Perpetual Nominees Ltd v McGoldrick
[2014] VSC 152
•9 April 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
List B
S CI 4476/2012
| PERPETUAL NOMINEES LTD (ACN 000 733 700) | Plaintiff |
| v | |
| IAN ANDREW McGOLDRICK & ANOR | Defendants |
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JUDGE: | Judd J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 1 April 2014 | |
DATE OF JUDGMENT: | 9 April 2014 | |
CASE MAY BE CITED AS: | Perpetual Nominees Ltd v McGoldrick & Anor | |
MEDIUM NEUTRAL CITATION: | [2014] VSC 152 | |
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Practice and Procedure – Application for summary judgment – Application for leave to amend – Civil Procedure Act 2010 ss 63 and 64.
Corporations – Duties of liquidators – Duty to guarantors of company debt.
Mortgage – Mortgagee’s powers of sale – Appointment of administrators by mortgagee – Sale of mortgaged property by liquidators – Liability of liquidators and mortgagee.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr B Carew | Gadens Lawyers |
| For the Defendants | Mr N Frenkel | Consult Solicitors |
| For the Liquidators | Mr M Galvin | CPB Lawyers |
HIS HONOUR:
In and between 2005 and 2010, the plaintiff, Perpetual Nominees Ltd, advanced funds to Zido Pty Ltd and Racso Pty Ltd under various loan arrangements. For present purposes, the only relevant borrower is Racso. The first and second defendants, Ian Andrew McGoldrick and Frederique Simone Bentley guaranteed the liability of Racso to Perpetual. The security for the advance included two mortgages over land at 441–443 Maroondah Highway, Lilydale. There were two titles. Perpetual had been granted a first mortgage over 443 Maroondah Highway, and a second mortgage over 441. The first mortgage over 441 Maroondah Highway had been granted to Banksia Mortgages Ltd.
Racso defaulted under its loan agreement. Clause 8 of a Fixed and Floating Charge authorised Perpetual to appoint a receiver. Instead, by Deed of Appointment dated 6 November 2012, Perpetual appointed Sule Arnautovic and Glen Anthony Crisp as joint and several administrators of Racso under s 436C of the Corporations Act 2001 (Cth).
It would appear that the only substantial asset of Racso was the Lilydale property. At the first meeting of creditors, held on 11 December 2012, the only creditor in attendance was Perpetual, although one other attended by proxy. At that meeting, there was discussion concerning the sale of the Lilydale property. A minute of the meeting recorded the administrators’ intention to sell both titles together. Colliers International had been engaged to conduct a valuation, which was expected by the end of the year, or in early January 2013. The administrators had already engaged, or proposed to engage, Fox Wood real estate agents, based in New South Wales, who were said to be specialists in residential development sites. At the time of the meeting the consent of Banksia to a sale of 471 Maroondah Highway had not been obtained.
On 24 August 2011, Charter Keck Cramer had valued the whole site at $10.9 million. On 30 December 2011, it had valued 443 Maroondah Highway at $5.75 million. That title comprised around 4 hectares. A little over 3 hectares was zoned Residential 1, and the balance, Business 4. The land at 441 was mostly zoned Business 4. A valuation of both titles made by the Valuer‑General, for the purpose of rates and land tax, determined the site value to be $6.35 million.
The minutes of a subsequent meeting of creditors of Racso, held on 11 February 2013, indicate that valuations for both properties had been obtained from Colliers with ‘no great variance to the valuations obtained prior to our appointment’. The defendants allege that the administrators knew of the earlier valuations. There is some indication in the minutes that the two properties may have already been advertised for sale. At that meeting, Perpetual moved to wind up Racso. The minutes record that the chairperson, Crisp, called for nominations for a liquidator. No nominations were received, and he announced that he and his co‑administrator would become joint and several liquidators. McGoldrick attended both meetings.
