Priority One Home Loans Ltd & Anor v. Amplitude Investments Pty Ltd & Ors

[2007] NSWSC 845

CITATION:	Priority One Home Loans Ltd & Anor v. Amplitude Investments Pty Ltd & Ors [2007] NSWSC 845
HEARING DATE(S):	26 July 2007
JUDGMENT DATE :	26 July 2007
JURISDICTION:	Equity Division
JUDGMENT OF:	Palmer J
EX TEMPORE JUDGMENT DATE:	26 July 2007
DECISION:	Upon certain undertakings by Plaintiffs, Receivers removed.
CATCHWORDS:	INTERLOCUTORY ORDERS – RECEIVERS AND MANAGERS – REMOVAL – Receivers and Managers appointed under charge securing debt which is disputed – serious question to be trued as to whether debt payable – Plaintiffs offer undertaking to preserve fund – whether balance of convenience requires removal of receivers.
PARTIES:	Priority One Home Loans Ltd – First Plaintiff Gerd Rolf Mertes – Second Plaintiff Amplitude Investments Pty Ltd – First Defendant Property Solutions 4U Pty Ltd – Second Defendant Richard Albarran – Third Defendant Blair Pleash – Fourth Defendant
FILE NUMBER(S):	SC 3519/07
COUNSEL:	M. Southwick – Plaintiffs B.F. Katekar – 1st & 2nd Defendants J.E. O’Sullivan – 3rd & 4th Defendants
SOLICITORS:	North Shore Lawyers – Plaintiffs Etienne Lawyers – Defendants

3519/07 Priority One Home Loans Ltd & Anor v
Amplitude Investments Pty Ltd & Ors


JUDGMENT – Ex tempore
26 July, 2007

1    By a Statement of Claim filed on 6 July 2007, Priority One Home Loans Pty Ltd (“Priority”) and Mr Mertes commenced proceedings against Amplitude Investments Pty Ltd (“Amplitude”) and Mr Lynch, a director of that company, claiming that Amplitude had repudiated a Consultancy Agreement between Priority and Mr Lynch, dated 23 October 2006. 2    The Statement of Claim also sought declarations to the effect that Priority had accepted the repudiation and had terminated the Consultancy Agreement on 1 June 2007, so that Priority ceased to have any further liability to Amplitude under a certain Deed of Charge entered into between the parties, also dated 23 October 2006, whereby the obligations of Priority to Amplitude under the Consultancy Agreement were secured. 3    Further ancillary relief was sought, including orders for damages against Amplitude for breach of the Consultancy Agreement and damages against Mr Lynch for trespass and wrongful detention of assets of Priority. 4    Slightly less than two weeks after the filing of that Statement of Claim and before any defence had been entered, Amplitude purported to appoint Receivers and Managers to Priority, pursuant to the Deed of Charge which secured the obligations of Priority under the consultancy agreement. 5    Priority and Mr Mertes now, by Notice of Motion filed 19 July, seek orders that the Receivers and Managers appointed by Amplitude to Priority, be joined as defendants in the proceedings, and an order restraining the Receivers and Managers from taking any further step in the proceedings until further order. Mr Southwick of Counsel, who appears for the Plaintiffs, now also seeks an order for the removal of the Receivers and Managers pending determination of the proceedings, upon the basis of a certain undertaking, which the Plaintiffs offers and to which I will come shortly. 6    The circumstances in which the application is made may be briefly recounted. Priority carried on a business of mortgage broking. The sole shareholder was the Second Defendant, Mr Lynch, who was also its director. Priority was entitled to certain trail fees from lenders in respect of mortgage loans which it had brokered. 7    On 23 October 2006, a company controlled by Mr Mertes, SC Investments & Finance Pty Ltd (“SCI”), entered into a Share Acquisition Agreement with Mr Lynch, whereby Mr Lynch agreed to sell all of the shares in Priority to SCI. Completion of the transfer of shares was deferred under the terms of the Agreement and, upon completion, Mr Lynch was to retire as a director. 8    It appears that, on the same day as the Share Acquisition Agreement was entered into, Priority entered into a Consulting Agreement with Amplitude, which is a company controlled by Mr Lynch. Under that agreement, Priority agreed to engage Amplitude as its consultant for a term of four years. Clause 3 of the agreement provided for the payment of a consultancy fee in accordance with item 4 of the schedule. The fee, as provided in the schedule, is as follows:

“ 4. Fee

Payment monthly in arrears:

1. 85% of the net trailer fees received by the Contractor on the loan book of the Contractor as at 30th September 2006 for a period of 4 years.

