H and G Group v Pilot Developments - [2002] NSWSC 257

No judgment structure available for this case.

CITATION: H & G Group v Pilot Developments [2002] NSWSC 257

CURRENT JURISDICTION: Equity

FILE NUMBER(S): SC 3904/01

HEARING DATE(S): 26 and 27 March 2002

JUDGMENT DATE: 9 April 2002

PARTIES :

H & G Group Pty Ltd (P, CD)
Pilot Developments Pty Ltd (D1, CC1)
Barbery Coast Investments Pty Ltd (D2, CC2)
Raymond Laurence Whitten (D3, CC3)
David Paul Hansen (CD on CC2)

JUDGMENT OF: Austin J

COUNSEL : W Haffenden with M Tyson (P, CD)
T Alexis with N Abadee (D, CC)

SOLICITORS: Macquarie Legal Practice (P, CD)
S J Von Muenster (D, CC)

CATCHWORDS: PRACTICE AND PROCEDURE - variation of consent orders based on compromise agreement - whether court has jurisdiction to vary orders other than in respect of time, where the underlying agreement is not open to variation on contractual and equitable grounds - court's discretion to vary orders with respect to time - relevant considerations

LEGISLATION CITED: Conveyancing Act 1990 (NSW) s 13
Supreme Court Rules Pt 2 r 3, Pt 40 r 9, Pt 44 r 5

CASES CITED: General Credits Ltd v Ebsworth [1986] 2 Qd R 162
General Insurance Co Ltd v Southern Cross Exploration NL (1988) 62 ALJR 216
Harvey v Phillips (1956) 95 CLR 235
Huddersfield Banking Co Ltd v Henry Lister & Son Ltd [1895] 2 Ch 283
New South Wales Crime Commission v Chik Chen [2001] NSWSC 331
Paino v Hofbauer (1988) 13 NSWLR 193
Prasad Singh v Abdul Fateh Mohammed Reza (1935) 62 Ind App 196
Siebe Gorman & Co Ltd v Pneupac Ltd [1982] 1 WLR 185
Singh v Secretary, Department of Family & Community Services [2001] FCA 1281

DECISION: Consent orders varied by extending the time for the plaintiff to comply

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

AUSTIN J

TUESDAY 9 APRIL 2002

3904/01 H & G GROUP PTY LTD V PILOT DEVELOPMENTS PTY LTD & ORS

HIS HONOUR: Introduction

1 This is my judgment on an urgent application by the plaintiff to vary some consent orders. The hearing was concluded on Wednesday 27 March 2002, and judgment was reserved. Unfortunately the judgment has been delayed for a week, to the inconvenience of the Court as well as the defendants, because the plaintiff made a further written submission without leave on the day after the hearing ended, and it was then necessary to give the defendants time to reply.

2 The plaintiff ("H & G") and the second defendant ("Barbary") are the shareholders in the first defendant ("Pilot"), each holding two shares. Mr David Hansen is a director and principal shareholder of H & G (evidently as trustee for a family trust). The third defendant, Mr Raymond Whitten, is a director and shareholder of Barbary. Pilot has been, in effect, a joint venture vehicle for the Hansen and Whitten interests for the purpose of developing a property at 2-6 Walker Street and 44-46 Melrose Parade Clovelly ("the Clovelly property"), which upon completion will provide 28 residential apartments. Broadly speaking, Mr Hansen has brought to the joint venture his experience as a property developer, and he has found the site for development. Mr Whitten has brought to the joint venture his experience as a commercial solicitor and in property development, and finance through Barbary.

3 Title to the Clovelly property is vested in Pilot, subject to a first mortgage in favour of GIO Australia Ltd and a second mortgage in favour of Barbary. The GIO loan is supported by guarantees, including guarantees by Barbary and Mr Whitten. Barbary also has a charge over the assets and undertaking of Pilot. As at 1 March 2002 the amount required to pay out the GIO loan was $7,749,326.77. The loan was made under a commercial equity facility in which, in effect, GIO is the financier for the building development, which is near completion but continuing, and so further advances may have been made since the beginning of March, or may in future be made, and additionally interest is accruing. As at 21 March 2002 the amount required to discharge all liabilities to Barbary was $5,992,768.05. Interest is accruing on that amount.

4 The development of the site has not been easy. Apart from difficulties with the builders (RMA Design and Construction, a business operated by two entities associated with Mr Mahmoun Rahme and his father Mr George Rahme), and negotiations with the Council, there has been litigation with an adjoining landowner and with purchasers. The purchaser litigation, in this Court, has arisen because Pilot sold 15 of the 28 residential units off the plan, and later purported to terminate the contracts for sale. It purported to rely on a clause in the contracts of sale which entitled either party to terminate in the event of non-completion of the development and registration of the strata plan within two years. Nine of the purchasers have brought proceedings to challenge the validity of the termination of the contracts. It appears that the present value of the residential units is higher than the contract prices, perhaps (according to some evidence) by as much as $1 million or more.

5 Unfortunately, there has been a deep and apparently bitter falling out between the Hansen interests and the Whitten interests. Their dispute led to H & G taking the present proceeding, after Mr Hansen was purportedly removed as a director of Pilot. H & G sought relief of various kinds, but its principal claim to relief was an order that Barbary or Mr Whitten or both of them purchase H & G's shares for a price established by valuation. The defendants filed cross claims against H & G and Mr Hansen. One of their principal claims is that Mr Hansen or H & G received a secret commission from Mr Rahme.

6 Up to the time of the hearing, the parties disagreed about the true value of Pilot, having regard to the extent of its borrowings and the difficulties encountered by the development. Essentially the Hansen interests saw great potential in the development and contended therefore that H & G's shares had substantial value. They relied on a valuation prepared by Hancock & Associates, which valued each of the four issued shares at over $1.5 million. On the other hand, the Whitten interests, relying on a valuation by O'Brien Palmer dated 19 October 2001, asserted that after taking into account borrowings and the various difficulties encountered by the development, the value of each share in Pilot was $178,289. In the course of an interlocutory hearing on 21 November 2001, counsel for the defendants informed the Court that Barbary and Mr Whitten asserted that by that time, Pilot had become worthless.

7 Whatever may have been view that the Whitten interests had as to the value of Pilot in November 2001, it appears that both sides see a substantial actual or potential value in the company now. The development is nearing completion. Although the ultimate profit out of the development will depend upon the resolution of the purchaser litigation, it seems that a profit of some millions of dollars is a real possibility. The battle before me now is essentially a battle for access to that profit.

