M3 Holdings Australia Pty Ltd v 420 Spencer Nominees Pty Ltd & Ors
[2007] VSC 396
•9 October 2007
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
CRIMINAL DIVISION
No. 8629 of 2007
| M3 HOLDINGS AUSTRALIA PTY LTD | Plaintiff |
| V | |
| 420 SPENCER NOMINEES PTY LTD & ORS | Defendants |
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JUDGE: | KAYE J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 8 October 2007 | |
DATE OF JUDGMENT: | 9 October 2007 | |
CASE MAY BE CITED AS: | M3 Holdings Australia Pty Ltd v 420 Spencer Nominees Pty Ltd & Ors | |
MEDIUM NEUTRAL CITATION: | [2007] VSC 396 | |
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PRACTICE COURT – Interlocutory injunction to restrain sale of property at auction – Property subject of joint venture – Disputes as to joint venture – Injunction granted.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr G. McEwen | Howard Obst Lawyers |
| For the Defendants | Mr J. Dixon | Aitken Walker & Strachan |
HIS HONOUR:
The plaintiff, by summons dated 1 October, claims an interlocutory injunction to restrain the defendants from selling the property at 420 Spencer Street, Melbourne.
The plaintiff company is controlled and its shares owned by three individuals, Henry Korrt, David Graham and Brent Fraser, or their entities. The first defendant, 420 Nominees Pty Ltd, is the trustee of the 420 Spencer Investment Trust. The plaintiff holds three units in that trust, and the fourth defendant, PMC Nominees Pty Ltd, holds one unit in the trust. The fourth defendant is controlled by the third defendant, Paul Macbain. Mr Macbain is also the sole shareholder in and director of the second defendant, 420 Spencer Street Developments Pty Ltd.
In September 2001, Mr Macbain entered into an agreement with Messrs Korrt, Fraser and Graham for the purchase and development of the property at 420 Spencer Street, Melbourne. There is a dispute in this proceeding as to the basis on which the property was to be purchased. According to the plaintiff, Korrt, Graham and Fraser were to fund the acquisition and development of the property and Macbain was to manage the development. In return, each of the four individuals or their entities were to have a 25 per cent interest in the property and the development.
In his affidavit Mr Korrt states that in 2001, the parties discussed the structure of the vehicle by which the acquisition and development of the property was to take place. According to the plaintiff, it was agreed that the property be purchased by a unit trust, of which the plaintiff was to hold 75 per cent of the units and Macbain or his entity, 25 per cent of the units. The plaintiff further alleges that the issued shares in the first defendant, the trustee, were to be held in the same proportions by the same entities or their principals. Macbain was to be the sole director as Korrt, Graham and Fraser were all overseas at the time. An entity controlled by Macbain was to borrow the funds to develop the property, such loans to be guaranteed by Korrt, Graham and Fraser, and Macbain was to manage the development.
The property was purchased in May 2001 for $M3.15. Macbain caused the property to be acquired by the first defendant and the second defendant as tenants in common, with the first defendant being registered proprietor as a tenant in common as to 7 of 20 equal undivided shares, and the second defendant being registered as proprietor as tenant in common as to the other 13 of 20 equal undivided shares.
Subsequently, in about October 2006, Macbain caused shares in the first defendant to be issued to the fourth defendant, PMC Nominees Pty Ltd, so that Macbain effectively controlled 8 of the 11 issued shares in the first defendant. In its statement of claim, the plaintiff alleges that, by causing the second defendant to acquire an interest in extent of 13 of the 20 undivided shares in the property, and by issuing the seven shares in the first defendant to PMC, the defendants acted in breach of the agreement reached between the parties in May 2001 and in breach of fiduciary duties owed to the plaintiff.
On the other hand, the defendants maintain that the original agreement between the parties contemplated that the purchase price and construction finance for the development would be borrowed. The equity funding for the project, consisting of expenses of the design of the development and marketing of it, was to be contributed by Korrt, Fraser and Graham. It was anticipated that the development cost of the project would constitute 65 per cent of the gross return of the project. Thus, according to the defendants, it was agreed that the property would be owned by two companies, a development company holding 65 per cent of the property and the balance being held by a holding company in which each of the four participants would hold one quarter interest. Accordingly, the property was purchased in the names of the first defendant as to 7 of the 20 undivided shares, or 35 per cent, and in the name of the second defendant as to 13 of the 20 undivided shares, that is, 65 per cent.
The dispute which I have just outlined is the background to the application which now comes before me, which is to restrain the auction of the property which is to be held on Thursday, 11 October next.
