Horton v Alberran
[2005] VSC 166
•9 May 2005
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
CORPORATIONS LIST
No. 5946 of 2005
IN THE MATTER OF DIDASKO LIMITED (ACN 060 891 796)
(ADMINISTRATOR APPOINTED) AND OTHERS
| ANDREW HORTON AND OTHERS | Plaintiffs |
| v | |
| RICHARD ALBERRAN AND OTHERS | Defendants |
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JUDGE: | HANSEN J | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 9 MAY 2005 | |
DATE OF JUDGMENT: | 9 MAY 2005 | |
CASE MAY BE CITED AS: | HORTON v ALBERRAN | |
MEDIUM NEUTRAL CITATION: | [2005] VSC 166 | |
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Loan agreement – Security - Charge over assets of borrower and guarantor corporations – Event of default – Administrators appointed by lender – Validity of appointment – Whether charge enforceable without notice – Loan agreement paramount and required notice – Construction of documents.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr I.D. Martindale | Lander & Rogers Lawyers |
| For the First to Third Defendants | Mr D.G. Collins SC with Mr P.F. Agardy | Robert James Lawyers |
| For the Fourth Defendant | Mr D.J. Anderson (Solicitor) | ERA Legal |
HIS HONOUR:
This is an originating process filed today, Monday 9 May 2005, but in relation to a matter that was first mentioned to Dodds-Streeton J in the Practice Court last Friday. The case concerns six companies to which administrators were appointed last Thursday under separate instruments of charge dated 6 April 2005 and s.436C(1) of the Corporations Act 2001.
The six companies are members of the Didasko Group of companies. They are Didasko Limited, a public company listed on the Australian Stock Exchange, and five subsidiaries. On 6 April 2005 Didasko Limited entered into a loan agreement with Thunder Enterprises Limited for the borrowing of $500,000 repayable in two years. The five subsidiary companies were parties to the loan agreement as guarantors. At the same time, by way of security for repayment, each of Didasko Limited and the five subsidiary companies granted to Thunder Enterprises Limited a fixed and floating charge over its assets and undertaking.
On 5 May 2005 Thunder Enterprises Limited, pursuant to the charge, appointed administrators of each company in the Didasko Group. The appointments were made under s.436C(1) of the Corporations Act on the basis that the charge had become enforceable.
The plaintiffs are the directors of Didasko Limited and one or more of them are directors of the subsidiary companies. The first, second and third defendants are the administrators, and the fourth defendant is Thunder Enterprises Limited.
Before her Honour on Friday an application was made by Mr Martindale, who has also appeared for the plaintiffs before me today, for an interim injunction which was granted restraining the administrators from acting as such in relation to the companies. The orders granted by her Honour also restrained the fourth defendant from enforcing the charge in relation to each company or taking any action on the basis that any such charge had become enforceable. Her Honour had before her an affidavit sworn by a director of the companies and he has sworn a further affidavit for the purpose of the hearing today.
There was a hearing today because her Honour granted the injunctions until 4.15 pm today and adjourned the further hearing of the matter to myself at 2.15 pm today. She did that because of the urgency of the case and in order to allow sufficient time to the administrators and the fourth defendant to prepare for today's hearing. In the result, the plaintiffs, the administrators and the fourth defendant have been represented and presented submissions. I have also had the benefit of an affidavit sworn by one of the administrators and an affidavit sworn by a director of the fourth defendant.
Following the granting of the injunctions on Friday, the plaintiffs filed the originating process this morning. It seeks relief under s.447A(4) and s.447C(1) of the Corporations Act as follows:
First, a declaration that the purported appointment of the administrators by the fourth defendant pursuant to s.436C of the Corporations Act was not valid on the ground that the charge held by the fourth defendant had not become enforceable at the time of the appointment.
Secondly and in the alternative, an order that the administration should end because (a) each company in the Didasko Group of companies is solvent, and/or (b) the provisions of Part 5.3A of the Corporations Act are being abused.
The plaintiffs also filed an interlocutory process this morning which sought the same relief on an interlocutory basis. In the alternative, it sought orders until the hearing and determination of the originating process restraining the administrators from acting or purporting to act as administrators of the companies, and restraining the fourth defendant from enforcing the charge given by each company or taking any action on the basis that any such charge has become enforceable.
At the outset, counsel for the plaintiffs stated that he sought an answer on the first ground of relief in the originating process, which is whether the charge had become enforceable. The defendants being agreeable to that course, I heard submissions as on a final hearing of that issue. There clearly was an urgency for resolution on this issue for the plaintiffs. Indeed, as a result of the appointment of administrators, trading in the securities of Didasko Limited was halted on Friday until tomorrow. Unless the appointment is terminated by 9.30 am tomorrow, trading will be suspended which would have commercial repercussions for the company. In these circumstances, and the defendants also desiring an answer on the point, and bearing in mind that the question was one of construction of the loan agreement and the charge, I considered it appropriate that there be a final hearing on that application for a declaration. The other aspect, concerning solvency and abuse, remains for adjudication in the future. It is accepted on all sides that for present purposes there is no relevant difference in the six instruments of charge executed by the companies. Hence, the instrument of charge to which I have been referred in the course of argument, which is Exhibit AH2, may be taken as common for this purpose.