Interlocutory arrangements

8 On 29 August 2001 H & G applied to Young CJ in Eq as Duty Judge for interlocutory relief. Short Minutes of Order were handed up by consent and without admissions, and his Honour made orders accordingly. The orders provided for the defendants to give H & G and their accountants reasonable access to the books and records of Pilot, and restricted the defendants from issuing a statutory demand or seeking to wind up H & G, and prevented Pilot from paying legal fees to Mr Whitten's legal firm without the written consent of Mr Hansen, pending the hearing. The orders included the following:

The hearing of the oppression proceeding

9 The case was set down for a six-day hearing beginning on 30 November 2001. In opening, counsel for H & G relied on written submissions, which included the following paragraph:

10 After the hearing on the first day had proceeded for a little while, counsel for the defendants informed me that he wished to take detailed instructions from his clients as to whether they would accept H & G's offer. I allowed time for the matter to be considered and later in the day, counsel for the defendants informed me that his clients had instructed him to accept H & G's offer contained in paragraph 7 of the submission. It was made clear in court that the two shares referred to in paragraph 7(a) were Barbary's shares in Pilot, and the legal fees referred to in paragraph 7(d) did not include the costs of the present proceeding.

11 As to the arrangements governing the 45 day period from the time of making orders to the time of settlement, counsel for the defendants said (Transcript, 30 November 2001, page 24):

“There is an interlocutory regime in place with respect to the orderly conduct of the 1st Defendant's affairs. It is agreed between the parties, as I understand, that that regime will continue until the transfer of those shares within the 45 day period. We would apprehend that the proceedings would then stand over to a convenient day, 46 or so days from now, which is probably the first week of term next year, so that orders can be made on that occasion for the proceeding and, by that, I mean the originating process and also the cross claims, to be dismissed."

12 The interlocutory regime referred to was the regime established by the orders of Young CJ in Eq on 29 August 2001.

13 After some discussion about whether I had the power to make orders by consent under s 233 of the Corporations Act, I made the following notations and orders:

14 Those orders have been entered.

15 On 4 December 2001 counsel for H & G made an application for leave to file and move on an interlocutory process that he had prepared and transmitted to my chambers late on the previous evening. The draft interlocutory process sought detailed orders to govern the arrangements for the development project and the relationship between the parties pending settlement. Some 35 orders were sought, dealing with access to documents and information, reconstitution of the board of directors of Pilot, arrangements for interim management of the project, and various orders with respect to costs and matters of procedure. Counsel for the defendants submitted that the draft interlocutory process was fundamentally misconceived because the Court had already made orders, on 30 November, for the purpose of settling the matter subject only to the question of costs. Counsel for H & G then informed me that he wished to withdraw the draft interlocutory process except insofar as it dealt with costs. He made a statement of his client's position which was recorded in the transcript.

16 I then heard argument as to costs, and decided that no order for costs should be made, except to the extent that the hearing on that day related to the foreshadowed and withdrawn interlocutory process, as to which I ordered H & G to pay the defendants' costs. I stood the oppression proceedings over to 1 February 2002, anticipating that by that time settlement would have occurred.

The interlocutory applications by the plaintiff and the defendants after failure of the settlement

17 When the matter returned to me, I was informed that settlement had not taken place, but that Mr Hansen was negotiating arrangements with third parties that would permit the settlement to go ahead. H & G filed an interlocutory application said to be made under s 233 of the Corporations Act and Part 44 rule 5 of the Supreme Court Rules. In its amended form the application seeks the following relief:

18 The present judgment deals with this application. The defendants have vigorously opposed it. Their position is that, since H & G has not purchased Barbary's shares in Pilot, and has not complied with the other terms of my orders, within the 45 day time period allowed by the orders, the settlement has failed and the case should proceed to hearing. To support their position, they have filed their own interlocutory application, seeking orders that the consent orders made on 30 November 2001, and my order with respect to costs made on 4 December 2001, be set aside. Although some submissions were directed towards the defendants' interlocutory application, I have heard only the application by H & G, and the parties have acknowledged that further submissions will be needed (though presumably not any additional evidence) if H & G's application fails and I proceed to consider the defendants' application.

19 As I understand the position of H & G, it would prefer to have the orders varied so as to substitute Bridge Street Developments for itself as purchaser of Barbary's two shares in Pilot; but if the Court decides that it cannot or should not make such an order, H & G would be content with an order granting an extension of time for completion of the transaction envisaged by my orders of 30 November 2001.

20 H & G's interlocutory process seeks to achieve an extension of the settlement time by an order staying the operation of Order 2 made on 30 November 2001 up to a stated date. On 1 February 2002, when the interlocutory application was initially filed, H & G argued that the 45 day time limit had not expired. At that stage an order staying the operation of my earlier Order 2 may have been appropriate. However, by the time the application came to be heard, the 45 day time period had expired on any view. The submissions of the parties proceeded on the basis that an extension of the settlement time would involve variation of my earlier order, rather than an order staying the operation of the earlier order.

Principles governing variation of orders after entry

21 Order 2 made by me on 30 November 2001 required H & G to purchase Barbary's shares in Pilot upon the terms of paragraph 7 of H & G's written submission. It was made on the basis that the parties had consented to it, and also on the basis that I had authority to make the order under ss 232 and 233 of the Corporations Act.

22 Paragraph 1 of my orders was intended to note a matter of a kind referred to in s 232 of the Corporations Act, sufficient to give me jurisdiction under s 233 to make an order under that provision. Paragraph 1 does not in its terms purport to give the Court jurisdiction to vary Order 2. It seems to me that any jurisdiction under s 233 that arose by virtue of Paragraph 1 was spent by the making of Order 2. In those circumstances, s 233 would not be available as a source of power to vary Order 2 now, unless I were to make a finding under s 232 and thereby give the Court a fresh jurisdictional basis to make orders under s 233.

23 H & G did not seek orders under ss 232 and 233 in its interlocutory application, and did not submit that the evidence on the interlocutory application was sufficient to warrant my making such an order. In my view the evidence on the application does not permit any such order to be made. Therefore H & G's application to vary Order 2 is to be assessed simply as an application to vary consent orders, uncomplicated by any special jurisdiction under the Corporations Act.