In late August 2007, Macbain retained Colliers International, an estate agent, to market the property. The sale of the property has been advertised and the auction, as I stated, is set for Thursday 11 October next. According to Mr Stagg, the estate agent, some six offers have already been received for the property and there is a strong possibility that the auction will realise a price of between $M7.5 and $M9. A planning permit was obtained for the property on 16 October 2006, to develop the property to 13 stories.
According to the affidavit of Mr Macbain, Messrs Korrt, Fraser and Graham have not been able to provide funding for the cost of architectural drawings, nor have they been able to provide funding to market the development in order to establish sufficient pre-sales which are required in order to obtain construction funding. Thus Mr Macbain states in his affidavit that the project now has intractable cash flow difficulties. The first and second defendants owe the National Australia Bank $M2.7, consisting of a $M2.5 bill facility and a $200,000 overdraft. The existing bill facility of $M2.5 has been temporarily rolled over. The interest on that facility is met by rent paid by a tenant. The lease to that tenant has recently been renewed for a period of three years.
A debt of $77,000 is owed to the architect and it is anticipated that in the early new year a land tax assessment will be received in the order of $30,000. At this stage, according to Mr Macbain, it appears that the first and second defendants will be unable to meet those accounts. On the other hand, in his affidavit filed yesterday, Mr Korrt denies that the project has such cash flow difficulties. He states that the venture has in place a finance facility which will enable it to cover all outstanding debts. The lease of the property produces a substantial rental income for the venture.
In order to be entitled to an injunction, the plaintiff must first establish that there is a serious issue to be tried. Mr Dixon of counsel, who appeared for the defendants, does not dispute that the plaintiff has demonstrated that there is a serious issue to be tried for the purposes of the issue which is before me. In my view, that concession made by Mr Dixon is correct. The plaintiff, on the materials before me, has established a serious issue to be tried as to the issue of the shares in October 2006 in the first defendant to the fourth defendant; a serious issue to be tried as to the registration of the interest of the second defendant on the title of the property as a tenant in common; and in addition, a serious issue to be tried in any event as to whether the second defendant holds its interest in the property as constructive trustee for the first defendant. I also consider that there is a serious issue to be tried relating to the right of the defendants to sell the property at auction. On the version of facts sworn to by Mr Korrt, it is reasonably arguable that that sale may constitute a breach of the agreement entered into by the parties for the development of the property and, further or alternatively, a breach of fiduciary duties by the defendants to the plaintiff. Indeed, no argument was addressed to me to the contrary on behalf of the defendants.
Mr Dixon, on behalf of the defendants, opposed the injunction sought by the plaintiff on four main bases. Namely, first, that the balance of convenience was against the grant of such an injunction. Secondly, that the plaintiff had failed to establish the damages and offer adequate remedy. Thirdly, that there has been excessive delay by the plaintiff in seeking the interlocutory injunction. And fourthly, that there is no sufficient evidence that the plaintiff would be able to pay damages to the defendants if the plaintiff became liable to the defendants on the undertaking as to damages which the plaintiff would be required to give in order to obtain the interlocutory injunction.
Mr Dixon also pointed out that, if the injunction were not granted, the defendants would undertake to pay the proceeds of the auction sale into an interest bearing account in the names of the solicitors for the plaintiff and the defendants, in order to abide the outcome of the proceedings which are the subject of the writ in this case, subject, of course, to the payment from that amount of any accounts as they fall due.
The submissions of the parties focused mainly on the question of the balance of convenience. Mr McEwen of counsel, who appeared for the plaintiff, submitted that the starting point is that no explanation has been given by the defendants for the issue of the shares in the first defendant to the fourth defendant in October 2006. He submitted that the only inference, which can be drawn from that issue and the lack of explanation for it, is that the shares were issued in order to enable Mr Macbain to control the first defendant and thus to sell the property against the wishes of the plaintiff. In other words, he submitted, the first and second defendants are only in the position of being able to sell the property and make title to it by reason of the unlawful and improper issue of the shares in the first defendant to the fourth defendant. Mr McEwen further submitted that the fundamental purpose of the venture entered into between the principals of the plaintiff and the third defendant was to develop the property at 420 Spencer Street in order to resell it at a profit. If the property were now sold at auction, the plaintiff would be deprived of its legitimate expectation of the profit which could be earned as a result of the development of the property.
