Muffingrove Pty Ltd v Melridge Mining & Exploration Pty Ltd

Re: MUFFINGROVE PTY LTD; JAMES WALTON BARKER and MARY JANE ISABELLA BARKER
And: MELRIDGE MINING AND EXPLORATION PTY LTD; JOHN WATSON QUINN; JACK ABBOT
BARKER and DAVID MURRAY HOADLEY
No. G109 of 1991
FED No. 584
Injunction

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Hill J.(1)

CATCHWORDS

Injunction - Interlocutory injunction - Purchase of business with mortgage back to vendor and lease of land said to be induced by misleading and deceptive conduct - relief sought includes rewriting of mortgage and/or lease - mortgagor seeking to restrain mortgagee until final hearing from entering into possession and disposing of interest in mortgaged premises - whether necessary to bring mortgage debt into court - moulding of court order so as to give adequate protection to mortgagee - dealing in land by mortgagee contrary to court order - lease unregistered - rights of third party purchaser - relevance of third party to balance of convenience - relevance of solvency of applicant to grant of interlocutory relief.

Trade Practices Act 1974 (Cth): ss.52, 87

HEARING

SYDNEY

#DATE 26:9:1991

Counsel and Solicitors for applicant: M.W.D. White QC and P.J. Baston

Instructed by: Primrose Couper Cronin Redkin

Counsel and Solicitors for respondent: P.H. Morrison QC and D. Savage

Instructed by: Phillips Fox

JUDGE1

Muffingrove Pty Limited, ("Muffingrove") the first applicant and the second applicants, the shareholders of Muffingrove, seek interlocutory relief against Melridge Mining and Exploration Pty Limited ("Melridge") by way of injunction restraining Melridge from re-entering upon motel premises owned by Melridge and leased by that company to Muffingrove pending the hearing of the proceedings, and from creating any interest in the land in derogation of Muffingrove's rights under the lease.

There is little that is not in dispute between the parties. One matter that is not in dispute, however, is that on 11 August 1989 a number of agreements were entered into between them. Of present significance is that on that day Melridge sold to Muffingrove for $400,000 the motel business which Muffingrove had carried on at 158 Greencamp Road, Wakerley, in Brisbane, its right title and interest in certain chattels and granted to Muffingrove, a lease of the freehold upon which the motel business was conducted for a period of five years with three options to renew each for a further period of five years. The lease provided initially for the rent to escalate from an initial rent of $10,000 a month for the first six months to $20,883 per calendar month for the period of the 19th month to the 24th month. Thereafter rent was to be increased by 10% or the consumer price index, whichever was the greater. However, there was a rental concession agreement to the effect that should the turnover of the motel for the period 8 February 1991 to 8 February 1993 not exceed three times the rental, an amount was to be rebated to the lessee in accordance with a formula, based upon a turnover of $600,000.
Melridge partially financed the purchase to the extent of $165,000 which was secured by a charge over the assets of Muffingrove. Although it is not presently material, the vendors agreed to purchase other motel premises from Muffingrove, so as to put that company in funds to pay the cash component of the purchase price. The transactions were the subject of a large number of agreements, the provisions of which it is unnecessary to recite.
By the statement of claim, the applicants allege that the transactions referred to above were induced by a number of false representations made by or on behalf of the respondents which constituted misleading or deceptive conduct pursuant to s.52 of the Trade Practices Act 1974 (Cth) ("the Act"). Final relief in the form of variation of the terms of the agreement was sought or in the alternative, damages.
There are many misrepresentations pleaded. The first group pleaded are:

1. That the motel under the management of Muffingrove and the second applicants would easily achieve an average occupancy rate of 60%.

2. That Melridge had made arrangements for the motel to be listed with the Royal Automobile Club of Queensland and the Queensland Tourist and Travel Corporation.

3. That Melridge was then in a position to secure for the motel or had already secured the patronage of a significant amount of custom from passengers staying overnight from coaches.