24 The Court's power to vary or set aside an order after entry is dealt with in Part 40 rule 9 of the Supreme Court Rules, which is as follows:

notice

25 The leading authority on the Court's power to set aside a judgment or order after it has been entered is the High Court's decision in Harvey v Phillips (1956) 95 CLR 235. That was a case in which the appellant sought to have a consent judgment set aside on the basis that her action had been settled by her counsel without her knowledge or authority. The High Court dismissed the appeal on the ground that counsel had signed the terms of settlement on the appellant's express authority. However, the Court took the opportunity to make a general statement as to the circumstances in which consent orders may be set aside.

26 After identifying some special cases, none of which is relevant here, the Court considered (at 242-243) reported cases where counsel settled proceedings contrary to a restriction on his authority. In such cases the Court "will not feel bound to enforce a compromise made by him contrary to the restriction, even though the lack of actual authority is not known to the other party" (quoting from the judgment of Lord Atkin in Sheonandan Prasad Singh v Abdul Fateh Mohammed Reza (1935) 62 Ind App 196, at 199-200).

27 The High Court continued:

"It is said that this power of the courts is to be exercised as a matter of discretion when in the circumstances of the case to allow the compromise to stand would involve injustice in view of the restriction on counsel's authority. See Halsbury's Laws of England, vol 3, 3rd ed,, p 51; 2nd ed, vol 2, pp 526, 527. But in the case of a compromise which is made within the actual as well as apparent authority of counsel the Court does not appear to possess a discretion to rescind it or set it aside. The question whether the compromise is to be set aside depends upon the existence of a ground which would suffice to render a simple contract void or voidable or to entitle the party to equitable relief against it, grounds for example such as illegality, misrepresentation, non-disclosure of a material fact where disclosure is required, duress, mistake, undue influence, abuse of confidence or like …".

28 In the present case there is no suggestion that counsel lacked actual authority to bind their clients to the terms of Order 2. Therefore, according to the High Court, the Court does not have any discretion to set Order 2 aside. The Court's power to vary a consent order presumably depends upon the same analysis - that is, that the order may be varied where there is a ground for varying the simple contract which underlies it, but not otherwise. Thus, a consent order may be varied where the underlying simple contract is amenable to rectification, just as a consent order can be set aside where the underlying contract is voidable on equitable grounds. In the present case, there is no suggestion that any ground exists under the doctrine of rectification or otherwise for varying the contract underlying Order 2, in the manner advocated by H & G or in any other manner. These considerations point to the conclusion that the Court has no power to make the variations that H & G seeks.

29 There is, however, one clear qualification to such a conclusion, and in addition, later cases have tended to soften the sharp edges of the Harvey v Phillips approach. The exception arises out of an express provision of the Supreme Court Rules. Part 2 rule 3 provides:

30 The rule was considered by the Court of Appeal of New South Wales in Paino v Hofbauer (1988) 13 NSWLR 193. McHugh JA, with whom the other members of the Court agreed, held that Part 2 rule 3 confers on the Court the power to extend a time fixed by a consent order, notwithstanding that the order has been entered (at 196). It is one of the powers to set aside or vary a judgment or order preserved by Part 40 rule 9 (5). He rejected a submission that Part 2 rule 3 does not enable the Court to vary a time contained in a condition, in contrast with a time fixed for performance of an obligation. After referring to the decision of the High Court in FAI General Insurance Co Ltd v Southern Cross Exploration NL (1988) 62 ALJR 216, he concluded (at 197):

Southern Cross Expiration

31 It follows from this decision that I have the power to vary Order 2 by extending the 45 day time period for purchase of the Pilot shares and performance of the terms with respect to other payments, even though the 45 day period has already expired.

32 However, rule 3 does not confer on me the power to vary the identity of the purchaser of the shares from H & G to Bridge Street Developments. The High Court's observations in Harvey v Phillips imply that I have no power to do so, absent any basis for varying the underlying contract on contractual or equitable grounds. However, the Court of Appeal in Paino v Hofbauer made some observations that may be relevant to this point.

33 In that case the parties agreed to terms of settlement, reflected in judgment being entered by the Court by consent. The judgment provided that the respondents pay the appellants $750,000. Order 5 said that execution on the judgment was stayed provided that the defendants paid $530,000 to the appellants by stated instalments on stated due dates. Order 6 said that provided payments were made within seven days of the due dates, interest would not run on the judgment. Order 7 said that compliance with payment obligations within seven days of the due dates would not constitute breach of the respondents' obligations, but otherwise time for the payment of each instalment of the judgment was of the essence.

34 The respondents were late in some of their payments, and they applied to the Court for variation of the orders to cater for the delay. The judge at first instance made orders for variation, after taking the view that the appellants had not been prejudiced substantially because any lost interest was only for a short time and would be minor. The Court of Appeal found that the Court had power to vary the orders by extending time under Part 2 rule 3, but that the exercise of discretion by the judge at first instance had miscarried. The judge had overlooked that the effect of the initial orders was that interest would run on the total amount of the judgment if any payments were late, and so the loss of interest produced by the orders for variation would be substantial. In the circumstances, the Court of Appeal proceeded to exercise the discretion afresh, and decided against variation of the initial orders.

35 McHugh JA referred to Harvey v Phillips, and General Credits Ltd v Ebsworth [1986] 2 Qd R 162, which applied it. He also referred to the English cases of Siebe Gorman & Co Ltd v Pneupac Ltd [1982] 1 WLR 185 and Huddersfield Banking Co Ltd v Henry Lister & Son Ltd [1895] 2 Ch 283, which are also regarded as authority for the proposition that if the underlying contract cannot be invalidated a consent order is good (see Lindley LJ in the latter case at 280).

36 McHugh JA pointed out (at 198) that in Harvey v Phillips the question was whether a consent order based on a compromise agreement could be set aside. He continued:

37 With respect, it is not clear to me whether, in this passage, his Honour intended to say that

· the Court has a discretion to make any sort of variation to consent orders based on an agreed settlement, but will only do so in an exceptional case (assuming that the underlying agreement cannot be set aside on contractual or equitable grounds), or

· the principle in Harvey v Phillips is ousted by Part 2 rule 3, which confers a discretion on the Court to extend or abridge time, but the discretion under the rule should only exercised in an exceptional case.

