Redmond v Devonport Pty Ltd - [2004] WASC 72

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: REDMOND -v- DEVONPORT PTY LTD & ORS [2004] WASC 72

CORAM: EM HEENAN J

HEARD: 8 APRIL 2004

DELIVERED : 8 APRIL 2004

FILE NO/S: CIV 1285 of 2004

BETWEEN: GAVAN ANDREW REDMOND
Plaintiff
AND
DEVONPORT PTY LTD
First Defendant
ALBERT LAURENCE GERICK
Second Defendant
SHERLOCK BAY NICKEL CORPORATION LTD
Third Defendant

Catchwords:

Interlocutory injunction - Mortgage of shares in public company by unconditional transfer - Equity of redemption - Alleged extinguishment of equity of redemption - No realisation or sale by mortgagee of security - Interlocutory injunction granted to prevent security being transferred otherwise than in accordance with mortgage

Legislation:

Nil

Result:

Injunction granted

Category: B

Representation:

Counsel:

Plaintiff:     Mr M L Bennett
First Defendant             :     Mr C D Belyea
Second Defendant         :     Mr C D Belyea
Third Defendant           :     Mr C D Belyea

Solicitors:

Plaintiff:     Bennett & Co
First Defendant             :     Clayton Utz
Second Defendant         :     Clayton Utz
Third Defendant           :     Clayton Utz

Case(s) referred to in judgment(s):

Reeve v Lisle [1902] AC 461

Case(s) also cited:

Nil

EM HEENAN J: This is an application on notice for an interlocutory injunction to restrain the first defendant from dealing with a certain parcel of shares in the third defendant otherwise than in accordance with the terms of an alleged agreement that those shares should be held by the first defendant as security for an advance of money.
Insofar as the application extends to the third defendant, the application is for an injunction to restrain the third defendant from registering or processing any transaction by the first defendant to dispose of those shares otherwise than in accordance with the alleged secured loan arrangement.
The shares in question are a parcel of 16.5 million shares in Sherlock Bay Nickel Corporation Ltd, originally registered in the name of the plaintiff, Gavan Andrew Redmond. These shares have, however, since 28 February 2002, been registered in the name of the first defendant, Devonport Pty Ltd. There is no dispute but that at the date of that registration of the transfer of the parcel of shares into the name of the first defendant the transfer was registered in accordance with an agreement between Devonport Pty Ltd and Mr Redmond that the shares would be taken and held as security for a series of loans made by the first defendant to a company of which Mr Redmond was a director.
It is apparent that those loans have been made over an extended time and, on the plaintiff's evidence, the aggregate of the loans for which security was given is of the order of $274,000. It is apparent from the evidence, and not disputed by the plaintiff, that the total of the loans by the debtor company to the first defendant is now of the order of $470,000‑odd and there may be an issue between the parties as to whether all of that indebtedness is secured by the transfer of the shares in the third defendant to which I have referred or whether the transfer was intended to secure no more than the advances totalling the $274,000. That issue has not been squarely raised before me today and it is not necessary for me to address it other than merely to recognise its potential existence. It does not affect the outcome of this application in any way.
However, the situation from February 2002 onwards is that the first defendant is the legal owner of the entire parcel of 16.5 million shares but the plaintiff retained an equity of redemption in them which could be enforced if and when the plaintiff or the debtor company discharged the loans. Until the loans are repaid, the first defendant is entitled to retain those shares as and by way of security. If there were to be a default in an obligation to repay the loan, such as would exist if there was a failure to pay on demand as has been alleged by the first defendant, the first defendant would be entitled to proceed to realise the security and in doing so to extinguish the equity of redemption.
However, the security has not been realised at any time, at least not in the sense that the shares have been sold by the first defendant to satisfy the loan in whole or in part. The present situation is that the first defendant remains the registered owner of the entire parcel of 16.5 million shares.
Over this two-year period the value of the shares, which are quoted on the stock exchange, has fluctuated. There is in evidence before me, annexed to the affidavit of Mr Albert Laurence Gerick sworn 15 March 2004 as exhibit ALG2, a graph showing movements in the share price of the third defendant from January 2002 until February 2004. Nobody suggests that this is precisely accurate, but its general accuracy is not disputed. During the period January 2002 until August 2003 the shares traded in the range of slightly more than 2 cents to slightly less than 5 cents, but mostly about the 3 cent mark. Since August 2003 there has been a steep rise in the share price and according to this graph their price in February 2003 was in excess of 9 cents and it is said that the shares are currently trading in the vicinity of 8 or 9 cents. This is a significant appreciation in the value of the shares and the security, if that is what they are, in that the value has doubled or trebled during that period.
On the basis that the shareholding is worth 9 cents or thereabouts, the current value of the parcel would be of the order of $1.4 million to $1.5 million. If the shares are worth only 2 cents, then obviously the value of the parcel is only in the order of $330,000 or thereabouts. The variation in value over time is a prominent feature in the dispute which has arisen in this litigation.
Essentially the position of the defendants is put by Mr Gerick in his affidavit of 15 March 2004 which I have already mentioned.
Speaking of the situation in mid‑June 2003 when there was a substantial indebtedness due by the debtor company to Devonport, the first defendant, and at a time when the value of the security was low, Mr Gerick says:
"In or about early June 2003 I spoke with Gavin Redmond at Redmond's Drilling main yard in Kalgoorlie and said I was getting worried. He owed me a lot of money and I did not seem to be getting any of it paid back. I demanded that he cause the debts to be repaid. He told me that neither he nor Redmond Drilling [which I interpose to identify is the debtor company] had money to repay the loans. Instead he told me to keep all the shares he had transferred to the first defendant to pay off loans from the first defendant to Redmond Drilling and told me to deal with them as I liked, as they, meaning the shares, were now mine."
The affidavit continues:
"I told him that would only partly pay off the loans because I could not hope to get more than 2 cents a share for such a large parcel of shares which were then trading at a little over 3 cents on the open market. He told me to take the shares anyway and keep them as mine [meaning the first defendant's]. I told him I would be doing just that to pay off part of the loans. He said, 'Okay', adding an oath."
The defendants submit that that transaction amounted to a transfer or abandonment of the equity of redemption in the parcel of shares then registered in the first defendant's name by Mr Redmond and, consistently with that submission, adopted the position that from that point on that the first defendant was the unqualified owner of that registered parcel of shares and that the equity of redemption had gone.
I have already mentioned that no steps were taken to realise those shares or any part of those shares by the first defendant at that date or subsequently. By the writ of summons and this present application, the plaintiff contends that those shares continue to be held subject to the security and that, in effect, the plaintiff continues to enjoy the equity of redemption and can redeem those shares on satisfying the indebtedness to the first defendant. Consequently, the plaintiff seeks an injunction to prevent the first defendant dealing with the shares otherwise than in accordance with the terms of the security.
As the shares are fully negotiable and could be sold or realised instantly, the plaintiff invites me to infer from the fact that the first defendant denies any obligation to hold the shares subject to the equity of redemption that there is a risk that the shares may be disposed of by the first defendant at any time and without notice. I accept that that is an inference which should be drawn but whether or not the plaintiff is entitled to relief or whether there is an arguable case that the equity of redemption remains are matters which I must consider first.
There are some other background facts which need to be narrated before coming to deal with those issues. The debtor company, Redmond Drilling, has, because of financial problems, entered into a scheme of administration and, in the process, the administrator has called for proofs of debt from creditors in order to consider and approve a proposal to reconstruct the company in some way. It is not necessary for me to identify or describe the process of proposed reconstruction. It is enough simply to recognise that the administrator has held a series of meetings at which the creditors with an interest in whether or not the company is to be reconstructed have been invited to vote.
In relation to those meetings and the call for proofs of debt, two proofs of debt were lodged by the first defendant, Devonport Pty Ltd, the second replacing the first. The first proof of debt is dated 4 November 2003 and claims that Devonport Pty Ltd is a creditor of Redmond Drilling Pty Ltd, to the extent of $478,156.50 or thereabouts, including GST.
The significance of that first proof of debt, so far as the plaintiff is concerned, is that it records the totality of the indebtedness by Redmond Drilling Pty Ltd to the first defendant without any diminution for realisation of security. This implies, according to the plaintiff's submissions, that none of the shares held by way of security had been realised in order to reduce the debt and, secondly, that nothing has occurred to diminish the debt by way of giving credit for any shares or other property which may have been taken in part or total satisfaction. It may well be the case that in filing that proof of debt the officers of Devonport Pty Ltd overlooked the particular significance of the security arrangements.