2. 10% of all net trailer fees received by the Contractor on new loans written and forming part of the Contractor’s loan book after 1st October 2006 for a period of 4 years.

Net trailer fee means the gross trailer (excluding GST) received by the Contractor less all fees payable to agents, brokers, introducers or third parties entitled to commissions with respect to each loan upon which the trailer fee is paid, (‘Third party payments’) all third party payments shall be made only upon agreement between the Consultant and the Contractor.”
9    Clauses 3.2 and 3.3 of the Consultancy Agreement provided:

“3.2 The Contractor shall provide to the Consultant a registrable fixed and floating charge over the assets of the Contractor as security for the payment of the consultancy fee.

3.3 In the event the Contractor fails to pay the consultancy fee to the Consultant for any reason within 14 days of receipt by the Contractor, the Contractor will be in default hereunder and any outstanding fees together with interest of 10% per annum thereon will forthwith become due and owing to the Consultant.”
10    Clause 7.6 of the Consultancy Agreement provided:
“In the event of termination for any reason the contractor will continue to make the fee payment as set out in item 4 schedule 1.”
11    The parties fell into dispute some time in early 2007. SCI and Mr Mertes allege that in March 2007 Mr Lynch broke into the premises in which the business of Priority was conducted and, without authority, removed a large number of items of equipment and property, which were the property of Priority. SCI, thereafter, ceased to make any further payments to Amplitude pursuant to the Consultancy Agreement. 12    On 20 June 2007, Amplitude, by its solicitor, purported to terminate the Shares Acquisition Agreement for non-payment of the consideration thereunder. Priority took the position that the actions of Mr Lynch in taking equipment from the premises of Priority and the actions of Amplitude itself constituted a fundamental breach of the Consultancy Agreement and it has accepted that breach and terminated the consultancy agreement, thereby bringing to an end, so it says, the obligation to make further payments of the fee, as provided in schedule 4 of the Agreement. 13    It was in this context and with the dispute so constituted, as evidenced by the pleading of Priority in the Statement of Claim filed 6 July 2007 that, without notice to Priority, Amplitude purported to appoint the Receivers to Priority, resulting in this application. 14    The questions for determination may be summarised thus:


– whether there is a serious question to be tried that a breach of the Consultancy Agreement has been committed by Amplitude such as to entitle Priority to terminate it for fundamental breach;

– whether there is a serious question to be tried that, even if Priority has validly terminated the Consultancy Agreement, nevertheless the fee payable under schedule 4 continues to remain payable as an accrued obligation, so that the failure to pay it by Priority is a breach of the Consultancy Agreement, entitling Amplitude to exercise its rights under the security to appoint Receivers

– where does the balance of convenience lie as to whether or not the Receivers should be permitted to continue in office, or should be removed pending determination of the suit upon the undertaking, not only as to damages, but as to security of funds which the Plaintiffs proffer.