In his affidavit, Mr Korrt has produced financial projections which have demonstrated that, if the assumptions in the projections hold true, a profit of $M26 could be derived from developing the property. Mr McEwen further submitted that there is no evidence that the defendant would be able to meet an award of damages against it if an injunction were not granted, and if it were later found that the defendants acted in breach of the contract or in breach of their fiduciary duties in selling the property. On the other hand, Mr McEwen submitted that if an injunction were granted, the equity of the plaintiff in the property is sufficient to account for any liability the plaintiff might have on its undertaking to the defendants to pay damages.
In response, Mr Dixon submitted that the balance of convenience was against the grant of an injunction. He submitted that there is no evidence that the development would be able to proceed if an injunction were granted. The plaintiff has not put forward any sufficient evidence that it can obtain the finance necessary to enable the development to proceed. Further, he submitted that the plaintiff does not have sufficient expertise to progress the development. Indeed, as Mr Dixon submitted, the contribution of Mr Macbain to the intended venture was to act as the developer by providing his expertise in supervising and managing the development.
Mr Dixon further submitted that the venture has pressing financial commitments which it cannot or may not be able to meet unless the property is sold. In particular, the bill facility secured over the property has only just been temporarily renewed and in addition, there are architect fees owing in relation to the development. It is anticipated that a land tax assessment will be due for payment early next year. Mr Dixon also pointed out the current planning permit, which was granted on 16 October 2006, will expire unless the development commences within two years of the grant of that permit. The permit itself enhances the value of the property and will thus be eroded if the sale of the property is delayed.
Mr Dixon relied on the affidavit of Mr Stagg, the estate agent, to support a submission that if the sale of the property were delayed, that would have an adverse effect on the credibility of the property in the marketplace and thus would have a deleterious effect on the value of the property. It might also cause the financier to refuse to further renew the temporary bill facility and to rely on its securities.
Finally, Mr Dixon submitted that it is problematic whether the plaintiff would be able to meet its obligation to the defendants under the undertaking for damages which it would be required to give should I grant an interlocutory injunction.
The question of the balance of convenience involves effectively an analysis and comparison of, on the one hand, the damage which would be occasioned to the plaintiff if an injunction were refused by me with, on the other hand, the damage to the defendants if the injunction were to be granted. The primary, if not sole, damage put forward by the plaintiff if an injunction were refused, consists of the loss by it of the opportunity to develop the property and to realise it at a profit. These proceedings were on affidavit and any finding which I make in relation to that issue must, to that extent, be substantially qualified. However, I do consider that there is force in the submissions made by Mr Dixon as to whether the plaintiff would be able to progress the development were I to grant an injunction. It is clear, on any view, that if I were to grant an injunction it is most unlikely that the development would be able to proceed unless and until the differences between the plaintiff and the defendants were resolved, particularly the differences relating to the ownership of the property, the issue of the shares in the first defendant, and the basis on which the parties entered into the agreement for the purchase of and development of the property. There is no suggestion that those differences could be readily resolved by agreement and it is likely that this case will proceed at least towards trial.
In those circumstances, it is most likely that there will be some delay in the commencement and progress of the development were I to grant an injunction. Whatever the outcome of the litigation which is now on foot, it seems accepted that the joint venture will need to be reconfigured with the introduction of another equity investor. Indeed, that much seems to be acknowledged by the plaintiff.
In his affidavit of 8 October, Mr Korrt has described a number of discussions which he has had with other potential investors with a view to introducing further equity investor into the project. The evidence relating to the ability of the plaintiff to introduce and attract another investor into the project is quite limited. In his affidavit, Mr Korrt states that he has been and is continuing to have discussions with a number of parties, but says that those discussions and the outcome of them are limited by the lack of accounting of the project's financial position by the defendants.
The affidavit of Mr Korrt does not say anything as to the stage which the discussions have reached, or as to the prospects of success of those discussions. The issue as to the accounting between the plaintiff and the defendants is unresolved and I have little confidence it could be resolved in the near future.
In summary then, the conclusion which I draw from the materials is that I would have substantial reservations whether the plaintiff does have a realistic likelihood of being able to proceed with and complete the proposed development if I were to grant an injunction.
Mr Dixon is correct, in my view, that Messrs Korrt, Fraser and Graham on the materials before me are unlikely on their own to have sufficient expertise to proceed with the development. Indeed, the reason for the introduction of Mr Macbain into the project was for the purpose of accessing his development abilities. It seems clear on the documents before me that Messrs Korrt, Fraser and Graham do not have sufficient expertise on their own to proceed with the development.