38 The former construction appears to me to be inconsistent with Harvey v Phillips itself, as well as the English cases upon which, to a degree, Harvey v Phillips was based. In Singh v Secretary, Department of Family & Community Services [2001] FCA 1281 (21 September 2001) the Full Federal Court treated Harvey v Phillips as authority for the proposition that where judgment has been entered, the Court's power to set aside its orders depends upon the existence of a ground sufficient to render a simple contract void or voidable, or to entitle the party to equitable relief (at paragraph 10).

39 Nevertheless, in some later cases judges of this Court appear to have adopted the former construction of McHugh JA's observations: see New South Wales Crime Commission v Chik Chen [2001] NSWSC 331 (Howie J, 4 May 2001), especially at para 67, and other cases cited in that case. And, notwithstanding their observations on Harvey v Phillips, the Full Federal Court in Singh's case (a case where the orders had not been entered) saw Paino v Hofbauer as authority for the proposition that where a party asks for a consent order based on a contract to be set aside or varied when the underlying contract could not be set aside or varied, the case needs to be exceptional before the Court will exercise its discretion in favour of the applicant (at paragraph 13).

40 Moreover, in Paino v Hofbauer itself Clarke JA, while purporting to apply Harvey v Phillips and the English cases as authority for the proposition that consent orders embodying a compromise agreement between the parties should only be set aside if the underlying agreement might be invalidated, nevertheless said (201):

"I should not be taken as saying that the Court has no power to make an appropriate order in the absence of proof of a circumstance which might entitle a party to relief in respect of his failure strictly to comply with the terms of the contract which was reflected in a court order. I simply suggest that it would be a rare case in which it would be a judicial exercise of the discretion to grant an indulgence the effect of which is to vary an agreement between the parties …".

41 Therefore there is some authority for the view that the Court has a discretion to vary a consent order in ways going beyond extension of time, in an exceptional case, even though the facts of the case provide no ground for varying or setting aside the underlying contract. But in light of the restrictive language used in Harvey v Phillips, and in the absence of any more recent authoritative pronouncement by the High Court, the point must be regarded as doubtful. I therefore doubt whether I have power to vary Order 2 by substituting Bridge Street Developments for H & G as the purchaser of the Pilot shares.

42 However, it is not necessary for me to reach a final conclusion on the point in this case. Even if I had the power to make such an order, it would only be available in an exceptional case. This is not an exceptional case as far as the variation of the identity of the purchaser is concerned, for two reasons. First, H & G itself says, in submissions, that its claim to this variation is put in the alternative, and if the Court finds difficulty in varying the orders in this fashion, it is content to achieve a variation by extension of time. There is therefore no pressing reason for me to make an order for variation of the identity of the purchaser. Moreover, since it appears that H & G can give effect to the purchase transaction without variation of the identity of the purchaser, and no hardship has been suggested, there is no discretionary reason for me to make that variation order. I shall therefore not do so.

43 The remaining question is whether I should, in the exercise of my discretion, make an order extending the 45 day time period. Where parties agree upon the sale and purchase of property and the discharge of securities, and fix times for the performance of their contractual obligations, time is not normally of the essence unless it is expressly declared to be so, although it is open to the non-defaulting party to give a notice upon expiration of which a non-essential provision as to time of performance may be converted into an essential requirement. If, on 30 November 2001, the Court had simply noted a compromise agreement of the parties rather than making orders in terms agreed by the parties, time would probably not have been of the essence. If, correspondingly, time for performance of my orders is not of the essence, completion of the purchase could take place without my making an order for variation. The defendants have not given a notice to H & G purporting to make time of the essence, and if they did so now, it may well be that a reasonable period of notice would be sufficient to enable H & G to complete the transaction. Consequently H & G could proceed to completion without any need for curial intervention, while perhaps being liable for damages for breach the 45 day time stipulation.

44 Was the 45 day time period in my orders of 30 November 2001 an essential stipulation as to time? The question did not arise in Paino v Hofbauer, because in that case the parties expressly stipulated the extent to which time was to be of the essence. The circumstances that lead the parties to go beyond having the Court note their compromise agreement, and to prefer obtaining orders from the Court, suggest an intention that the terms of the Court's orders are to be treated as essential provisions of their compromise. I am therefore inclined to the view that the requirement for H & G to perform its obligations within 45 days was an essential time stipulation.

45 I take Paino v Hofbauer as authority for the proposition that where Part 2 rule 3 applies, so that the Court clearly has the power to vary its consent order, it should only do so in an "exceptional" or "rare" case. I must therefore consider whether the circumstances of the present case are sufficiently exceptional to warrant an order varying the time period as sought by H & G. I have decided that they are.

H & G's case for relief

46 H & G essentially relies on three matters, the cumulative effect of which (in its submission) should be to persuade me to exercise my discretion in its favour. It says that Mr Whitten's conduct spoilt its negotiations with Gowing Bros for financial accommodation to meet its obligations under the consent orders; that Mr Whitten's conduct was, in any case, in breach of undertakings given by the defendants to the Court for the maintenance of the interlocutory regime; and that the defendants made it difficult for H & G and its financiers to gain access to the site, consequently interfering with H & G's efforts to raise finance so as to perform its obligations under the consent orders.

Reasons for collapse of negotiations with Gowing Bros

47 Mr Hansen authorised counsel to make the offer for purchase after a discussion with a business associate, Mr Jennings. Mr Hansen and Mr Jennings had been involved in other real estate projects, and Mr Jennings expressed an interest in the Clovelly project subject to finalisation of appropriate terms and conditions, and due diligence. A few days after 30 November 2001, Mr Jennings introduced Mr Hansen to the directors of Gowing Bros Ltd, and there followed numerous meetings and discussions between Mr Hansen and representatives of Gowing Bros about the project. On about 10 December 2001 the project manager for Gowing Brothers, Mr Byers, told Mr Hansen that "the figures stack up on this deal". Heads of agreement were prepared, and on 12 December 2001 Gowing Bros sent Mr Hansen a draft letter of intent. On 14 December 2001 Mr Hansen received from Gowing Bros a program for due diligence.

48 I am satisfied by the evidence that there were serious and mature negotiations between Mr Hansen and Gowing Bros with a view to Gowing Bros giving or arranging financial backing for the project sufficient to permit Mr Hansen to carry out the terms of settlement. I think it probable, on the evidence, that arrangements would have been finalised between Mr Hansen and Gowing Bros were it not for the events I am about to relate.