In her affidavit sworn 31 January 2014, Bentley alleged that from 6 November 2012 until completion of the sale of the Lilydale property, Arnautovic and Crisp acted as agents for, or at the direction of, Perpetual. Her allegation was based upon the participation of Perpetual in their appointment, first as administrators and then as liquidators; Perpetual’s involvement in the engagement of, and instructions to, valuers; the provision of funding to the liquidators; various provisions in the Deed of Appointment relating to administrators’ remuneration; and the sale process. McGoldrick deposed to the involvement of Perpetual in the choice of the agent in New South Wales, the selection of a local agent, and the sale process generally.
McGoldrick deposed to certain aspects of the sale process. He maintained that it was seriously mishandled. He alleged that the properties ought to have been sold separately, because 443 Maroondah Highway was primarily residential, and 441 Maroondah Highway was primarily commercial. He alleged that there was no justification for selecting an agent in New South Wales, and that the advertising process was far too short. McGoldrick alleged that the properties ought to have been marketed with sufficient information to enable potential purchasers to make informed expressions of interest or offers. He deposed that the Melbourne agent, subsequently appointed to assist Fox Wood, expressed the view that the marketing campaign was flawed in a number of respects and ought to be cancelled and relaunched. The appointment of Biggin & Scott as Melbourne agents took place on 12 February 2013.
Contracts of sale had been prepared by the administrators prior to their appointment as liquidators. The sale process continued until formally closed on 14 March 2013. Only one unconditional offer for both titles was received, in the sum of $3 million. The offer was accepted by the liquidators. Bentley deposed to a conversation with the subsequent purchaser of 441 Maroondah Highway, at a price of $2 million. That person is reported to have originally offered $2 million for that title during the tender process. His offer was rejected, because both properties were to be sold together.
Following the sale, the proceeds were divided between Banksia and Perpetual. Banksia was paid the full amount due under its first mortgage, in the sum of $1,780,812.14. Perpetual received less than 20 per cent of the amount due to it under the mortgage. The amount paid to Perpetual was only $644,249.70. Thus, the amount of the Perpetual debt was not fully extinguished. The defendants alleged that had the proceeds of sale of Racso’s land and Zido’s land been applied to the debt, it would have been fully discharged. They alleged that Perpetual was involved in the allocation of funds between it and Banksia.
Application for leave to amend
The defendants new application for leave to file and serve a second further amended defence and counterclaim was overshadowed by the plaintiff’s application for summary judgment under s 63 of the Civil Procedure Act 2010. Whether the defendants succeed in resisting the application does not depend upon the viability of their pleading, although their inability to properly plead a case may point to the absence of any substantive defence and counterclaim, with any real prospect of success.
In my view, the application for summary judgment would ordinarily be considered before the adequacy of a proposed pleading. When considering an application for summary judgment by a plaintiff, the court must look beyond a pleading, to the ‘affidavit or other material’ relied on by the defendants. But in the present case, I propose to first consider the defendants’ application for leave, because it was in that context the defendants best elaborated their defences.
The defence and counterclaim has undergone significant change since a defence was first filed. A claim against the receiver of Zido, also appointed by Perpetual, has now been compromised. On 11 February 2014, the defence and counterclaim, filed by the defendants on 19 November 2013, was struck out. The defendants were warned that they should proceed on the basis that their application to file a second further amended defence and counterclaim would be their last. They were given an opportunity to apply to the court, on or before 14 March 2014, for leave to file a further defence and counterclaim, a draft of which was to be filed in advance.
Before filing a proposed new pleading, the defendants issued a subpoena to each of Fox Wood and Biggin & Scott, requiring production of documents relating to the sale process. Perpetual and the liquidators objected to inspection of that material on the basis that the purpose of the subpoenas was to assist the defendants in formulating their case, rather than proving their case, and that they did not have a valid defence and counterclaim before the court. They also contended that each subpoena was too wide in some respects.
The defendants argued that they had a right under r 42A.01 to subpoena documents for the purpose of an interlocutory application. But the objectors contended that the rule could not be used in lieu of pre‑action discovery, or to discover whether the defendants had a case to plead.
The objection by Perpetual and the liquidators to inspection of the subpoenaed documents was eventually set down for hearing on 1 April 2014, following determination of the defendants’ application for leave to amend. The application for summary judgment was also set down for hearing on the same day. Thus, all three applications came before the court on 1 April 2014.