There is also a risk relating to the NAB bill facility which has been temporarily rolled over. While there is no evidence on this matter, it seems to me as a matter of inference that there is a least a risk that if the sale were delayed, the lender may give consideration to whether it ought to continue to roll over that facility rather than call it up.
The matters which I have so far discussed relate to an assessment, albeit at this preliminary stage, of the submission on behalf of the plaintiff that if I were to refuse to grant an interlocutory injunction, the plaintiff would sustain substantial damages which it would not be able to recoup from the defendant.
I then turn to the other side of the equation, that is, to the question of what damages might be sustained by the defendants if I were to grant the injunction. The defendants rely on the current financial position of the first and second defendants. Mr Macbain states that at the moment he is not able to pay the architect. He also points to the fact that the land tax assessment will be due for payment next year. Those matters are disputed by Mr Korrt in his affidavit. As I have already indicated, there is at least some risk that the temporary bill facility might not be rolled over were I to grant an injunction. On the other hand, the evidence of Mr Korrt is that there are some monies, in particular, the overdraft, available to the defendants by which they can fund the outstanding bills.
The further matter relied on by the defendants relates to the planning permit. As I stated, it does seem that if I do grant an injunction, it is unlikely that the development will be able to proceed at least in the immediate future. The planning permit expires if the development has not commenced by 16 October 2008. A number of steps need to be undertaken before the development is commenced. The grant of an injunction would thus imperil the planning permit, although it must be observed that the planning authority does have the right to extend the planning permit, and nothing has been put before me to show that it would be disinclined to do so.
On the matters which I have so far discussed, it is thus clear that if I were to grant an injunction, there is some prospect that the defendant will sustain damages. In particular there is, according to the affidavit of Mr Stagg, a prospect that the value of the property might be adversely affected, so that if the property would need to be sold in the near future, it would be sold at a lower value. That gives rise to the question whether the plaintiff has sufficient assets which would enable it to pay any liability for damages which it would incur under an undertaking given to this Court should I grant the interlocutory injunction.
If the plaintiff's version of the agreement is correct, then the plaintiff has a 75 per cent interest in the equity in the property. On the other hand, on the account of Mr Macbain, the plaintiff has at least a 75 per cent interest in the interest held by the first defendant, which itself thus equates to a 26.3 per cent interest in the property. However, I do note that, on the affidavit of Mr Macbain, it appears that it was only intended that the second defendant would take its 65 per cent interest in the property in order to quarantine the debt over the development from the interests of the first defendant in the property. It would seem that it was not intended that the second defendant take any equity in the property net of borrowings. If that is correct, then it is reasonably arguable on the affidavit of Mr Macbain that the interest of the plaintiff in the property, in effect, amounts to 75 per cent of the equity in the property net of the debt secured over the property. Indeed, Mr Dixon did not make any submission to me to the contrary.
In final address, Mr McEwen produced to me a set of figures which showed that if in fact the plaintiff was confined to a 25 per cent interest in the property, it would still be able to pay damages out of its interest in the property which would account for any share of a loss of profit occasioned to the defendants if the value of the property fell from $9 million at the present time to $6 million at the time of some future hypothetical sale. There are, of course, many variables in making such an assessment, particularly given the circumstance that further debts may accumulate over the property were their sale to be delayed. However, Mr McEwen’s analysis does demonstrate that, in my view, the plaintiff has at least a realistic prospect of meeting any liability for damage which would be occasioned to the defendants if I were to grant an injunction. Indeed, if the plaintiffs succeed in showing that they have a 75 per cent interest in the equity in the property, I would consider at this stage that they would have a substantial prospect of being able to meet any damages occasioned to the defendant out of its interest in its property.
Pausing there, on the analysis I have undertaken so far, it seems to me two conclusions can be drawn. Firstly, I do have significant reservations whether the plaintiff will be able to develop the property profitably. However, I do not consider that its prospects of doing so are so remote as to be deemed to be fanciful. On the other hand, the defendants have demonstrated tangible damage which may be sustained by them should I grant an injunction, but at the same time I am satisfied that there is a reasonable prospect that the plaintiff will be able to pay any damages so occasioned to the defendants should I grant the injunction.
In those circumstances, the question which arises is whether I should grant an injunction. The relevant test which I am to apply is that stated recently by the Court of Appeal in Tymbook Pty Limited v the State of Victoria.[1] Maxwell P and Charles J[2] stated that the appropriate test, both in relation to a prohibitory and a mandatory injunction, is that the Court should take whichever course appears to carry the lower risk of injustice if it should turn out to have been wrong, in the sense of granting an injunction to a party who fails to establish his right at the trial or in failing to grant it to a party who succeeds at trial.