49 On about 22 December 2001 Mr Hansen received a telephone call from Mr Byers who said:

"David, I've got some bad news for you. Gowings have decided to pull out of the joint venture. We’re unhappy about the legal and security aspects of the project."

50 It appears that the cause for concern was that in the purchaser proceedings, consent orders had been made which had the effect of limiting any mortgage on the Clovelly property to $15 million. Gowing Bros estimated that the project's total cost would be approximately $16 million. The attitude of Gowing Bros was explained to Mr Hansen more fully in their letter of 8 January 2002.

51 Mr Hansen endeavoured to find an alternative venture partner and after some unsuccessful negotiations with someone else, he commenced negotiations with Mr Ian Widdup of Bridge Street Developments Pty Ltd early in January 2002. Bridge Street Developments have remained interested in participating in the proposal up to the time of the hearing. However, Mr Hansen was unable to put his new arrangements in place within the 45 day period set by the Court's orders. I should note, in passing, that the solicitors for the parties disagreed as to when the 45 day period would expire, the plaintiff insisting that the time period should be calculated under the Supreme Court Rules and that therefore certain holidays should be disregarded. Nothing turns on that dispute now, since it is clear that however the 45 day period was to be calculated, Mr Hansen was not ready to settle within that period.

H & G's Allegations of breach of undertaking by the defendants

52 The interlocutory arrangements noted by Young CJ in Eq on 29 August 2001 included an undertaking by the defendants not to "enter into any contracts or arrangements or amend or terminate existing contracts or arrangements or grant any rights or interests in the assets of the first Defendant" without Mr Hansen's prior written consent.

53 In proceeding No 3283 of 2001 between Marcelle Pearson and Stephen Ronald Kerr as plaintiffs and Pilot as defendant, consent orders were made on 29 October 2001, by which Pilot was restrained from entering into any contract to sell, transfer, mortgage or charge one of the residential units of the Clovelly property, Lot 9, subject to the proviso that Pilot would be entitled to discharge any mortgage and to mortgage and re-mortgage the development to secure any debt not exceeding $15 million. Consent order 3 stated that if Pilot were to discharge its mortgage and re-mortgage the development to secure a loan of up to $15 million, the new mortgagee would have priority to the extent of the mortgage over the interests claimed by Ms Pearson and Mr Kerr.

54 In my opinion, by consenting to the orders made on 29 October 2001, Pilot breached the undertaking that it had given to the Court on 29 August 2001. By doing so, Pilot entered into an arrangement of the kind envisaged by interlocutory undertaking, and it also granted a right or interest in its assets to Ms Pearson and Mr Kerr contrary to the interlocutory undertaking. The right they acquired was the right to restrain Pilot from entering into any new mortgage over its assets to secure a debt in excess of $15 million. That right was intended to give them a proprietary interest having priority over the interests of any mortgagee for such a sum. It was a right or interest "in" Pilot's assets.

55 I regard this breach of undertaking as reprehensible. Although there may be some scope for technical arguments as to whether the consent orders of 29 October 2001 gave rise to an interest in Pilot's assets, there can be no doubt that the orders were contrary to the spirit of the undertakings noted by Young C J in Eq. Pilot agreed to a restriction which has seriously inhibited H & G's attempts to refinance the development project. There has been no suggestion that H & G or Mr Hansen agreed to such a restriction. Indeed, it appears on the evidence before me that Mr Hansen discovered the restriction only when it was brought to his attention by Gowing Bros, who in turn discovered it during their due diligence investigation.

Problems of access to the site for prospective financiers

56 Mr Hansen's evidence is that he has experienced various difficulties in acquiring information from the defendants to assist potential investors. One problem has been that some information requested by H & G's accountants, Hancock & Associates, in their letter of 19 December 2001, was not supplied until after the end of January 2002.

The defendants' case for opposing relief to the plaintiff, and for dissolving the Court's orders

57 In his affidavit made on 24 March 2002, Mr Whitten has set out his grounds for opposing H & G's application. I shall deal with each of those grounds.

Mr Whitten's work to overcome problems on the building site

58 Mr Whitten says that he has worked extensively with the builder, the architect, and the project manager to ensure that the project is completed. He has personally been involved in negotiations with Randwick City Council to arrange for a Certificate of Occupancy. Since January 2002, he estimates that he has spent some 25-35 hours per week in negotiations with the builder, architect, project manager and Council, and other consultants.

59 Additionally, Barbary has continued to fund interest payments to GIO and all payments to project managers, the architect, the builder, Sydney Power, Sydney Water, Randwick City Council, the Office of State Revenue and all other authorities, to enable the project to continue to completion.

60 Mr Whitten says that from mid-January 2002, he has attended to numerous problems on the Clovelly site. Problems have included continuing building defects, delays associated with bad weather, non-completion of works and rectification work by the builder and subcontractors, cash flow problems of the builder and subcontractors, and an extensive list of works required by the Randwick City Council before a Certificate of Occupancy will issue. It has been necessary for him to deal with George and Maroun Rahme on an almost daily basis, to make many phone calls, attend numerous meetings, and make many site inspections.

61 A cash flow problem for the builder arose on about 3 January 2002, when GIO discovered that in March 2001, by mistake, it had credited a progress payment of $146,881 twice, and sought to deduct the overpayment from other money becoming due to the builder. In Mr Whitten's view, the builder was under-capitalised, and would therefore be unable to pay its subcontractors, and subcontractors were not prepared to return to the site to finish work. Mr Whitten became involved in extensive negotiations with the builder during January to ensure that the builder could complete the project. According to Mr Whitten, work effectively ceased on the project while the problem was resolved.

62 After extensive negotiations, it was agreed that Barbary would advance to Pilot a further $150,000 by way of variation of the building contract, so that the builder could complete the work. In early February 2002 it became evident to Mr Whitten that the $150,000 would not be sufficient and that the builder needed an additional $56,891 (the balance of the loan approved for construction finance by GIO). However, GIO was not prepared to advance this additional money pending the issue of a Certificate of Occupancy. Consequently the additional funds were advanced by Barbary. Pilot and the builder eventually entered into a deed on 14 February 2002. H & G's consent was sought to the deed, and Mr Hansen proposed some alterations to it. H & G eventually consented to the execution of the deed by Pilot, without modification, on 25 February 2002. The uncertainty created by the process of negotiations caused further delay in the building works.