Shortly prior to the hearing, the defendants filed and served a proposed second further defence and counterclaim. The application for leave was advanced on the basis of that pleading. The defendants had also filed and served additional affidavit material in opposition to the application for summary judgment. In particular, they relied upon further affidavits of Bentley and McGoldrick, both dated 21 March 2014.
By their defence and counterclaim filed on 18 November 2013, the defendants alleged that the liquidators were acting as the agents for or at the direction of Perpetual. The particulars were generally consistent with the allegations made by Bentley in her affidavit dated 31 January 2014. The significance of the allegation was to attribute liability to Perpetual for a breach of duty by the liquidators in the sale process, and thus support a set‑off between the sum which Perpetual claimed and the defendants claim for damages. The allegation of agency had been abandoned in the draft propounded by the defendants on their application for leave.
The principal opposition to the application for leave came from the liquidators. Perpetual opposed the application, but rolled up its opposition with its application for summary judgment. Briefly stated, Perpetual contended that there was no discernible foundation for the set‑off, which required an attribution of liability to it for the conduct of the liquidators. Accordingly, whether or not the defendants were successful against the liquidators was of no consequence to the viability of Perpetual’s claim against the defendants as guarantors. It reinforced that contention by reference to cl 9.5 of the Guarantee, which provided:
All money payable by the Guarantor under this Guarantee must be paid without set‑off or counter claim and free of all deductions. Payments will be credited to the Guarantor only when actually received by the Lender. The Lender will have an absolute discretion (without the need to communicate its election to anyone) to apply any payment received by it in reduction of such part of the Debt as it elects. Any surplus money received by the Lender will not carry interest and may be paid by the Lender to the credit of an account in the name of the Guarantor in any bank the Lender thinks fit including the Lender.[1]
[1]Emphasis added.
Perpetual contended its involvement in the appointment of the administrators and liquidators was irrelevant. The sale by the liquidators, even if found to be in breach of some duty was, it argued, a sale by the company, who was the principal debtor and mortgagor. In such circumstances, Perpetual argued, there was no occasion for the defendants, as guarantors, to complain about the circumstances of the sale, or seek to attribute any liability to Perpetual.
The liquidators pointed out that the defendants had abandoned the allegation that they acted as agents for Perpetual. They criticised the formulation of the duties alleged in paragraph 17Z, in which the defendants alleged:
By reason of their appointment as joint and several administrators and liquidators of Racso, Arnautovic and Crisp owe and at all material times since 6 November 2012 have owed to the Defendants a duty to:
(a)exercise reasonable care and diligence in exercising their powers and duties;
(b)act in good faith in exercising their powers and duties;
(c)refrain from acting in a manner in which no reasonable administrator/liquidator would act;
(d)in exercising a power of sale in respect of the property of Racso, take all reasonable care to sell the property for not less than market value;
(e)pay the debts of Racso and adjust the rights of the contributories among themselves.
Particulars
The duties alleged in subparagraphs (a)–(d) above arise at law and/or in equity.
The duty alleged in sub-paragraph (e) above arises pursuant to section 506(3) of the Corporations Act 2001 (C’th) and/or in equity.
The liquidators contended that as the sale was made by Racso, as debtor and mortgagor, they were not amendable to the duties imposed upon external controllers under s 420A of the Corporations Act, or the general law. They acknowledged that had they been appointed receivers, the position of the defendants as guarantors, and their ability to complain about the sale process, might have been quite different. The liquidators contended, in effect, that the choice made by Perpetual to appoint administrators, who then sold the land as liquidators, had the effect of limiting the scope for complaint by the defendants about the sale process. The liquidators contended that the defendants had not pleaded any case in which they alleged a breach of duty to prevent foreseeable economic loss. They went so far as to contend that such a case could not, in any event, be advanced against them as liquidators.
If the contentions advanced by the liquidators were to be taken to their natural conclusion, it would mean that administrators appointed by a mortgagee to sell mortgaged property could never be held accountable by guarantors of the mortgagor, even though a sale might have been made in breach of the duties imposed on external controllers.