[1][2006] VSCA 89.
[2]Ibid, [35].
Applying that test, in my view there are five points which are particularly relevant and which warrant, and indeed require, the grant of an injunction to restrain the sale of the property, notwithstanding my reservations as to whether the plaintiff will be able to proceed with the development were I to grant it the injunction. Those points are as follows. First, it is not in contention that there is a serious issue to be tried, that is, the plaintiff has established that it is seriously arguable that the intended sale of the property next Thursday will constitute a breach of the agreement between itself and the third defendant, and a breach of the fiduciary duties owed to the plaintiff by the first, second and third defendants.
Secondly, and in my view significantly, on the evidence before me, the plaintiff through its principals has already invested $2 million in the property. The defendants have not invested any funds in the property. The bill facility is secured by a debenture over the first and second defendant, and guarantees given by Messrs, Korrt, Fraser and Graham. There is no evidence that the first and second defendants have any assets other than their registered interest in the property. Thus it would seem that all the risk taken in the venture is that taken by the plaintiff. If the development proceeds, it is the plaintiff which is at risk.
Thirdly, if I were to grant an injunction and the plaintiff were unable to proceed, so as to necessitate a sale of the property in the future at a lower value than that which could be achieved on 11 October, in my view there is a reasonable likelihood that the interest of the plaintiff in the property is sufficient to enable it to meet any liability which it might have to the defendants under its undertaking as to damages.
Fourthly, if I were to refuse to grant an injunction, the plaintiff would lose its right to develop the property. The property was purchased for that purpose, and a planning permit has been obtained. There is no suggestion that the proposed development is not feasible provided that appropriate funding can be arranged. The plaintiff has estimated that if the development successfully proceeds, there are substantial profits which could be derived from it. There are, of course, many variables in what are generally described as “blue sky” assessments of the type put forward by Mr Korrt. However, it has not been gainsaid by the defendants that it is anticipated that if the development is able to proceed large profits are to be made from it. There is no evidence before me that if the plaintiff is refused an injunction, but if ultimately it was to succeed at trial for a claim for damages against the defendants, that those damages could be paid by the defendants. In other words, I am satisfied that the plaintiff does not have available to it any alternative remedies which would give it satisfaction should I refuse the grant the injunction today.
Finally, in my view, Mr McEwen is correct in pointing out that the defendants have only been able to put the property on the market for sale next Thursday, as a result of the share issue which occurred in October 2006. The defendants could not sell the property unless the first defendant were able to make title. It is true that the third defendant, Mr Macbain, is the sole director of the first defendant. However, before the share issue in October 2006, he only held 25 per cent of the shares. Under Clause 24 of the constitution of the first defendant, Mr Macbain could have been readily removed at a general meeting by the resolution of the shareholders. Accordingly, it was necessary for the third defendant to hold a majority of the shares in the first defendant, in order to be able to act contrary to the wishes of the plaintiff and its principals. No explanation has been put forward on behalf of the defendants as to why that share issue occurred. Clearly it was not for the purposes of raising capital. No other explanation has been proffered. On the other hand, if the share issue had not occurred, the plaintiff would not have needed to seek equitable relief from this Court in the form of the interlocutory injunction it now claims.
In my view, those five factors combined are important. The plaintiff has established, as I have said, a serious issue to be tried, in terms of the test prescribed in Tymbook Pty Limited v State of Victoria, I am satisfied that a lower risk of irreparable harm and injustice would occur if I were to grant the injunction sought by the plaintiff, and if that should turn out to be wrong, than if I were to decline to do so.
Finally, I should briefly refer to the submission made on behalf of the defendant, that there has been untoward delay by the plaintiff in seeking this relief. The plaintiff was first aware of the plans to sell the property in late August, but did not learn of the intended auction until 8 September. The plaintiff's solicitor sent a letter to the defendants' solicitor dated 18 September, warning that if the sale were to proceed, the plaintiff would seek to intervene. A response was received on 27 September and the summons was issued on 1 October. While perhaps it might be fairly said that the plaintiff did not proceed with the sense of urgency that, at least in retrospect, the circumstances warranted, in my view that timetable does not disclose any delay of the nature which would shut out the plaintiff from the remedy it seeks from this Court.
In conclusion then, in my view the plaintiff is entitled to the interlocutory injunction sought by it in its summons, subject to and upon the plaintiff giving to this Court the usual undertaking as to damages.
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