63 I accept that Mr Whitten has done a great deal of work to overcome problems on the Clovelly site. To the extent that this involved Barbary advancing additional funds, the position of Barbary will be protected if the settlement proceeds, because the settlement envisages that the full amount of the loan by Barbary will be repaid to it. To the extent that Mr Whitten's work was undertaken by him as Pilot's solicitor, he is in a position to render a memorandum of costs and disbursements to that company. Once Pilot passes into the control of the Hansen interests upon settlement, the prospect of disagreement over the amount of fees owing to Mr Whitten as a solicitor will, of course, be enhanced. But he has some protection under the terms of the settlement, according to which a sum of $50,000 is to be paid into a controlled money account to secure any valid claim for his legal fees. It seems to me that Mr Whitten has a case for the an increase of this $50,000 amount, and I shall consider later whether there is some means of achieving such an increase.

64 To the extent that Mr Whitten has been left unprotected for his legal fees, and to the extent that he and his fellow directors of Pilot have undertaken work in their capacity as directors, there is potential for them to be left unremunerated. It is relevant to note, however, that the defendants expressly agreed to the continuation of the interlocutory regime reflected in the undertakings given to Young CJ in Eq on 29 August 2001. When H & G endeavoured to replace that regime with more specific and detailed orders, the defendants objected. Mr Whitten and his co-directors undertook their work in the context of the interlocutory regime, and although they regarded the 45 day time period as having run out in mid-January 2002, they must have been aware that in mid-January H & G was continuing its efforts to find a financier and a partner. It cannot have been a surprise to them that H & G would seek to keep the settlement arrangements alive.

65 In my view, the work undertaken by Mr Whitten and his co-directors, as outlined above, does not make it unreasonable, in all the circumstances, to hold the defendants to the terms of settlement by varying the time for completion.

Litigation against Pilot

66 Mr Whitten's evidence is that the position of Pilot in litigation has improved considerably since January 2002. Pilot has been a litigant in two respects.

67 First, the body corporate of the adjoining block of flats made a claim against Pilot and the builder because of the collapse of some shoring. The builder's insurer refused to indemnify Pilot, even though the builder had control of the site. Mr Whitten and his firm made strenuous efforts to obtain an indemnity from the insurer, and a cross-claim was prepared against it. After extensive negotiations an indemnity was finally granted by the insurer to Pilot in February 2002, on the basis that Pilot pay its own costs to date. This has removed a substantial contingent liability from Pilot's balance sheet. Mr Whitten has expressed the view that consequently, there has been an increase in the value of Pilot shares.

68 Secondly, Mr Whitten and his firm have undertaken extensive work in the purchaser litigation. The work has included preparation of a building report for the litigation, involving co-ordination of the efforts of various experts. This work, carried out from January to March 2002, has substantially advanced the purchaser litigation towards final hearing. Mr Whitten has expressed the opinion that the work has significantly improved Pilot's prospects of success in the purchaser litigation. Of course, success in the purchaser litigation would substantially enhance the value of Pilot shares.

69 It seems to me that the work by Mr Whitten and his firm in connection with litigation is in the same category as Mr Whitten's work (to the extent that it was work as a solicitor) in advancing the Clovelly project, and my remarks made above are equally applicable here. I note, however, that the work on litigation has substantially increased the legal fees owing, to over $200,000. While the arrangement for retaining $50,000 in a controlled money account as security for payment of legal fees was specifically agreed to by Mr Whitten, and it appears that he has incurred the additional legal fees without making an application to vary this arrangement, there is arguably an element of unfairness in allowing H & G to have the benefit of such a substantial amount of legal work without ensuring that an adequate arrangement is made for payment of Mr Whitten's reasonable legal fees as agreed or assessed. While it is doubtful that I have any power to impose an increase in the amount deposited in the controlled money account by variation of my order of 30 November 2001, it may be possible for me to have the amount to be set aside increased from $50,000 to, say, $250,000, as a condition of my making an order in favour of H & G to extend the time for completion. I shall invite the parties to make further submissions on that matter.

70 In his affidavit, Mr Whitten expresses concern that if Pilot is liquidated after transfer of the shares from Barbary to H & G, the legal fees outstanding to his firm may not be recoverable, and even the sum of $50,000 in the controlled money account could be recovered by a liquidator of Pilot as an unfair preference. Mr Whitten points to some evidence by Maroun Rahme, that at a site meeting on about 15 January 2002 Mr Widdup of Bridge Street Developments expressed an intention to liquidate Pilot after the settlement had taken place. However, H & G has relied on an affidavit by Mr Widdup in which he has strenuously denied any such conversation, and Mr Widdup's evidence is corroborated by the affidavit of Christopher Heap, a contractor to Bridge Street Developments who was with Mr Widdup on-site on 15 January 2002. On balance, my view is that Mr Widdup did not express an intention to liquidate Pilot. Moreover, counsel for H & G gave an undertaking on behalf of his client, during the hearing of the application, that Pilot will not be wound up.

71 None of this will protect Mr Whitten from the risk that Pilot may be wound up at the instance of a creditor, and that subsequently the liquidator may seek to recover fees paid to Mr Whitten's firm as an unfair preference. I express no view on the validity of any such claim. It seems to me, however, that it would be reasonable to hold Mr Whitten to the terms of settlement notwithstanding that risk, provided arrangements are made to ensure that there is a fund from which his reasonable legal fees may be paid. The risk of recovery by a liquidator was present when he agreed to the terms of settlement, and the only thing that has changed is that the quantum of fees has increased.

Mr Whitten's objections to the proposed settlement arrangements

72 Mr Hansen wishes to proceed to settlement in reliance on indicative proposals for finance from ING Bank and Grenfell Securities Ltd. H & G has entered into an agreement with Bridge Street Developments dated 24 January 2002, to which Mr Hansen and Mr Widdup are also parties, under which Bridge Street Developments will assist H & G to comply with the Court's orders of 30 November 2001, by using their best endeavours to procure funding. It appears that the funding proposals have emerged from the efforts of Bridge Street Developments under the agreement.

73 The indicative proposal by ING Bank was set out in its letter of 13 March 2002, although the proposal was subsequently modified by letters dated 25, 26 and 27 March 2002. The indicative proposal by Grenfell Securities Ltd was set out in its letter of 11 March 2002, subsequently modified by its letter of 27 March 2002. In his affidavit, Mr Whitten has strenuously objected to some of the terms of these proposals.