In support of their case against the liquidators, the defendants relied on Mills & Ors v Sheahan,[2] a decision of the Full Court of the Supreme Court of South Australia. The principal judgment was delivered by Debelle J. His Honour considered whether a duty of care might be owed by a liquidator to third parties, such as guarantors of the obligations of a company. His Honour considered such factors as the foreseeability of loss, indeterminacy of liability, autonomy of the individual, vulnerability to risk and knowledge of the risk and its magnitude, as the guiding policies and principles.[3]
[2][2007] SASC 365.
[3]Mills & Ors v Sheahan [2007] SASC 365, [21]–[33]; see generally Perre v Apand Pty Ltd (1998) 198 CLR 180; Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515.
The liquidators contended that the essential elements for such a cause of action had not been pleaded. They submitted that the allegations contained in paragraph 17Z were formulated under a misconception of the nature of any such duty, merely reciting duties imposed under ss 180 and 181, or under s 420A of the Corporations Act. The defendants contended that their pleading adequately pleaded their case for a breach of a duty owed to them as guarantors.
In my opinion, the proposed defence and counterclaim does not sufficiently or clearly plead a breach of such a duty of care against the liquidators. For example, it does not address the question of the liquidators’ knowledge of the risk to the defendants, or the magnitude of the risk. While other parts of the pleading and particulars allude to such matters, which were addressed more directly in the affidavits filed on behalf by Bentley and McGoldrick, they are not pleaded.
The deficiencies in pleading the duty of care are compounded in the pleading of breach. First, the breach is pleaded by merely reciting each duty, and that it was breached. Particulars were provided. The material facts necessary to establish the breach were not alleged. Some material facts were submerged in the particulars. Some of the particulars plead evidence.
The liquidators contended that the particulars of breach, even if converted into allegations of fact, were incapable of supporting an arguable case for a breach of the duty the defendants accepted must be alleged. While the particulars were inelegantly expressed, buried within them were facts that might be pleaded, together with other facts, to plead a case against the liquidators. The discrepancy between the evaluations and the eventual sale price is arresting. When coupled with the evidence given by McGoldrick and Bentley about the sale process, the defendants’ case for a breach of a duty to act with reasonable care and diligence, and in good faith, cannot be described as fanciful.
The defendants also alleged that a property owned by Jairo Pty Ltd at Braybrook was mortgaged to Racso, and the liquidators were obliged to call in the debt and sell the property to reduce their liability. Amendments made to this part of the pleading in the most recent draft were minimal. In earlier submissions, the liquidators had contended that this part of the case was misconceived and ought to be stayed or struck out. The liquidators contended they had no duty to compel a sale of the property owned by Jairo in order to extinguish or diminish the liability of the defendants to the plaintiff. While there is merit in the liquidators’ contention, I doubt that a determination of the Jairo issue would occupy much attention at trial. It was not suggested that the claim as pleaded was unclear. This allegation did not attract much attention in submissions.
The more difficult question for the defendants is the absence of any proper allegation to support the set‑off claimed in paragraph 17CC. The defendants contended for a right of set‑off that did not depend upon a viable claim against Perpetual. They relied on such general propositions as that found in Tooth & Company Limited v Smith,[4] in which Clarke J said:
No general rule can be laid down except by stating that such a set‑off will arise where there exists circumstances which make it unjust or inequitable that a plaintiff should be permitted to proceed with his claim.
[4]Supreme Court of New South Wales, unreported, 5 September 1984.
In my view, a defence by way of equitable set‑off in the present case requires the defendants to establish a connection between the competing claims, so that Perpetual’s claim under the guarantees is impeached by its liability for the conduct of the liquidators. Nothing is pleaded to support such a case. When pressed, counsel for the defendants outlined circumstances that were reminiscent of the defendants’ case for agency, or involvement by Perpetual in directing the sale process. The defendants relied upon the decision of Dodds‑Streeton J in Florgale Uniforms Pty Ltd (Receiver and Manager Appointed) (in liquidation) & Ors v Orders & Anor,[5] in which her Honour considered the liability of a bank for a breach under s 420A of the Corporations Act. That was a case concerning the conduct of a receiver, not a liquidator.
[5](2004) 11 VR 54; [2004] VSC 65.