15    I note that, although the evidence as to the alleged unauthorised entry by Mr Lynch into the premises of Priority is in somewhat abbreviated form and is in the nature more of a broad allegation than of precise particulars, nevertheless, it does seem to have some substance, by reason of the fact that, on 22 April 2007, Mr Lynch consented, without admissions, to an order in proceedings 2429/07 brought against him by SCI that he would deliver up possession of the premises in which Priority was conducting its business and would also deliver up certain items of property, "removed by him or on his behalf" , from the premises on 22 April 2007. 16    Neither Amplitude nor Mr Lynch has put on any evidence in this application endeavouring to explain or justify how it came about that Mr Lynch removed items of property of Priority from its premises on 22 April 2007. Mr Katekar of Counsel, who appears for Amplitude, submits that ASIC records show that, at that time, Mr Lynch was still a director of Amplitude, so that, as a director, he was entitled to do what he did. I think that is somewhat of a simplification, bearing in mind the existence of the Share Acquisition Agreement and the Consultancy Agreement and the fact that the property of Priority is not the property of Mr Lynch even if he was still then its director. 17    It seems to me that there is sufficient evidence to find that there is a serious question to be tried as to whether what Mr Lynch did on 22 April 2007 amounted to a fundamental breach of the Consultancy Agreement between Amplitude and Priority. 18    The second question is as to the consequences of that breach. Mr O'Sullivan of Counsel, who appears for the Receivers and Managers, and Mr Katekar draw attention to the provisions of clauses 3.3 and 7.6 of the Consultancy Agreement, which I have set out above. They say that, even if the Consultancy Agreement has been validly terminated for the fundamental breach of Amplitude, nevertheless, those clauses make it clear that the fees set out in paragraph 4 of the schedule remain payable, so that the appointment of the Receivers is properly made in order to secure their payment. 19    Again, I do not think the matter is quite as simple is that. It seems to me that there is a serious question as to whether the provisions of the Consultancy Agreement are dependent upon continuance and completion of the Share Acquisition Agreement. It must not be forgotten that Mr Lynch himself has purported to terminate the Share Acquisition Agreement. If that termination is valid then, of course, he is now and has at all times been in sole control of Priority. In such a circumstance, there would be no need for Priority to have the services of Amplitude as its consultant to carry on the business if the only person who was going to provide the services on behalf Amplitude was Mr Lynch, who has, at all times, remained a director and is still now the sole director of Priority. 20    It seems to me that that circumstance is capable of founding an argument that the continued obligations of Priority under the Consultancy Agreement are co-extensive with the obligations of SCI to acquire the shares in Priority under the Share Acquisition Agreement. If the very foundation of the Consultancy Agreement disappears because the Share Acquisition Agreement has been terminated, the Consultancy Agreement, at least, as far as its operation in the future is concerned, may also disappear. 21    It is not necessary for me to canvas further these questions. The transaction is complex; so, also, will be the arguments at trial. I think it is sufficient for my purpose to say that, in my view, there is a serious question to be tried as to whether, assuming the termination of the Consultancy Agreement is valid, there is a continuing obligation on the part of Priority, nevertheless, to continue to pay the trail fees to Amplitude, as provided in the Consultancy Agreement. 22    The final question is: where does the balance of convenience lie. I begin by noting that Priority, through its present director, Mr Mertes, offers an undertaking to the Court to ensure that payments which Amplitude claims under the Consultancy Agreement will be paid into a bank account to be controlled jointly by the solicitors for the parties to abide the outcome of proceedings or to be dealt with pursuant to agreement in writing between the parties. 23    The claim of Amplitude is for payment of a money sum and of continuing income stream. The undertaking proffered by Mr Mertes and Priority will ensure that the moneys to which Amplitude claims it is entitled will be preserved. Amplitude will not have the benefit of those moneys pending determination of the suit but, then again, neither will Priority. Both parties will have to await the determination of their respective entitlements to the moneys in due course when the matter comes on for final hearing. 24    There is no evidence filed on behalf of Amplitude that the retention of this fund in a controlled moneys account pending determination of the suit will produce any particular hardship to it in the conduct of its business. On the other hand, Mr Mertes has given evidence that the continuation of the receivership will have an adverse effect on the ability of Priority to continue its business as a mortgage finder and mortgage broker. Mr Mertes has given evidence to the effect that in seeking new business for Priority it will be necessary to disclose to the lenders with which it is accredited the fact that it is in receivership, and that is likely to have a serious impact on the possibility of the loan application proceeding. 25    It seems to me that, in view of the fact that there is no evidence of particular hardship to Amplitude, on the one hand and, on the other hand, there is evidence that the continuation of the receivership would damage the continuing business of Priority, the balance of convenience lies in favour of preserving the present status quo by the least damaging method, that is, by accepting the undertaking on the part of the Plaintiffs to preserve the disputed moneys in a controlled money account, while permitting Priority to continue its business and to generate income, a part of which, it must be remembered, will be payable to Amplitude if Amplitude is found to be correct in all of its assertions at trial. 26    For these reasons, in my view, the balance of convenience is in favour of an interlocutory order removing the Receivers and Managers. 27    I note in this regard that the appointment of the Receivers was made after Priority had commenced these proceedings against Amplitude and it was made without prior notice to Priority. The charge does not require Amplitude to give prior notice of the appointment of a Receiver. However, I note that if, by some means, the Plaintiffs had discovered that Amplitude was about to make an appointment of the Receivers, it would have stood a very fair chance of success, in my view, of obtaining an interlocutory injunction restraining the exercise of that power, had it applied before the power was exercised and proffered the undertakings which it has now proffered. 28    I note that Priority and Mr Mertes are prepared to offer the usual undertaking as to damages, in addition to the undertaking as to the controlled moneys account to which I have referred. 29    I will stand the matter over until tomorrow at 2pm to enable the parties to bring in Short Minutes of Orders reflecting these reasons for judgment. 30    Costs should be reserved. 31    The undertaking given by the Third and Fourth Defendants which I previously noted is now extended until tomorrow afternoon at 4pm.
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