Counsel for the administrators said that if it were to be held that their appointment was not valid, he sought the validation of the appointment under s.447A of the Corporations Act. For this purpose the solvency of the companies is relevant, and, hence, the defendants have put forward affidavit material as to solvency. As I have observed, however, to counsel for the plaintiffs, I am not in a position to deal with the plaintiffs’ alternative ground as to solvency in the originating process, and likewise I could not deal with the foreshadowed application of the administrators, simply because I do not have from the plaintiffs evidence of solvency or otherwise that would be relevant on the validation application. Of course, it may be that if that application were to become relevant no further evidence might be relied upon by the plaintiffs. I cannot speculate as to that and do not do so, but it seemed to me, as I said to counsel, that on that aspect at least the evidence is not complete.
Furthermore, if I were to decide to the contrary of the primary application I would not be in a position this afternoon to determine the alternative application of the plaintiffs that the provisions of Part 5.3A of the Corporations Act were being abused. That would require a hearing, possibly with cross-examination, at a later date.
I turn, with that introduction, to the matter in issue, which is the question of construction raised by Mr Martindale. This question turns on the construction of and relationship between the provisions of the loan agreement and the charge.
The loan agreement is contained in Exhibit AH1, it is dated 6 April 2005 and relates to an advance made as recently as that date or thereabouts of $500,000 to Didasko Limited. There are several provisions of the agreement to which Mr Martindale referred and I mention them briefly. In the definition clause, clause 1.1, "event of default" is defined as meaning "any of the events, omissions or occurrences specified in clause 10.2 which occur at any time after the Commencement Date". The commencement date is also defined and for present purposes may be taken as being the date of the agreement. Clause 6.1 required the borrower to repay and finally discharge the total amount owing on the repayment date, which date is defined in clause 1.1 as the date which is two years from the commencement date.
Clause 1.3 is a sole agreement provision and provides paramountcy to the loan agreement. It provides that the loan agreement -
“exclusively and completely state[s] the rights of the Lender and the Borrower with respect to the Loan and this Deed supersedes any previous agreement ... In the event of any conflict or inconsistency between the terms, conditions and provisions of this Deed and the Security, the terms, conditions and provisions of this Deed will prevail”.
Then turning to clause 10, which is the critical clause for present purposes, it consists of three parts: 10.1 headed "Consequences of Default"; 10.2 headed "Events of Default" and 10.3 headed "Acceptance of Moneys". Clause 10.2 lists a series of matters each of which is called "an event of default". Paragraph (q) relates to two applications to wind up, one against Didasko Limited, and the other against one of the subsidiary companies. In particular, para (q)(ii) states: "If the winding-up petition brought against Didasko Technologies Pty Ltd ... in the Supreme Court of Western Australia is not dismissed by a final order of the court on or before 30 April 2005". It was common ground that that proceeding was not dismissed by the court on or by that date and still has not been.
Turning back to clause 10.1, it states that -
"If any of the events described in clause 10.2 occurs and subject to clause 10.3, the Total Owing will, at the option of the Lender and notwithstanding any delay or previous waiver of the right to exercise that option, become due and payable upon demand by the Lender. In addition, if the Lender exercises that option the Security will become immediately enforceable".
Then clause 10.3 provides that:
"The Lender may exercise its rights under clause 10.1:(a) notwithstanding acceptance of any part of any of the amounts payable under this Deed after the occurrence of any Event of Default; (b) notwithstanding the occurrence of any previous or other Event of Default PROVIDED THAT it gives the Borrower and/or Guarantor (as the case may be) not less than 14 days written notice, before exercising those rights".
Mr Martindale submitted - and it seems clear enough on the terms of clause 10 - that what it contemplates is a 14 day notice before the exercise of rights under clause 10.1. The exercise of the right is the option of making the total owing due and payable upon demand. So much is not really in question, I think, because we are here concerned with the appointment of the administrators.
What is not so clear is what is meant by the last sentence in clause 10.1: namely, "In addition, if the Lender exercises that option, the Security will become immediately enforceable". It was that sentence which is critical to Mr Martindale's argument together with clause 1.3 of the loan agreement which gives paramountcy in the event of any conflict or inconsistency between the terms, conditions and provisions of the loan agreement and the charge.
