Smith Holdings Pty Ltd v Collex Pty Ltd - [2006] SADC 19

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil: Interlocutory Application)
SMITH HOLDINGS PTY LTD v COLLEX PTY LTD
Reasons for Ruling of His Honour Judge Tilmouth
3 March 2006
EQUITY - EQUITABLE REMEDIES - INJUNCTIONS - INTERLOCUTORY INJUNCTIONS - BALANCE OF CONVENIENCE
Defendant serves notice of demand enforcing a charge over property of plaintiff. Plaintiff seeks interlocutory injunction preventing respondent from enforcing charge. Plaintiff and defendant both dispute monies owed to each other under various agreements. Charge provides in case default for the appointment of a receiver. Whether irreparable injury to plaintiff in ordering full amount of the charge to be paid into court or in appointing receiver if injunction not granted. Whether damages an adequate remedy.
Held: Balance of convenience favours plaintiff. Detriment suffered by plaintiff if not granted. Interlocutory injunction may be granted by discretion which must be executed with due regard to the rights under the charge. Subject charge forms only one component of overall financial obligations to be resolved.
Corporations Act 2001 (Cth) 459(c); Films Rover International Ltd v Cannon Film Sales Ltd [1987] 1 WLR 670; Harvey v McWatters (1948) 49 SR (NSW) 173; Hortico (Aust) Pty Ltd v Energy Equipment Co (Aust) Pty Ltd (1985) 1 NSWLR 545; Kilpatrick Green Pty Ltd v State Supply Board (1991) 56 SASR 591; McDonnell & East Ltd v McGregor (1936) 56 CLR 50; Murphy v Abi-Saab (1995) 37 NSWLR 280, 289; Parakalo Pty Ltd v E M Redmond & Co Pty Ltd [1983] 2 QdR 604; Paringa Mining & Exploration Co PLC v Flinders Mines Ltd (No 2) (1988) 165 CLR 452; Parangawood Nominees Pty Ltd v Baulderstone (1999) 204 LSJS 408; SASC 380; Sanyo Australia Pty Ltd v Componere Informations Systems Pty Ltd [1999] NSWCA 389, referred to.
Castlemaine Tooheys Ltd v South Australian Brewing Co (1986) 161 CLR 148; Australian Broadcasting Corporation v Lenah Game Meats Pty Limited (2001) 208 CLR 199; D L & J E Graetz Pty Ltd v NTHG Pty Ltd (2002) NTR 1; Elders Ltd v Di Giorgio [1997] SASC 6364; Emmanuel Orchards Pty Ltd v National Australia Bank Ltd (2003) SASC 368; National Australia Bank Ltd v Zollo (No 3) (1995) 64 SASR 63, applied.
Inglis v Commonwealth Trading Bank of Australia (19172) 126 CLR 161, distinguished.
Terry Clark & Associataes Pty Ltd v Carez Nominees Pty Ltd & Anor (1994) 13 ACSR 314, considered.

SMITH HOLDINGS PTY LTD v COLLEX PTY LTD
[2006] SADC 19
Judge Tilmouth
Civil
Preliminary

The business relationships between the parties to these proceedings for an injunction, came to a head at midnight on 31 January 2006, upon it becoming clear to the applicant Brenton Smith Holdings Pty Ltd, (“Smith Holdings”), that the respondent Collex Pty Ltd (“Collex”) was intending to enforce a charge in its favour against it.
The Injunction Proceedings
In the days following, letters were exchanged between the solicitors for the parties. Smith Holdings brought matters to a head, by lodging an application in this Court on 6 February 2006 seeking injunctive relief, in order to prevent Collex from exercising certain rights under a fixed and floating charge granted in its favour by Smith Holdings, being Annexure C to a Business Rental and Agency Deed entered into on 10 March 2004[1].
[1] Exhibit BPS2.
The terms of Annexure C bound Smith Holdings to Collex by way of a charge “as security for the payment and discharge of the secured money”[2]. The term “secured money” is defined in Clause 1.1 as “all amounts which the [plaintiff] owes the [defendant] at any time” in respect to the “charged property” and “charged property” was defined widely to mean “all property, rights …of [Smith Holdings] including, without limitation, all real and personal property …”.