I have been asked to infer that because an amended proof of debt was put in after an earlier hearing on this injunction application there is a particular significance to be attributed to that, but I am disinclined to draw any such inference.
I am content to turn to the second proof of debt, dated 5 March 2004, which shows a total indebtedness of $470,060.50, including GST, which is some $8000 less than the previous figure, but nothing appears to turn on that. It shows that the creditor holds security valued at $342,515, reducing the extent of the unsecured debt to $127,545.50. This second proof of debt contains a note, par 2, that security valued at $342,515 was appropriated in June 2003 pursuant to an agreement with Gavin Redmond in reduction of the debts. It seems that what the first defendant really intends by that notice, or at least what it is saying at the moment, is that the current indebtedness of Redmond Drilling Pty Ltd is only $127,545 because it has been satisfied in part by the value of the security, as it was in June last.
However, that is not what the proof of debt itself states. The proof of debt, as I have already described, states that the total value of the indebtedness is $470,060, that existing security on hand is worth $342,515, and that the unsecured debt is $127,545, implying that the security remains in existence. That interpretation of the document favours the plaintiff, but it seems to me to be somewhat equivocal because all depends on the proper interpretation of what took place in the conversation between Mr Redmond and Mr Gerick which I have already cited in relation to the telephone exchange in June 2003 about taking the security.
It seems to me that on one view, and perhaps the best view of that transaction, what Mr Redmond was saying was that Devonport could take the shares to satisfy the loan in whole or in part and that what Mr Gerick was saying on Devonport's behalf was that that is just what it would do. But there was no suggestion that if there were to be a shortfall the unsatisfied balance of the loan would be discharged.
This seems to me to be consistent with a view that the discussion proceeded on the basis that the shares would be taken as, or realised as, security for the loan and nothing more. But that is not what Mr Gerick contends. He and the first defendant assert that this was the elimination of the equity of redemption and that from this point on Devonport was both the legal and the beneficial owner, or - as I prefer to describe it - the company was the unqualified owner of that parcel of shares because the equity of redemption had disappeared.
In his submissions in support of that contention counsel for the defendant says that this conversation in June 2003 which I have referred to amounts to an equitable assignment in favour of the first defendant of the equity of redemption and that it was an assignment for value, the value being the partial discharge of the secured debt pro tanto. I am unable to accept the submission that this was an assignment for value because no additional consideration was offered, proposed or accepted. All that was being proposed, at least as I can interpret the evidence presently available before me appreciating that this is an interlocutory hearing and that this may ultimately be an issue in the case and that, therefore, my observations need to be tentative and provisional, is that the freedom acknowledged by Mr Redmond for Devonport to take and deal with these shares was the freedom to use the shares for their purposes as security to reduce the loan and that it was simply an acknowledgment that the shares could be realised in partial discharge of that loan. No new consideration appears to me to have been offered or accepted or to have moved on either side in this transaction. That being the case, the transaction could, at the very most, be a voluntary assignment which, not being perfected, would not be enforced by any Court exercising equitable jurisdiction.
The situation is that an equity of redemption will survive for a mortgagor, and the right to redeem can be exercised right up to the point of final disposition or destruction of the secured property. I read now from the passage in Sykes on Securities, 5th ed, Law Book Co 1993 at 86:
"Apart from the process of redemption itself, which may be either be by the mortgagor herself or himself or by a subsequent encumbrancee, the right to redeem is extinguished by (a) subsequent independent purchase of the equity of redemption by the mortgagee or release thereof by the mortgagor within the limits previously discussed, (b) foreclosure, (c) due exercise of a power of sale, (d) the operation of the Statute of Limitations, or (e) ... [other possibilities which we need not discuss on this occasion]."
The present situation could only be an alleged extinction of the equity of redemption by a subsequent purchase of the equity of redemption by the mortgagee or a release by the mortgagor. Still quoting from Sykes, but on this occasion at page 71, the learned author says, in relation to extinguishment of the equity of redemption:
" ... equity imposed no barrier to a subsequent transaction independent of the contract of loan, whereby the mortgagor made an agreement to sell her or his equity of redemption to the mortgagee."
Reeve v Lisle [1902] AC 461 is cited in support of that proposition:
"Equity refused to treat such a bargain in the same rigorous way in which it treated a purchase by a trustee of a beneficiary's interest. The transaction is not set aside unless there are extraneous matters, for instance the exertion of undue influence or the existence of some relationship between the parties which is such as to raise the presumption of undue influence. The relationship of mortgagor and mortgagee is not of itself sufficient to raise such a presumption."
I pause to mention that it has not been suggested here that there is any such relationship or vitiating factor. However, it does not seem to me that the transaction relied upon by the first defendant can conclusively or beyond argument be said to be an independent transaction by which the equity of redemption was sold or released.
It seems to me that there are serious matters to be tried as to whether or not that equity of redemption was disposed of and if it were not, whether the position is that the plaintiff remains entitled to redeem, and that any action by the first defendant to realise the security by way of foreclosure or otherwise would leave the first defendant in the position where it must account to the plaintiff for any surplus after the realisation of that security for the satisfaction of the then indebtedness.
As to the balance of convenience, there does not seem to be any reason to me why the plaintiff should be precluded from protecting this equity of redemption, the secured shares still being held intact by the first defendant, and the first defendant still being entitled to exercise its rights as a secured creditor to enforce this loan by realisation of that security, subject to accounting, as I have indicated, at any point.
For these reasons, I consider that an injunction should be granted to the plaintiff, essentially on the terms sought, but only to prevent the first defendant from dealing with this parcel of shares otherwise than in accordance with the agreement of loan; that is, to deal with them as security, so that if it becomes necessary for the parcel of shares or any part of it to be sold, the first defendant would be in an accounting position.
That is not to imply that this is any final determination of the rights of the parties, because the first defendant claims that it is entitled to unrestricted use of the proceeds of any such sale. So if a sale were to occur, it would be necessary for the first defendant to retain the proceeds of the sale or secure them in some acceptable alternative mode of investment pending the ultimate disposition of this litigation.
It has been submitted that the undertaking offered by the plaintiff may not be sufficient to meet any obligations for damages in the event that the plaintiff fails in the action or the Court considers that damages have been suffered as a result of this injunction. In that regard the defendants point to the financial difficulties of Redmond Drilling.
This undertaking is offered by Mr Redmond rather than by the company and, having regard to the value of the parcel of shares, and the dimension of the debt, it seems to me that there is ample property to meet any potential liability for damages which might accrue under the undertaking, so I will grant an injunction suitably fashioned to meet the conclusions which I have just expressed.