74 Mr Whitten's starting point is that, when he instructed counsel to accept H & G's offer on 30 November 2001, he was particularly influenced by the fact that H & G was to carry out each of its four obligations contained in paragraph 7 of its written submission simultaneously, and also within 45 days. He says he would never had accepted and offered to sell Barbary's shares, if the discharge of its securities and the GIO's securities were not to occur simultaneously with the sale of the shares.

75 On this basis, Mr Whitten criticises the letters from ING Bank and Grenfell Securities because they do not contemplate concurrent discharge of the GIO and Barbary loans and payment of the $50,000 into a controlled money account, concurrently with the transfer of the shares. Mr Whitten says:

"A critical element of the consent orders was the simultaneous nature of the proposed settlement. Barbary did not have to fear any possible compromise of its security because all liabilities to Barbary and the GIO were to be discharged at settlement. For the same reason, I, as personal guarantor to the GIO, did not have to fear the possibility of a call upon the guarantee by the GIO."

76 Mr Whitten's criticism in this manner was provoked by the following statement in the letter of ING Bank and dated 13 March 2002 (written on the supposition that Bridge Street Developments would be the purchaser of Barbary's shares in Pilot):

77 This clearly means that Barbary must first transfer its shareholding in Pilot to BSD, without the concurrent discharge of the securities and liabilities of the GIO and Barbary. Mr Whitten's view is that this puts his interests at risk because the proposal requires them to lose control of Pilot before Pilot has bound itself to discharge the GIO and Barbary securities.

78 During the hearing of the application, I raised the question whether the ING letter envisaged a substantial time between transfer of Barbary's shares and discharge of the GIO and Barbary securities. In response to that query, H & G obtained ING’s letter of 27 March 2002. In that letter ING said:

79 ING's confirmation that all seven steps set out in its letter of 27 March would occur, in effect, simultaneously, substantially reduces the risk to Barbary and Mr Whitten. At settlement each of the participants would be able to inspect the documents prepared to give effect to all seven steps. In effect, all the documents would be "on the table", and would be passed to their destinations only when everyone was happy that the documents would achieve the desired outcomes.

80 Nevertheless, a theoretical risk to Barbary and Mr Whitten would remain. This is because, in the settlement proposed by ING, ING would become committed to provide funds only when all the security documentation in its favour was executed. As a practical matter the security documentation could be executed only when the old board resigned and the new board was appointed, and therefore only when the shares were transferred by Barbary. Consequently Barbary would necessarily give over the shares, and Mr Whitten and his colleagues would necessarily resign from the Pilot board, before funds were made available to discharge the GIO and Barbary securities, even if only a scintilla of time separated those events. If some unforeseen event occurred between the former and latter events, Barbary would not have been repaid and Mr Whitten would remain liable to GIO notwithstanding that they had given up control of Pilot. On instructions, therefore, counsel for the defendants informed the Court that Barbary and Mr Whitten would refuse to hand over share transfers and resignations except in exchange for bank cheques.

81 The issue that the defendants invite the Court to consider is whether ING’s proposal for settlement places an unreasonable risk on Barbary and Mr Whitten, so that the Court should decline to vary the time limit for the purpose of permitting such a settlement to occur. In my view it is unnecessary and inappropriate for the Court to decide upon the detailed mechanisms for achieving settlement. In its supplementary submission, H & G proposed some lengthy and complicated orders under which the Registrar of the Court would act as an escrow agent for the purpose of effecting the settlement. Registrars of this Court are people of considerable ability, but they cannot be assumed to have the training or experience necessary to supervise settlement of a complex commercial transaction. Moreover, the Registrar should not be put in a position in which there is a real risk that he will become embroiled in controversy with respect to the particulars of settlement. Finally, the defendant submitted plausibly that there was real doubt as to whether the Registrar had the power to act as an escrow agent, and whether the Court had jurisdiction to make such orders. I shall not finally decide those questions of jurisdiction and power, because the other considerations are overwhelmingly against orders of the kinds proposed by H & G.

82 The problem now pointed to by the defendants arises out of the very nature of the settlement to which they agreed on 30 November 2001. As an experienced solicitor, Mr Whitten ought to have realised that any financier agreeing to discharge existing securities on the basis that it would have valid new securities in its favour, would require the new security documents to be executed by the new board of the Borrower, and therefore would necessarily require that the new Borrower be put in control of the company before the documents were executed. Mr Whitten's evidence that he expected the settlement to be "simultaneous" cannot mean, in my view, that he had any reasonable expectation that the new financier would hand over funds before validly executed security documents were in its possession. In the present context, in my opinion, "simultaneous" settlement is the kind of settlement offered by ING. Therefore, in my view, if the defendants refuse to participate in the "simultaneous" settlement arrangements that have been proposed, they will be acting in breach of the orders of 30 November 2001.

83 If Mr Whitten wanted to have some greater measure of protection than is available through inspecting all the documents before the settlement steps occur "simultaneously" but in sequence, it would have been open to him to insist upon different arrangements before agreeing to H & G’s settlement proposal on 30 November 2001. For example, arrangements could have been proposed at that time under which the existing mortgages would be transferred to the new financier subject to indemnities in favour of the defendants, while H & G would unconditionally undertake to cause new securities to replace the existing mortgages as soon as it obtained control of Pilot. Another possibility, perhaps less secure from the point of view of the Whitten interests, would be escrow arrangements of the kind set out in H & G's supplementary submission, though based on consensus rather than orders of the Court. Neither of these kinds of arrangements would provide perfect protection, although they would address Mr Whitten's concerns to a degree. Yet neither of these arrangements, nor any other protective arrangements, were proposed by Mr Whitten when the settlement was agreed on 30 November 2001. Now that ING has offered arrangements which would be regarded by any reasonable person as "simultaneous settlement" of the kind Mr Whitten says he expected, it seems to me that the defendants have no cause for complaint.

84 In paragraphs 38-48 of his affidavit, Mr Whitten reviews the ING Bank loan terms, conditions precedent and special conditions, and makes critical comments. I have carefully considered the points Mr Whitten has made. I do not think it is necessary to deal with them individually. I note that as regards his concern about Condition Precedent 6, ING Bank has provided a letter dated 26 March 2002 in which it says:

“At this stage we do not envisage any releases being required however we are yet to sight the same court orders and rulings."

