further amendment is appropriate by reason that there are new circumstances which render the enforcement of the earlier undertaking unjust.