[2] Clause 5.1.
The terms of the charge also provided for several acts of default, including the failure to pay the secured monies when due (clause 16.1(a)). At any time in the event of such default, Collex as chargee, could then appoint a receiver of the “Charged Property” (clause 17.1)), who may then do anything “an absolute owner could do … in respect of any such property”. One component of the secured monies involved an advance of $250,000 to Smith Holdings acknowledged in the Deed of Variation of 16 February 2005[3], and a further loan of 1 February 2005 of $250,000[4].
[3] BPS4 Recital D and Acknowledgment C.
[4] Para 3. Affidavit of Mr Raggatt, an employee of Collex.
Background events
Smith Holdings for some time beforehand, operated a waste collection and management business at Roxby Downs in the far north of this State. It appears to have been a fairly substantial business, as it held two principal contracts with the Roxby Downs Council and Western Mining Corporation (now BHP Billiton). It was first approached by Collex in late 2003, negotiations then ensued, which included the prospect of selling the business to Collex. Ultimately on 10 March 2004, the Business Rental and Agency Deed was entered into, along with a Sale Agreement and a Consultancy Agreement. The package was described by counsel for the defendant as one “lucrative” to Smith Holdings and whereby Collex “in effect, leased or rented the plaintiff’s business”.
Pursuant to these various arrangements, Collex commenced operating and managing the business from about 1 February 2004, a period extended for a further year as recorded in a Deed of Variation on 16 February 2005. However, in about May 2005, solicitors for Smith Holdings were given notice that Collex would not be exercising an option to purchase the business, which meant the agreements expired on midnight on 31 January 2006, according to their terms.
Problems under the agreement
In the meantime, certain difficulties arose between the parties of growing complexity and intensity, especially during the latter part of the operation of the agreements, and more so in the wake of their expiry.
These are recorded in the extensive correspondence between the respective solicitors for the parties. They culminated on 24 January 2006 when Collex served a notice of demand for repayment of the total sum of $500,000 advanced to Smith Holdings, which was to become due and payable by 1 February 2006. The notice specifically invoked the security by means of the fixed and floating charge of 10 March 2004, and which ultimately led to the present application.
The subject of the various matters of contention are extensively detailed in the correspondence exhibited to affidavits filed with the Court. It is sufficient for present purposes to note that in a letter of 31 January 2006, the solicitor for Smith Holdings[5] sought to summarise the issues and contentions between them, as they existed at that point in time, by way of open letter. Without being exhaustive, that letter speaks of repairs to be undertaken by Collex on plant and equipment owned by Smith Holdings, seeks the reinstatement of the registration on a number of vehicles allegedly allowed to elapse by Collex, demands repayment of interest on a loan (an item conceded by the defendant during the course of the proceedings) and presses for payment of a significant number of outstanding unpaid invoices rendered by Smith Holdings to Collex during the term of the contract.
[5] Exhibit BPS16.
The total sum alleged to be owed to Smith Holdings was $489,846.10. On the other side of the ledger, Collex claimed the repayment of the loans mentioned, a significant sum for trade debtors and a small amount on a fuel account, together totalling $597,038.88. The minimum sum admitted to be owing to Collex was calculated by Smith Holdings to be $107,440.46, on the assumption that each claim on either side was fully justified. The letter also raised issues concerning delivery up of assets to Smith Holdings and the return of books of account and other records of the company.
In a letter dated 8 February 2006, handed up to the Court with the consent of the defendant by counsel for Smith Holdings during the course of submissions, solicitors for Collex asserted the sum indisputably owing to it was in the order of $254,441.16, so it may be seen the ambit of the outstanding issues as between the parties is substantial on either view, at least expressed in money terms. Obviously the Court is in no position to resolve or to judge the merits relating to the various issues of contention, and the parties did not seek to have it do so.