The submission is that clause 10.1 makes enforcement of the charge subject to the observance of the requirements of clause 10.3. If that were correct it would mean that the lender was not entitled to appoint administrators until the elapse of a 14 day notice. That has not happened. The solicitors acting for the fourth defendant wrote to Didasko Limited on 4 May 2005 giving 14 days' notice on the basis of the failure to meet the requirement in clause 10.2(q)(ii). The period of 14 days not having expired, the plaintiffs contended that the appointment made last Thursday pursuant to s.436C was without power and invalid.
It is to be observed that in the letter of 4 May 2005 the fourth defendant’s solicitors stated that their client was now entitled pursuant to clauses 7.1 and 9 of the deeds of charge to appoint a receiver to the company and its subsidiaries. How is this so? To answer that question one needs to turn to the charge itself.
In clause 1.2.11 the expression "Event of Default" is defined as having “the same meaning as in the Loan Agreement”. Then clause 7, which is headed "Events of Enforceability" states that "This security shall immediately become enforceable in any of the following events", the first of which is "If any Event of Default occurs". It is unnecessary at present to refer to the other events which are set out in clauses 7.2-7.11 as events of enforceability.
The submission on behalf of the administrators and the fourth defendant was this: When the charge defined an event of default as having the same meaning as that expression has in the loan agreement, the definition took one to clause 10.2 of the loan agreement but not to the surrounding clauses 10.1 and 10.3. For the purpose of giving meaning to the expression in the charge, all that was done was to pick up the described events in the loan agreement but no more. Then, in addition, clause 7 went on to state a further ten events on the occurrence of which the security became immediately enforceable.
The point is a short one. The question is whether there is an inconsistency between the loan agreement and the charge on their proper construction. The plaintiffs’ submission is that the loan agreement requires a 14 day notice before the amount may be made due and payable and that it is only when the fourth defendant exercises that option that the charge becomes enforceable. If it be considered that the charge provides otherwise, the loan agreement prevails by reason of clause 1.3. If this is correct, the ability of the fourth defendant to act in protection of the security is significantly impaired compared to that which normally obtains, for example in its ability to appoint a receiver on the occurrence of an event of default which may immediately endanger the security.
One is talking here not merely of a failure to pay an amount of money on the date upon which it was due for payment but upon the occurrence of a range of matters. That is because, on the construction contended for by counsel for the plaintiffs, the final sentence in clause 10.1 of the loan agreement operates as a condition upon the ability to exercise the security, the expression "security" being defined to include each instrument of charge.
I am of the view, having heard the argument this afternoon and having had a sufficient time to consider the matter, that the construction contended for by counsel for the plaintiffs is not correct. In my view, properly construed, by incorporation of the events of default, the chargor was entitled to proceed to make the appointment of the administrators upon the non-happening of the event described in clause 10.2(q)(ii) of the loan agreement and to do so without first giving a 14-day notice. That is because on the occurrence of an event of default as it is defined in clause 7 the charge became immediately enforceable.
It is to be remembered that the operation of such provisions in a charge, as distinct from a loan agreement, can operate not merely when there is a failure to pay an amount of money on the date due for payment but in circumstances in which there may be some urgency requiring action as, for example, the immediate appointment of a receiver. And when one has regard to the extended events of default which are referred to in clause 7, one sees the power and purpose in a different context from that which one sees if one merely has regard to clause 10 of the loan agreement in its total setting including clauses 10.1 and 10.3. In my opinion clauses 10.1 and 10.3 are concerned with recovery of the loan in relation to an event of default whereas clause 7 of the charge is concerned with the charge becoming immediately enforceable, in the events of default referred to, whether or not the loan is due and payable. The rights in the charge are, relevantly, concerned to confer on the fourth defendant the right to enforce the charge immediately and without giving notice, for example, by appointing a receiver to protect the security.
Let us take a simple example that demonstrates the extraordinary consequences of the plaintiffs’ construction. If another party appointed an administrator to Didasko Limited in circumstances in which the fourth defendant had not given a notice under clause 10, the fourth defendant would not be able to appoint a receiver until it had first given such a notice and the period of 14 days had expired. That would place the fourth defendant in a significantly disadvantageous position, a position that a lender would not lightly accept. In my view the language in the charge in this case is clear, as it was to me in a similar case in Stewart v New Colorscope Paint Industries Pty Ltd[1]. There is no inconsistency in the language and terms of the loan agreement and the charge. On the occurrence of the relevant event of default the charge became enforceable without notice under clause 10. The consequence is that the appointment of the administrators was valid.
[1]Unreported, Supreme Court of Victoria, 8 March 1996; BC 9600745
For those reasons, in my view, the claim for a declaration in para 1 of the originating process must fail. The question that then arises is what should be the future disposition of the proceeding and I will now hear counsel upon that matter.
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