4. That the Motel was then of such a standard that it would receive a three and one half star rating with the RACQ.

5. That the Motel was then operating with a minimum "rack rate" of $60.00 per night for a standard single room.

6. That the Motel was then operating with "rack rates" commensurate with a three and one half star rating of excellence.

All of the above representations, said to have been false, are alleged to have been made on or about 2 or 3 February 1989 by a Mr Sandford, then an employee of Melridge whom, it would seem, was later sacked.
The next set of false representations said to have been made on or about 13 March 1989, again by Mr Sandford, were that:

7. On the worst of estimates that Melridge had prepared the Motel would:

(i) gross an income in the first year of management by Muffingrove and the second applicants in the order of $700,000 to $800,000 and

(ii) make an operating profit of not far short of $200,000.

The next set of representations said to have been made by Mr Sandford to Mr Barker on or about 21 March 1989 are alleged to be that:

8. (a) an achievable income for the motel under the management of Muffingrove and the second applicants for the period 1 May 1989 to 30 May 1990 was $768,000.

(b) the average occupancy rate of the Motel under the management of Muffingrove and the second applicants would reach 60% within a few months.

(c) Melridge had made arrangements to attract custom for the Motel from certain named sports organisations.

Then, it is alleged that on a date between 24 and 30 March 1989, Mr Sandford on behalf of Melridge represented that:

9. (a) a conservative achievable yearly turnover for the Motel under the management of Muffingrove and the second applicants was $600,000, based on monthly turnover of amounts stated.

(b) the said turnover was achievable without the extra income that would be generated by listing with the RACQ and QTTC;

(c) the said turnover was based on the Motel's actual trading figures over the preceding four weeks of operation.

Next, it is alleged that on or about 30 March 1989, Mr Quinn, on behalf of Melridge represented that:

10. (a) an expected turnover of $600,000 for the first year of operation of the Motel was "too conservative".

(b) a total income for the first year of operation of the Motel from 1 May 1989 to 30 April 1990 of $768,000 was easily achievable.

(c) Passengers from coaches were likely to form a substantial part of the business of the Motel.

Then it is alleged that on or about 15 June 1989, Mr Quinn, on behalf of Melridge represented that:

11. an expected turnover of $600,000 for the first year of operation of the Motel under the management of Muffingrove and the second applicants was "far too low";

Further representations are said to have been made on or about 8 July 1989 by Mr Quinn that:

12. (a) Melridge had secured assurance from "Army Movements" of additional custom over that then coming to the Motel of occupancy from personnel in the Australian Regular Army and their families; and

(b) the said additional custom would be worth income of $150,000 to the Motel over a 12 month period;

To the extent that the above representations involve matters of prediction, the statement of claim alleges that the representations made were not believed by Melridge and that there were no reasonable grounds for Melridge to believe them. It is further alleged that the Motel under the management of Muffingrove and the second applicants attained the following trading results:

"(a) 14 August, 1989 to 13 August, 1990:

(i) Gross income $330,849.00

(ii) Net loss $ 81,675.00

(b) 14 August, 1989 to 30 June, 1990:

(i) Gross income $292,017.00

(ii) Net loss $ 75,048.00

(c) 1 July, 1990 to 30 June, 1991:

(i) Gross income $396,331.00

(ii) Net loss $ 70,512.00

Evidence was adduced on affidavit from both sides. It was, of course, not the subject of cross-examination at this stage. For the applicants, the principal affidavits were from Mr Barker. It seems that Mr Barker and his wife were lessees of the Welcome Inn at Nambour, a property owned by Melridge. In February 1989 the motel at Wakerley had been in receivership. On 2 or 3 February Mr Barker deposes to a conversation with Mr Sandford in which, inter alia, Mr Sandford is said to have made the representations 1-4 referred to above. He is said to have shown Mr Barker a published tariff list showing a charge of $60.00, which is presumably the basis for representation 5.
The affidavit continues by deposing to a conversation with Mr Sandford on 4 or 5 February 1989 at which Mr Sandford is said to have repeated what he had said at the first meeting. Thereafter Mr Sandford is said to have expressed his interest in getting Mr Barker out of Nambour and into the Wakerley motel. He is said to have spoken then of an asking price of $400,000 and a rent concession for the first year to assist in "doing up" the property. A subsequent meeting was said to have been held between Mr Sandford and Mr Barker on 13 March 1989 at which there were some negotiations on price and conditions. It is at this meeting that the representations referred to in 7 above are said to have been made.
Mr Sandford is then said to have finalised a budget for the period from 1 May 1989 to 30 May 1990 which he faxed to Mr Barker. Prior to so doing he indicated in a telephone call that the total income projected was $862,000. It is in the course of this telephone call that words are relied upon as constituting the representations 8(b) and (c). I can see no evidence adduced to support the allegation of representation 8(a). Mr Sandford, according to Mr Barker, faxed the budget which was an exhibit to Mr Barker's affidavit. It was based on 60% occupancy with $65 "av R R." It shows an annual total income of $862,000.
According to Mr Barker a further conversation occurred between himself and Mr Sandford on 23 or 24 March at which the budget prepared by Mr Sandford and reworkings of them in spread sheet form by Mr Barker were discussed. These discussions terminated with a request by Mr Barker that a more conservative budget be prepared. It is then said that between 23 and 24 March 1989 and 30 March 1989 Mr Sandford phoned Mr Barker and gave him monthly figures which were said to have been based on the preceding four weeks of turnover and which showed annualised sales of $600,000. It is said that words were used in this conversation which were said to amount to the representations 9(a) to (c).
Mr Barker expressed reservations about his ability to afford a purchase price of $400,000. He said to Mr Sandford that he was not concerned about rent. It was at this meeting that the suggestion was made that the respondents would purchase a property owned by the Barkers at Airlie Beach which would help fund the purchase of the Wakerley property.
Negotiations were thereafter conducted between Mr Barker and Mr Quinn. Mr Barker's evidence of the conversation with Mr Quinn on 30 March 1989 supports the representations 10 (a) and perhaps 10(c). There is no evidence to support representation 10(b).
The affidavit evidence then refers to a conversation with Mr Quinn, and two other persons at which Mr Quinn is said to have made the representation numbered 11 above. The evidence continues to record a further meeting with Mr Quinn on 6 or 7 July 1989 on the subject of rent concessions. At this meeting the arrangement was made, so it is said, that if sales did not exceed the budget of $600,000 in the first 12 months the rent would be one third of turnover, but if turnover were higher the purchasers would reimburse Melridge the shortfall. The next day Mr Quinn, in the presence of two other persons, is said to have discussed army accommodation in terms which used words which were said to amount to representation 12.
Mr Barker then, in another affidavit, deals with what he says are the falsities in the representations which are alleged by the applicants.
It seems that since August 1989, Muffingrove has paid by way of rental only one third of turnover. Mr Barker says that no more than that was ever requested. Interest was paid on the charge until February 1990, when Mr Barker advised Mr Quinn that he could no longer afford interest. He says that no demand was thereafter made for interest.
From about August 1990 onwards, Melridge has been interested in selling the motel land. To engender in Mr Barker a favourable attitude to the sale transaction, so Mr Barker would suggest, he was offered a revised rental arrangement under which moneys in effect were to be given to him to ensure that he was able to pay the correct rent until he was able to trade profitably. It does not seem that those arrangements proceeded. Because of what appears to be an oversight, the lease to the applicants was never registered. A receiver was appointed to Muffingrove pursuant to the deed of charge on 3 September 1991 and has taken control of the applicant company's bank accounts.
The evidence filed on behalf of the respondent puts at issue most of the matters sworn to by Mr Barker including, of course, the making of the representations, or the falsity of them or the honesty of belief in making projections, which it is said were made on reasonable grounds. It is unnecessary to canvas this evidence, primarily given by Mr Quinn, because it would be impossible without extensive cross-examination and a projected trial of up to two weeks to resolve the conflicts which emerge.