The Court granted an interim injunction on undertakings by Smith Holdings pending hearing and resolution of the application for an injunction, on condition that it pay into court the sum of $107,440.46 referred to above, and in light of its undertaking to pay such compensation as the Court might later assess. The question now under consideration is whether the interlocutory injunction should be confirmed or discharged, and if confirmed, on any or what conditions.
Basis for injunctive relief
These issues as described, plainly disclose serious questions to be tried[6]. Although an applicant for injunctive relief must demonstrate a “sufficient colour of right to the final relief”sought: Australian Broadcasting Corporation v Lenah Game Meats Pty Limited[7], there is no doubt the defendant can identify an action to set off, by way of defence, to any suit by Collex seeking recovery of the loans, at common law or in equity. It appears from the papers that the circumstances present a classic mutual debits and credits situation[8]. When the matter first came before the Court, there was a contention by the defendant that the plaintiff would have no right of set-off regarding the sums claimed against the defendant. That issue was not pressed when it came to the substantive hearing; indeed defence counsel conceded there was a serious question to be tried as to “the veracity of set-offs asserted by the plaintiff”. Argument on the resumed hearing therefore focussed almost entirely on the balance of convenience as between the parties. Accordingly, this is the matter of substance to be resolved by the Court.
[6] Paringa Mining & Exploration Co PLC v North Flinders Mines Ltd (No2) (1988) 165 CLR 452, 458.
[7] (2001) 208 CLR 199 at [11] and refer also at [60], [91] – [97].
[8] McDonnell & East Ltd v McGregor (1936) 56 CLR 50.
Submissions of the parties.
It was urged on behalf of the defendant there was no proper basis when it comes to assessing the balance of convenience, for granting or maintaining an injunction of any kind. It was rightly pointed out by counsel for Collex, that it was entitled to enforce its lien under the contract, since the consequences and the appointment of a receiver were clearly envisaged by the parties within the four walls of the contract, and it should be entitled to the enforcement of the lien freely granted by Smith Holdings accordingly[9].
[9] Terry Clark & Associates Pty Ltd v Carez Nominees Pty Ltd & Anor. (1994) 13 ACSR 314, 317, L15-33, Murphy v Abi-Saab (1995) 37 NSWLR 280, 289(B)
It was also pointed out that the plaintiff was in a sound financial position, so far as the papers presented to the Court indicated, although neither party was able to advise the Court of its “cash” position. It was said to own some $2m of plant and equipment. It was asserted on its behalf that if the sum of the loans were required to be paid into Court as a condition of an injunction, it would have to “sell assets” in order to comply, hardly surprising since $500,000 is at stake on assertion.
It was further argued by the defendant that there was no underlying dispute calling the validity, enforceability or the fairness of the lien into question. That being the case, the sole effect of an injunction would be to undermine the lien on account of an essentially extraneous dispute relating to quite independent issues. In any case Smith Holdings should simply repay the loan. For its part the defendant did not identify any particular prejudice it would suffer should an injunction be granted or continued, except that it would be precluded from enforcing its contractual rights, the contract having been brought to an end and the loan moneys having been called up and being presently due and payable.
The case for the plaintiff in relation to the balance of convenience is one of consequence. In an affidavit filed in support of the application of 6 February 2006, Mr Smith a director and shareholder of the plaintiff, deposed of the prejudice and to “serious consequences” flowing from the appointment of a receiver as provided for in the charge. First it was pointed out that the receiver exercises full control over the charged property, which encompassed all the assets of Smith Holdings and the receiver has full power to sell that property and wind up an otherwise viable trading business. Secondly, such an appointment would necessarily constitute an act of default, resulting in a breach of covenants with its bankers. Thirdly, its capacity to raise capital would be detrimentally affected and its credit reputation with its customers and in the business community would be adversely affected. Fourth it contends any sale of assets would mean that its ability to undertake work for existing customers would be impeded and the goodwill the business has built up over the course of time, destroyed. Finally it was submitted that the appointment of a receiver attracts the presumption of insolvency created by s459C(c) of the Corporations Act 2001 (Cth).