For present purposes I am satisfied that if the defendants were to establish that Perpetual relevantly directed the conduct of the administrators or liquidators in the sale of the mortgaged property, for which the liquidators may be found to be liable, the defendants would have some prospect in succeeding in a claim against Perpetual. In such circumstances it might be said that the liquidators were, in relevant respects, acting as Perpetual’s agent, or under its direction. But none of that is pleaded.
While I am satisfied that the defendants might be capable of pleading a claim against the liquidators for breach of a duty of care owed to the defendants as guarantors, and against Perpetual, no such claims have been adequately pleaded. Accordingly, leave should not be granted to the defendants to file and serve the proposed second further amended defence and counterclaim.
In the course of submissions, counsel for the defendants foreshadowed a desire to revisit and further amend the draft pleading to remedy its inadequacies in relation to the alleged duty of care and the claim for equitable set‑off. To permit such a course would be to grant a significant indulgence to the defendants, who have made numerous amendments, including withdrawing the allegation of agency. Moreover, there would be no utility in a further attempt to replead a case against Perpetual, if it were to succeed in its application for summary judgment. Accordingly, I turn to Perpetual’s application for summary judgment.
Application for summary judgment
It is common ground that the test to be applied on an application for summary judgment under s 63 of the Civil Procedure Act 2010 was settled by the Court of Appeal in Lysaght Building Solutions Pty Ltd v Blanalko Pty Ltd,[6] in which Nettle JA set out the following principles:
Upon the present state of authority:
a)the test for summary judgment under s 63 of the Civil Procedure Act 2010 is whether the respondent to the application for summary judgment has a ‘real’ as opposed to a ‘fanciful’ chance of success;
b)the test is to be applied by reference to its own language and without paraphrase or comparison with the ‘hopeless’ or ‘bound to fail test’ essayed in General Steel;
c)it should be understood, however, that the test is to some degree a more liberal test than the ‘hopeless’ or ‘bound to fail’ test essayed in General Steel and, therefore, permits of the possibility that there might be cases, yet to be identified, in which it appears that, although the respondent’s case is not hopeless or bound to fail, it does not have a real prospect of success;
d)at the same time, it must be borne in mind that the power to terminate proceedings summarily should be exercised with caution and thus should not be exercised unless it is clear that there is no real question to be tried; and that is so regardless of whether the application for summary judgment is made on the basis that the pleadings fail to disclose a reasonable cause of action (and the defect cannot be cured by amendment) or on the basis that the action is frivolous or vexatious or an abuse of process or where the application is supported by evidence.
[6][2013] VSCA 158 [35].
The claim for summary judgment was straightforward and simply articulated by Perpetual. The essential elements of its claim under the guarantees are not disputed. There is a certificate proving liability. Perpetual contended that there was no viable counterclaim apart from the misconceived allegation of set‑off. In any event, it was contended, cl 9.5 of the guarantee precluded any set‑off.
A respondent to an application for summary judgment may show cause against the application ‘by affidavit or other material to the satisfaction of the court’.[7] As is often the case, the numerous challenges to the defendants’ pleading have enabled the defendants to refine their case, although this is not yet reflected in a pleading. Approaching the defendants’ defence of set-off on the basis of the evidence that has been filed, I am satisfied that there is a basis to allege a breach of duty by the liquidators for which Perpetual is liable. Such a case is not hopeless. But does it have a real, as opposed to a fanciful, chance of success? In my opinion, the defendants’ case, discernible from the evidence that has been filed, has some prospect of success. It is sufficient to support the filing of a proper basis certificate under s 42 of the Civil Procedure Act. It is not hopeless, or fanciful. It has a real prospect of success, as that phrase is understood within the context of pt 4.4 of the Civil Procedure Act.
[7]Supreme Court (General Civil Procedure) Rules 2005, r 22.04(1).
Perpetual argued that cl 9.5 of the guarantee provided a complete answer to the defendants’ counterclaim. I am not so sure. There is the question of construction, and the extent to which such a contractual term operates to prevent the defence of set‑off in a proceeding.