There was no dispute as to the proper tests to be applied in determining whether the court should grant interlocutory relief. The court should consider whether there is a serious question to be tried and then where the balance of convenience lies in determining whether to grant or refuse injunctive relief: Australian Coarse Grain Pool Pty Ltd v Barley Marketing Board of Queensland (1982) 46 ALR 398; Tableland Peanuts Pty Ltd v Peanut Marketing Board (1984) 52 ALR 651; Epitoma Pty Ltd v Australasian Meat Industry Employees' Union and Ors (No 2) (1984) 54 ALJR 730, 734; Castlemaine Tooheys Ltd v South Australia (1986) 60 ALJR 679. These two tests are not wholly independent of each other. The weaker the applicants' case, the greater significance will the balance of convenience assume; cf Contractor Services Pty Ltd. v Esanda Finance Corporation Ltd (1990) ATPR 41-020 at 51355.
The respondents sought to persuade me that the applicants' case was weak. It was suggested that the evidence as it stands shows considerable difficulty in the way of the applicants establishing reliance. The respondents pointed to evidence that Mr Barker had prepared his own budgets, that he had conducted research as to occupancy rates (which incidentally reinforced the projected occupancy rate of 60%) and that he had, right up to the signing of the agreements, expressed reservations, declining to sign up on 9 May 1989 because there were too many "ifs" about the deal.
Rather more significantly, and a matter that has caused me considerable concern, is that Mr Barker, who reported on a regular basis to the respondents on his profit figures and the like, and whose reports, together with comments on trading, were in evidence, made no complaint of the alleged misrepresentations in the period between 14 August 1989 and 10 May 1991. For the applicants, however, it may be said that the respondents were not demanding rent, the parties were friendly and there was some suggestion in the evidence that the respondents were prepared to give some concessions to the applicants. In these circumstances the failure to complain may be explicable. I say nothing more about this matter, save that it will no doubt become a significant issue in the ultimate trial.
It is true also that an applicant seeking to rely upon representations of projections as in part the applicant here does may often have a difficult case, for he will need to show not only that the projections turned out to be wrong, but also that at the time they were made, they were known to be wrong. The respondent must establish that there were reasonable grounds for believing that the projections were correct: see s.51A of the Act. It is not possible to form a concluded view as to the strength of the applicants' case having regard to the considerable conflict of evidence, yet untested. However, it is clear to me that the applicants have made serious allegations, and that if their evidence is ultimately believed they would be entitled to relief, which could, if appropriate, include an order for the remoulding of the lease or mortgage to grant relief against the conduct impugned by s.52 of the Act.
The next matter advanced for the respondents in opposition to interlocutory relief was that the applicant, seeking as it is to restrain the mortgagee from exercising its rights under the securities, should be required to bring into court the amount of the mortgage. Reference was made to Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161; Harvey v McWatters (1948) 48 SR (NSW) 173; Glandore Pty Ltd v Elders Finance and Investment Co Ltd (1984) 4 FCR 130; Mainibanner Pty Ltd v Dadincraft Pty Ltd (1988) ATPR 40-896; Contractor Services Pty Ltd v Esanda Finance (supra) and Atkinson v Hastings Deering (Qld) Pty Ltd (1985) 6 FCR 331.
The general principle is that laid down in Inglis, namely that interlocutory relief restraining the exercise of a mortgagee's power of sale will not be granted unless the mortgage debt be paid into court or held in some account pending the outcome of the proceedings. However, that is not an invariable principle, as counsel for the respondents agreed. Where the claim of an applicant goes to the root of the title to exercise the rights, as is the case where relief is sought under s.87 of the Act to vary or set aside the mortgage, the normal principle may be dispensed with if the case so warrants. In other cases the court may mould its order so as to require payment in of so much only as will suffice to give adequate protection to the mortgagee: Harvey v McWatters; Glandnore Pty Ltd v Elders Finance and Investment Co Ltd (supra) at 135, unless the case is one where the appropriate remedy of the applicant sounds in damages only, Mainbanner Pty Ltd v Dadincroft Pty Ltd. However, in the latter case Pincus J. expressed the view that in general it would not be correct to exercise a discretion in favour of an applicant dispensing with the requirement to pay into court merely upon the court being shown that there was a prospect, however modest, of success on an allegation of oral misrepresentation.
Two considerations intervene in the present case to lead me to the conclusion that the severity of the general rule should be relaxed here. First and foremost, the proceedings have been instituted seeking a rewriting of the mortgage itself, upon which the rights of the mortgagee depend. Second, if the applicants' case is accepted, not only will it be unable to pay the money into court, and hence be unable to obtain its injunction, but also that inability will have stemmed from the unlawful conduct of the mortgagee himself in breaching s.52 of the Act. These factors must be seen cumulatively with a case, the strength of which, it being based upon oral misrepresentations both of existing fact and future outcomes, it is impossible to assess, without embarking upon what would in essence become a final hearing of the matter. However, to the extent that the mortgagor is in arrears under the mortgage I would, at the very least require an undertaking that interest continue to be paid to the mortgagee (or into court) pending the outcome of the litigation.