In a second affidavit, responsive to material filed by the defendant, Mr Smith referred to and exhibited two registered charges Smith Holdings granted in favour of Adelaide Bank Ltd and CBFC Ltd respectively, and two further charges in favour of National Australia Bank Ltd[10]. These charges are said to be secured over plant and equipment valued at some $300,000 or so. He goes on to assert, as did counsel in the course of submissions, that an “act of insolvency” would be constituted by the appointment of a receiver, no doubt having in mind the Corporations Act, which for certain purposes under that Act, requires the Court to “presume that the company is insolvent if … a receiver … of property of the company was appointed under a power contained in … a floating charge on such property…”.[11]
[10] Exhibits BPS4 – BPS7, inclusive.
[11] S459C(c) above.
It appears that under the terms of the four charges, the appointment of a receiver also constitutes an “event of default”; in the case of the Adelaide Bank charge when a receiver is appointed[12]; upon the failure to keep to the terms of any security or a power of sale arises under any other security over the goods charged in the CBFC charge[13]; and where default is made in the performance or observance of any security in the case of NAB charges[14].
[12] Clause 12(h)(i), Exhibit BPS4.
[13] Clauses 18(c) and 18(e), Exhibit BPS5
[14] Clause 23.1(c), Exhibits BPS6 and BPS7.
The “Inglis” principle.
A great deal of attention was devoted during the course of argument to the application to the above circumstances of the longstanding principle established in Inglis v Commonwealth Trading Bank of Australia[15], to the effect that as a general rule in relation to applications to restrain the exercise of powers of sale pursuant to mortgages, an injunction would not be granted unless the full amount of the mortgage debt was paid, if it is not in dispute.
[15] (1972) 126 CLR 161, 164, 169.
Whilst the decision of the High Court in Inglis v Commonwealth Bank remains influential, an examination of the authorities reveal that it is not always applied literally, or so narrowly as to impose an automatic requirement for the payment of the whole of the underlying debt, whether that is in dispute or not[16]. The authorities in point were canvassed extensively by Matheson J in National Australia Bank v Zollo[17], in a judgment cited with approval by the Court of Appeal in Sanyo Australia v Componers Information Systems Pty Ltd[18].
[16] Harvey v McWatters (1948) 49 SR (NSW) 173, 174-177, Cunningham v National Australia Bank (1987) 15 FCR 495, Eltran Pty Ltd & Ors v Westpapc Banking Corporation & Ors (1988) 32 FCR 195.
[17] National Australasia BankLtd v Zollo (No 3) (1995) 64 SASR 63, at 65-68.
[18] [1999] NSWCA 389, [32-33].
As explained by King AJ (as the former Chief Justice then was) in Elders Ltd v Di Giorgio[19], after referring to Zollo, in a passage referred to by Bleby J in Emmanuel Orchards Pty Ltd v National Australia Bank[20], what emerges from the cases is that the Court retains a discretion to restrain the mortgagees, or secured creditors for that matter, as an exception to the Inglis principle, to be exercised in the interest of justice after paying due regard to the rights of the mortgagee or of the secured creditor, and the primary rule established by Inglis. His Honour then continued:
A consideration of great importance in considering how the discretion should be exercised is whether the defendants will suffer irreparable injury for which damages will not be adequate compensation unless the order is made. Frequently that is stated as a condition which must be satisfied before the question of the balance of convenience arises for consideration; Castlemaine Tooheys Ltd v South Australian Brewing Co (1986) 161 CLR 148 per Mason ACJ at 153. But whether it is so stated or looked upon as an aspect of the balance of convenience, it is a question of central importance.
[19] Elders Ltd v Di Giorgio, [1997] SASC 6364, King AJ, page 6.
[20] Emmanuel Orchards Pty Ltd v National Australia Bank (2003) 231 LSJS 118 [2003] SASC 368.
Another variant in the application of the Inglis principle, is referred to by the Full Court of the Federal Court in Telstra Corp Ltd v First Netcom Pty Ltd :- [21]
…the approach of the Court even in such cases is to endeavour to mould its order so as to do justice as between the parties.