There are circumstances in which a court will allow a matter to proceed to trial even though the case may be considered weak, or without the requisite prospect of success. A court may decline to order summary judgement because it is not in the interests of justice to do so, or the dispute is of such a nature that only a full hearing on its merits is appropriate.[8] Section 64 of the Civil Procedure Act provides:
[8]Civil Procedure Act 2010, s 64.
Court may allow a matter to proceed to trial
Despite anything to the contrary in this Part or any rules of court, a court may order that a civil proceeding proceed to trial if the court is satisfied that, despite there being no real prospect of success the civil proceeding should not be disposed of summarily because—
(a)it is not in the interests of justice to do so; or
(b)the dispute is of such a nature that only a full hearing on the merits is appropriate.
The defendants implicate Perpetual in an alleged breach by liquidators of a duty owed to them as guarantors. If proven, such a breach by liquidators might also involve a breach of their duty to the company. Some of the facts are arresting, and require exposure at trial if justice is to be done, and seen to be done. It is not only the discrepancy between valuations and sale price that is in issue; the defendants raise serious questions about the sale process itself, and the conduct of those involved in it, including the role of Perpetual. There is the issue concerning the allocation of sale proceeds between Banksia and Perpetual. There is also the question whether a choice made by a mortgagee, to pursue a sale of mortgaged property through the appointment of administrators, will have the effect of stripping guarantors, in the position of the defendants, of remedies.
The defendants contended that the court should exercise the discretion under s 64 of the Civil Procedure Act but did not elaborate. I was not assisted by oral argument. Given the nature of the applications before the court, to call for further submissions on this topic would have involved unnecessary additional expense and delay. My research has revealed only a few recent decisions of this court which touch upon the scope of the discretion. In Ottedin Investments Pty Ltd v Portbury Developments Co Pty Ltd & Anor,[9] Dixon J said:
The section affirms the court’s broad discretion, exercised judicially, whether to summarily dismiss a proceeding or a claim, which was the basis upon which the previous test was applied. The circumstances in which the court might consider the dispute to be of such a nature that only a full hearing on the merits is appropriate is equally wide in its compass and plainly to be considered in the circumstances of each case.
I respectfully agree with the approach taken by Dixon J in Ottedin. In my view, the ‘interests of justice’ and the nature of the dispute invite consideration of a wide range of factors which depend on the circumstances of each particular case.
[9][2011] VSC 222, [12]; see also Feldman v Frontlink Pty Ltd [2014] VSCA 27.
The issues raised by the defendants in this proceeding are important. They concern the conduct of liquidators over whom the court has supervisory jurisdiction. The defendants also raise a question concerning the consequence of a choice made by a mortgagee to appoint administrators or liquidators, and the effect that may have on the remedies available to guarantors. These are matters that concern the interests of justice.
I am satisfied that the defendants have a real prospect of success in their proposed claim against the liquidators, and for a set‑off against Perpetual to resist the application for summary judgment under s 63 of the Civil Procedure Act. In any event, I am of the opinion that this case ought, in the interests of justice, and by reason of its nature, proceed to trial. That being so, Perpetual’s application for summary judgment will be dismissed. If the defendants are to have a trial, they must be given a further opportunity to plead their case.
Objections to subpoena
I propose to give leave to the defendants to inspect the documents produced under subpoena by Fox Wood and Biggin & Scott. They have, by their affidavits and submissions, articulated the nature of the case they propose to advance. In so doing, they have successfully resisted an application for summary judgment. They have a case to advance. Moreover, it would be undesirable if the discovery of new material in subpoenaed documents resulted in a further application to amend. While those documents have not been inspected by anyone at this stage, it seems likely that they will contain information highly relevant to the conduct of the liquidators, and even Perpetual, in the sale process.
Orders
For the reasons given above, the following orders will be made:
(1)The defendants’ application for leave to file and serve the proposed second further amended defence and counterclaim dated 28 March 2014 is dismissed.
(2)The application for summary judgment is dismissed.
(3)The parties have leave to inspect and make copies of the documents produced under subpoena by Fox Wood and Biggin & Scott.
(4)On or before 20 April 2014, the defendants file and serve a defence and counterclaim upon which they intend to rely at trial.
I will hear the parties on costs, and directions for trial.
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