This necessarily brings me to a consideration of the balance of convenience.
But for two matters, there could be no prejudice at all to the respondents by the grant of the injunctive relief, which would then preserve the status quo pending the ultimate hearing, provided at least that appropriate undertakings were given as to the observance of the terms and conditions of the lease and the payment of interest under the mortgage. The first matter is that the respondent has for some time desired to sell the realty upon which the motel stands and the existence of an injunction would no doubt put an impediment in the way of that course. More significantly, since the interlocutory orders were made by Pincus J. shortly after the proceedings were commenced, the respondents have in fact entered into a conditional contract for the sale of the motel freehold.
Obviously these two matters are intertwined. If no purchaser were in the offing, the weight to be given to the fact that the respondents were seeking out a purchaser would not be great.
The injunction granted by Pincus J. as an interim measure, and it would appear, by agreement, restrained the respondents from:

"re-enter(ing) into possession of the land the subject of this action or creat(ing) any interest in such land by way of transfer, assignment, mortgage, charge, hypothecation, lease, easement or otherwise in derogation of the First Applicant's rights as lessee in the lease..."

It was following this injunction being made that the respondents entered into a contract to sell the freehold to a third party on 14 September 1991. That contract is conditional. As such it would not constitute the purchaser beneficial owner of the land or confer upon the purchaser an interest in the land until the condition is fulfilled. If the condition be fulfilled, the act of the respondents will arguably put them in a position where they are in contempt of the order of the court, and subject to be dealt with therefor. This is particularly so since, at least until the applicant's lease is registered on the title, a purchaser would, on registration of a transfer to him, become entitiled to be registered for the estate in fee simple freed from the unregistered interest being the lease.
One of the conditions to which the contract of sale is subject is a condition which in effect allows the purchaser to get out of the contract if not satisfied with the trading figures of the motel business. The supply of those results depends upon the applicants, but they have agreed to give undertakings in suitable form to ensure these results are supplied. After such supply, the respondent has 5 days to decide whether these figures are satisfactory.
It may be noted that even if the lease were registered on the title, the applicants would be at risk as against a bona fide third party. A purchaser taking subject to a registered lease would take subject to the conditions set out in that lease. While no doubt the court has power in an appropriate case, to grant relief under s.87 of the Act in the form of rewriting the conditions of the lease, the court, whether as a matter of law or discretion is not necessary to determine, would be unlikely so to do where the rights of third parties innocent of any misleading or deceptive conduct intervene. Thus the applicant is in a position of some jeopardy now as against the third party. First, the third party may, while the lease remains unregistered, defeat entirely the rights of the applicant. Second, even if the lease in its present form be registered, the third party would hold the reddendum subject to the covenants contained in the lease and freed from any fear of the benefit of those covenants being varied by an order of the court under s.87. Yet on the face of it, this jeopardy has come about as a result of what appears, at this stage, to be a flagrant breach of the injunction of this court by the respondents.
While I have, in the circumstances of an apparent breach of an injunction of the court, little sympathy for the respondents, who have introduced the property to a third party and involved that third party in some potential delay in disregard, it would seem, of the injunction, I am conscious of the need to consider the position of the third party, who appears, at least, to be innocent of any attempt to breach the injunction. It is an obvious truism that hardship to third parties is a factor to be considered in the context of the balance of convenience: Silktone Pty Ltd v Devreal Capital Pty Ltd. (1990) 21 NSWLR 317 at 332 per Meagher J.A.
For this reason I decided to adjourn the proceedings until a day approximately 10 days hence, to determine whether the purchaser resolves to pull out of the contract. If it does, then the position of the third party need not arise further.
A further matter to consider is the solvency of the applicants. The respondents submit that the evidence shows that the applicants have no assets and that accordingly an undertaking as to damages would be of no value to them. Thus it is said that for this reason the injunctive relief should be refused. The impecuniosity of the applicants is, of course an important matter to take into account, as is the adequacy as a remedy to the applicant of an award of damages. However, as was said by Cooper J. in Active Leisure (Sports) Pty Ltd v Sportsman's Australia Limited (1991) 1 Qd R 301 at 311:

(they) "are two important matters to be considered in the balancing process whereby the Court is required to determine where the greater convenience lies. In some cases, depending upon the particular facts of that case, they may ultimately as a matter of importance and weight be determinative of the matter. However they are to be considered as part of the totality of determiniiing the balance of convenience and not as a step anterior thereto."

The applicants sold their sole asset it would seem to purchase the motel business in dispute. That business is their livelihood and their home. Some of the evidence suggests an agreement between both parties at an earlier time that a receiver in possession tends to run down the business. The same has not been suggested of Mr Barker. The respondent's interests are, it seems to me at this interlocutory stage, protected if the applicants give to the court the following undertakings:

"That the applicants will:

1. Forthwith provide to the solicitors for the respondents details of the gross takings and total expenses for the period July 1990 to June 1991, and for the period July 1991 to August 31, 1991.

2. Forthwith make available to the solicitors for the respondents for inspection and enable the said solicitors to take copies thereof the following documents:

1. the daily accommodation register;

2. the receipt books of the business;

3. the cheque books of the business;

4. the bank deposit books of the business

5. the bank statements of the business.

3. to allow a representative of the respondent to enter upon the premises of the motel for the purposes of taking an inventory.

4. to allow an accountant nominated by the respondents on reasonable notice and in normal business hours to enter the premises of the motel for the purpose of verifying entries in the accounting or other records of the motel business.

5. On or before the 5th day of each and every month to :

a) provide to the solicitors for the respondents a statement of gross receipt for the preceding month; and b) pay into court, to the credit of this action an amount representing one third of gross receipts for the preceding month c) pay into court to the credit of this action a further sum of $3075.18 at the times interest is payable under the securities to the respondents or any of them.

6. to abide by all the terms and conditions contained in the lease dated 11 August 1989 including payment of amounts in arrears for rates, but not including rent or arrears of rent.

7. the usual undertaking as to damages."

Undertakings one to three were given on September 16, the remaining undertakings being proferred in substance at the same time. By way of explanation, the reference to one-third of gross receipts is a reference to the rent that has been paid under an agreement reached in respect of a variation of rent. It is alleged by the respondent that that figure was to be increased some time ago, but that matter is in dispute. At least until the determination of the proceedings, the applicants should pay the rent which all parties agree is payable. On the whole, I am of the view that the undertaking should be to pay to the lessor, rather than in to court, since at least until an order is made, if at all, for variation of the lease money is payable to the lessor. The same is true of the sum of $3075.18, which the parties agree is the interest payable at the penalty rate under the security for the unpaid balance of purchase price.
Provided such undertakings are given, then I would subject to further argument as to the rights of the third party purchaser should that be necessary, make orders enjoining the applicants from dealing with the land on which the Motel is situated. I will hear counsel in due course as to the precise form which those orders should take.
For the present I note merely that I have continued the injunctions made by Pincus J. until 4pm on 2 October, 1991, upon all parties additionally renewing the undertakings given to the Court on 4 September 1991. The respondent has been directed to file and serve an affidavit setting out the facts relevant to the question whether the purchaser intends to proceed with the contract to purchase the motel premises. The proceedings have accordingly been adjourned to 2 October 1991 at 10.15, with liberty to any party to restore the matter to the list on 24 hours notice.

[1991] FCA 584

26 SEPTEMBER 1991