….
In making its order the Court will, naturally, have regard to the circumstances of the particular case. So, if there is a dispute between the parties as to the amount owing, the court might determine that the appropriate order was, as in Businessworld, not that the totality of the amount owing should be paid into court, but rather that some lesser sum (in addition to an undertaking …) be paid into Court so that the Court's order not work injustice. In determining the extent of the amount which should be paid into Court (if any), the Court must, of necessity, have regard to the financial circumstances of the applicant for injunctive relief. Where the applicant is comfortably solvent, so that there would be no concern that the respondent be forced to continue to do business, and incur perhaps ever greater indebtedness, and ultimately be left lamenting for amounts unpaid, the Court, as a matter of discretion, might refrain from ordering payment into court. But it will almost invariably be relevant to the way the Court exercises its discretion to have evidence as to the financial situation of the Applicant, unless all amounts owing are paid to the respondent, paid into Court, or security for the amount provided.
[21] (1997) 78 FCR 132 at *
Applying these principles to a case like the present, the rights of the lienee must be balanced against any inconvenience to the lienor, and in that process the Court must consider whether the applicant for an injunction “will suffer irreparable injury for which damages will not be an adequate compensation”: Castlemaine Tooheys Ltd v South Australia[22], or in the words of Dawson J in Federal Commissioner of Taxation v Myer Emporium Ltd (No 1)[23]’there is a real risk that it will not be possible for [the applicant] …to be restored substantially to his former position…’
[22] (1986) 161 CLR 148, 153, Australian Broadcasting Corporation v Lenah Game Meats Pty Limited (2001) 208 CLR 199, [13]
[23] (1986) 160 CLR 220, 222-223.
Principles applied to facts of this case.

It is true enough that the underlying debt which gives the right to invoke the charge and put in motion the consequences which flow, is not in dispute. Nevertheless, moneys said to be owing on both sides, clearly arise out of and in the course of the performance of the overall contractual arrangements between the parties concerning the waste collection management business to which the agreements pertain. Furthermore, the loan has only quite recently fallen due for repayment, whereas a substantial portion of the claims by Smith Holdings, date back to 2004 and 2005.
It would be artificial to consider the suggested rights of the parties and consequently the balance of convenience, from the narrow and restricted perspective of the floating charge, and from the confines of the discrete rights and responsibilities the parties respectively hold thereunder, divorced from the associated contractual arrangements, or from the fact that the dispute between them relates to the performance of their respective obligations within the umbrella of the total arrangements. To borrow an expression of Williams J in Paringawood Nominees Pty Ltd v Baulderstone[24] to think otherwise “is a very blinkered way of looking at only one limited aspect of a much larger arrangement”.
[24] [1999] SASC 333, [36].
The situation here is that the performance of commercial contracts involving relatively large sums of money, have given rise to various disputes, some of which may be owing, and some, coincidentally, enforceable pursuant to a charge created by a schedule to the principal agreement. The loan of $500,000 is not disputed, but sums of money arising out of the performance of the wider contractual arrangements are, of which the subject charge forms only one component.
It can be readily accepted that the appointment of a receiver resulting from the exercise of the charge to enforce the unpaid loan, would have a detrimental effect on the plaintiff. That appointment triggers acts of default in relation to the other securities referred to, and problems will obviously arise in conducting everyday business, in raising money, and necessarily trigger the statutory presumption of insolvency.
As a general consideration the position is as pointed out by Angel J in D L & J E Graetz Pty Ltd v NTHG Pty Ltd[25] “the effect of an out-of-court appointment of a receiver over the business on the value of the business as a going concern, is incalculable”. On the other hand King CJ in Terry Clark & Associates Pty Ltd v Cruez Nominees Pty Ltd[26] regarded the appointment of a receiver as ruinous of the plaintiff’s business in that case, and Lindgren J in Politano & Ors v ACN 060442926 Pty Ltd & Ors[27] spoke of the appointment of a receiver and manager as “thereby depriving the applicants of their only source of income …”.