85 As regards consent by ING to a second ranking security, the Bank has provided a letter dated 25 March 2002 in which it says that "we advise that should [Grenfell Securities] execute the deed of priority required by ING Bank in its letter of offer dated 13 March 2002, including a full standstill agreement, then we can see no reason to not deem them as being acceptable". Again, there is no reason at this stage for doubting that Grenfell Securities will execute the required document.

86 The other concerns expressed by Mr Whitten fall into two categories. One category relates to what may happen after the settlement has occurred. For example, Mr Whitten expresses concern that ING may require early repayment of the loan because he believes that settlement negotiations in the purchaser litigation will not succeed. It seems to me that, once the settlement occurs, the relationship between the new owners of Pilot and the new financier is not something to concern the defendants. Mr Whitten expresses apprehension that if ING requires early repayment of its loan, the plaintiffs in the purchaser litigation might sue the former directors of Pilot (including him) for insolvent trading and seek to recover their losses personally from him. It seems to me that any potential liability for insolvent trading on the part of the present directors of Pilot will have arisen if the ingredients of liability have been satisfied prior to the settlement, but if the ingredients for liability arise after the settlement when Mr Whitten and his colleagues are no longer directors, it is hard to see any reasonable grounds for concern on their part.

87 The second category of concern relates to whether particular requirements of ING will or can be satisfied prior to settlement. In my opinion none of the matters referred to by Mr Whitten is so clear as to enable me to conclude, at this stage, that ING's requirements cannot be met and that therefore finance will not be provided by ING. In my view of the evidence, there is at the very least a reasonable prospect that ING will provide finance. It is reasonable in all the circumstances to give H & G the chance to proceed to settlement by granting an appropriate extension of time. But I should grant liberty to apply in case some problem arises of a justiciable kind.

88 As to the proposal by Grenville Securities, once again Mr Whitten expresses concern that the proposal cannot proceed (at paragraph 50). Again, it seems to me that, on the evidence, it is not open to me to conclude that settlement with Grenfell is impossible, and the appropriate course is to give H & G the opportunity to attempt settlement.

Conclusions

89 Weighing up all matters I have discussed, my view is that the appropriate course is to vary order 2 made on 30 November 2001 by extending the time for settlement by the minimum period necessary to enable settlement to occur. The evidence of Mr Kalfus suggests that this period is no more than five weeks, though I wish to explore with counsel whether, in view of the time that has elapsed since that evidence was given, a shorter period (say to the end of April) would be feasible.

90 I am persuaded that I have power under Part 2 rule 3 to make an order of this kind, although the authorities indicate that I should do so only if I am satisfied that there are exceptional circumstances. In my view exceptional circumstances arise out of the evidence as a whole. In particular, it seems that me that the defendants' breach of an undertaking given to the Court on 29 August 2001 was a contributing cause of H & G's inability to comply with the initial timetable set out by my orders of 30 November 2001. H & G has exhibited all appropriate diligence in finding another funding arrangement, and has produced funding proposals which are plausible and to which, in the form ultimately presented to me at the hearing, there is no reasonable objection. However, I should grant liberty to apply in case unforeseen developments occur.

91 I have taken into account that in the time that has elapsed since 30 November 2001, the defendants and in particular Mr Whitten have expended considerable effort in bringing the Clovelly development closer to completion. Since, however, they remained in control of Pilot under the interlocutory regime established by the orders of 29 August 2001 and expressly continued on 30 November 2001, it was inevitable that the diligent pursuit of their duties by the directors of Pilot would have brought the project closer to completion and to that extent, would have enhanced the value of the Pilot shares. I therefore do not accept the defendants' submission that to allow completion to take place on an extended timetable would be to provide H & G with an unjustified windfall.

92 However, it does seem to me desirable that some arrangements be made for more than $50,000 to be placed in a controlled money account to secure payment of the legal fees of Mr Whitten's firm. I have therefore suggested in the body of this judgment that my order for variation of the timetable should be made conditional on the establishment at settlement of a controlled money account of $250,000. However, I shall hear the submissions of the parties on that point.

93 I shall direct H & G to prepare draft short minutes of orders to give effect to these reasons for judgment, and I shall stand the manner over to hear argument as to the appropriate form of orders and as to costs.

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Last Modified: 04/10/2002

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Citations

H and G Group v Pilot Developments [2002] NSWSC 257

Most Recent Citation

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CITATION:	H & G Group v Pilot Developments [2002] NSWSC 257
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 3904/01
HEARING DATE(S):	26 and 27 March 2002
JUDGMENT DATE:	9 April 2002
PARTIES :	H & G Group Pty Ltd (P, CD) Pilot Developments Pty Ltd (D1, CC1) Barbery Coast Investments Pty Ltd (D2, CC2) Raymond Laurence Whitten (D3, CC3) David Paul Hansen (CD on CC2)
JUDGMENT OF:	Austin J

COUNSEL :	W Haffenden with M Tyson (P, CD) T Alexis with N Abadee (D, CC)
SOLICITORS:	Macquarie Legal Practice (P, CD) S J Von Muenster (D, CC)
CATCHWORDS:	PRACTICE AND PROCEDURE - variation of consent orders based on compromise agreement - whether court has jurisdiction to vary orders other than in respect of time, where the underlying agreement is not open to variation on contractual and equitable grounds - court's discretion to vary orders with respect to time - relevant considerations
LEGISLATION CITED:	Conveyancing Act 1990 (NSW) s 13 Supreme Court Rules Pt 2 r 3, Pt 40 r 9, Pt 44 r 5
CASES CITED:	General Credits Ltd v Ebsworth [1986] 2 Qd R 162 General Insurance Co Ltd v Southern Cross Exploration NL (1988) 62 ALJR 216 Harvey v Phillips (1956) 95 CLR 235 Huddersfield Banking Co Ltd v Henry Lister & Son Ltd [1895] 2 Ch 283 New South Wales Crime Commission v Chik Chen [2001] NSWSC 331 Paino v Hofbauer (1988) 13 NSWLR 193 Prasad Singh v Abdul Fateh Mohammed Reza (1935) 62 Ind App 196 Siebe Gorman & Co Ltd v Pneupac Ltd [1982] 1 WLR 185 Singh v Secretary, Department of Family & Community Services [2001] FCA 1281
DECISION:	Consent orders varied by extending the time for the plaintiff to comply