[25] (2002) 140 NTR 1. [28]. Reversed on Appeal on other grounds at [2002] NTCA 6.
[26] Moore at 318 L23-26.
[27] NG 416 of 1998, 29 May 1998, unreported: BC 9802108, p2-3.
In these circumstances, whilst the Court must always pay due regard to the rights of Collex as lienee to enforce the lien according to its tenor, it would not be right for the Court to ignore all the consequences flowing from the exercise of those rights wholly divorced from the wider ambit of the respective claims of both parties. Accordingly, the conclusion must be that the balance of convenience and the “balance of the risk of doing an injustice”[28] favour the granting of an injunction.
[28] Kilpatrick Green Pty Ltd v State Supply Board (1991) 56 SASR 591, 594.
Damages not an adequate remedy
The nature and terms of the letters between the parties indicate that specific sums of money are being sought in relation to specific heads of dispute. Although primary proceedings relating to those disputes have not yet been issued, the parties have entered into mediation in an attempt to resolve them. There is no apparent reason to suppose other than that the dispute will ultimately crystallise into money and therefore damages terms. In the event that Collex succeeded or substantially recovered as claimed, it would be entitled to a proper award of damages and it would also be entitled to interest, as well as the payment of legal costs “on a full indemnity basis”, as provided for in the charge[29], so its position remains fully protected, and of course this is reinforced by the undertaking as to damages.
[29] Clause 1.1 “Interst Rate” and Clause 28.1 respectively.
There is no evidence that Collex is dependent upon the payment of the loans or the enforcement of the lien for its survival. Nor is there any suggestion it would suffer any other prejudice or corresponding hardship. The evidence filed on its behalf in these proceedings went wholly to the merits of the underlying disputation with Smith Holdings. That being the case, Collex seems no more at risk other than as to “the possible depreciation of the security pending the hearing”[30].
[30] Harvey v McWatters (1948) 49 SR (NSW) 173, 177
On the other side, Smith Holdings may cease to trade, so that damages would be futile. Its position would then be irreparable and irreversible[31]. The proper order is for the Court to confirm the injunction as disproportionate hardship or prejudice will ensue if interlocutory relief is refused[32].
[31] Parakalo Pty Ltd v EM Redmond & Co Pty Ltd [1983] 2 QdR 604, Hortico (Aust) Pty Ltd v Energy Equipment Co (Aust) Pty Ltd (1985) 1 NSWLR 545.
[32] Films Rover International Ltd v Cannon Film Sales Ltd [1987] 1 WLR 670.
Subsidiary Issues
A further issue is whether a further amount of money should be paid into Court, as a condition of the injunction. On reflection that exercise would simply require the Court to make an ill-judged and premature assessment of the merits of the outstanding disputes between the parties, and as to the quantum which may be involved, an exercise the Court is ill-equipped to undertake at this point in time. No further conditions should therefore be imposed.
The Court also notes outstanding issues remain in relation to the delivery up by Collex of some plant and equipment and as to the return by it of certain books of account and other records of Smith Holdings. These are being negotiated by the parties, and if necessary they have leave to bring into Court short draft minutes of order as to procedures they agree, in order to resolve those matters. As noted, they have also embarked upon a process of mediation.
Orders
Upon the undertaking by Smith Holdings, and on condition of the payment into Court as described above, the Court affirms the order for an interim injunction made on 10 February 2006 and orders accordingly:-
1. until further order, the defendant by its servants and agents be restrained from exercising, whether directly or indirectly, any power granted to it pursuant to a fixed and floating charge granted in its favour by the plaintiff, which fixed and floating charge is dated 10 March 2004 and is registered and numbered 1038342 in the Australian Register of Company Charges;
2. both parties have leave to bring into court draft minutes of order as to: (1) the handing over of plant and equipment by the defendant to the plaintiff and (2) as to the handing over of books of account and other records by the defendant to the plaintiff; and
3. that the substance of paragraph 2 of the Notice of Specific Directions filed by the plaintiff on 6 February 2006 be adjourned.
The parties will now be heard as to costs, and they may have liberty to apply on short notice.