Sun-Life Properties Pty Ltd v Chellaston Pty Ltd
[1993] FCA 311
•30 APRIL 1993
Re: SUN-LIFE PROPERTIES PTY LTD
And: CHELLASTON PTY LTD; DOMINIC MADDESTRA and CUSTOM CREDIT CORPORATION LTD
No. WAG82 of 1992
FED No. 311
Number of pages - 7
Corporations
(1993) 10 ACSR 476
COURT
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
French J(1)
CATCHWORDS
Corporations - receiver appointed under mortgage - mortgaged land sold - mortgage discharged - corporation sued for misleading or deceptive conduct - mortgagee also sued - mortgagee and receiver instructing common solicitors - extent of receiver's powers - directors of mortgagor company claiming right to appoint their own solicitors to conduct defence - possible conflict of interest between mortgagor and mortgagee in proceedings - no sufficient legal connection between proceedings and receiver's powers.
Corporations Law s.420
Re Geneva Finance Ltd (receiver and manager appointed) (1992) 10 ACLC 668
Newhart Developments Ltd v. Co-Operative Commercial Bank Ltd (1978) 1 QB 814
Tudor Grange Holdings Ltd v. Citibank NA (1991) 4 All ER 1
HEARING
PERTH, 23 April 1993
#DATE 30:4:1993
Counsel for the Directors of Chellaston Pty Ltd: Mr P. Kyle
Solicitors for the Directors of Chellaston Pty Ltd: Kyle and Co.
Counsel for the First and Third Respondents: Mr A. Metaxas
Solicitors for the First and Third Respondents: Phillips Fox
ORDER
The Court orders that:
1. Kyle and Co. of 6th Floor, 37 St. George's Terrace, Perth be substituted as solicitors on the record for Chellaston Pty Ltd.
2. Kyle and Co. file an appearance accordingly.
3. Costs of the motion reserved.
Note: Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
Introduction
FRENCH J The applicant in these proceedings sues a corporate property developer, a former director of that company and a finance company. The cause of action is in misleading or deceptive conduct based upon representations made to the applicant by the developer which, it says, induced it in November 1990 to agree to purchase certain land. The applicant alleges that the finance company, which was mortgagee of the land from the developer, was aware of the falsity of the representations. In negotiations with the applicant, for finance to purchase the property, the finance company is said to have engaged in misleading or deceptive conduct by failing to disclose the true position. The developer had granted a first mortgage over the land and a receiver was appointed under that mortgage by the finance company in February 1991. The same solicitors have been instructed by the receiver to represent the developer in these proceedings as represent the finance company. The directors of the developer move for an order that it be represented by solicitors of their choice. They contend that the receiver's powers, which derive from the mortgage, do not extend to the conduct of these proceedings. The mortgage has been discharged over the relevant land but the receiver maintains that the contract between the applicant and the developer amounts to an interest in the land which is part of the mortgaged premises for the purposes of the mortgage under which he was appointed.
The Nature of the Claim
2. Sun-Life Properties Pty Ltd ("Sun-Life") says that on or about 1 November 1990 it entered into a written agreement with Chellaston Pty Ltd ("Chellaston") to purchase land forming part of a subdivisional development known as the Country Road Estate and located at Mandurah. The land the subject of the agreement comprised Stages 4, 5 and 6 of the development and various blocks in Stages 1, 2 and 3. Sun-Life says it was induced to purchase the land by various representations made to it by Dominic Maddestra, then a director of Chellaston. Mr Maddestra is now a bankrupt. The representations which were said to have been made in May 1990, allegedly related to the average rate at which blocks had sold in Stages 1, 2 and 3, the average sale prices achieved and the average sale price for blocks in Stage 4. The representations are said to have constituted misleading or deceptive conduct on the part of Chellaston. Sun-Life says that in reliance upon the representations it approached Custom Credit for loan funds to finance the purchase of the land.
In the course of the negotiation Sun-Life repeated to Custom Credit the representations made by Chellaston. It alleges that Custom Credit thereby came under a duty to inform it that the representations were misleading or deceptive. Custom Credit as first mortgagee over the estate was, it is alleged, well aware of the average rate at which the land had been selling and the average selling price. It would and did receive the net proceeds of the sale of the land by Chellaston to Sun-Life and intended to take an assignment of any security given by Sun-Life to Chellaston to secure the performance of Sun-Life's obligations under the contract of sale. Custom Credit, it is said, breached its duty to Sun-Life and thereby engaged in misleading or deceptive conduct. The source of the duty is not specified.
The statement of claim goes on to assert that from May to October 1990 Chellaston sold blocks of land on the estate at a rate and for prices well below the represented averages. Chellaston, Maddestra and Custom Credit were, it is said, under a duty to inform Sun-Life of the actual sales performance but failed to do so and thereby engaged in misleading or deceptive conduct. This conduct is said to have induced Sun-Life to enter the agreement in November 1990 to purchase the land for a price of $5,189,642. Sun-Life says that on 2 November it borrowed $2,600,000 from Custom Credit secured by mortgage over the lands. On 5 November it granted a mortgage over the land to Chellaston. In the event Sun-Life said that the Stage 4 blocks did not sell at the represented rates and prices and that it was unable because of that to settle the purchase of Stage 6. Chellaston terminated the contract on 15 February 1991 and/or on 7 May 1991 and is claiming damages against Sun-Life in the amount of $1,360,000. Sun-Life claims damages and other relief against Chellaston, Maddestra and Custom Credit.
The Proceedings Thus Far
5. On 14 July 1992, Messrs. Murie and Edwards, Solicitors, filed an appearance for Mr Maddestra. Messrs. Phillips Fox entered appearances for Chellaston and Custom Credit and a common defence was filed on 19 August 1992. Both respondents gave discovery on 3 November. Orders for further discovery were made against them on 1 December 1992 and further discovery was given on 16 December by Chellaston and on 30 December by Custom Credit.
Following the hearing of a strike out motion filed by Chellaston and Custom Credit on 17 February 1993, an order was made for the filing of an amended statement of claim. This was filed on 24 February. Further interlocutory orders were made in relation to leave to interrogate on 19 April 1993. To that point Chellaston and Custom Credit had had common legal representation. Custom Credit had appointed a receiver under the mortgage originally granted to it by Chellaston and the receiver asserted the right to instruct the same solicitors. On 19 April however, Mr P.A. Kyle sought leave to appear on behalf of the directors of Chellaston who want to instruct him to take over the conduct of Chellaston's defence. On 27 April 1993, the directors of Chellaston, Kerry Maddestra and Maria Turco, filed a motion seeking an order that Kyle and Co. be solicitors for Chellaston in place of Phillips Fox.
Factual Circumstances
7. On 10 November 1988, Chellaston granted to Custom Credit a first registered mortgage D931809 over Stages 4, 5 and 6 of the estate to secure an advance of $3,500,000. The "mortgaged premises" were defined in the preamble to the substantive clauses as "the estate and interest of the mortgagor hereinafter specified in the land above described". The interest of Chellaston was the fee simple in the land. The mortgage made provision for the appointment of a receiver under cl.20(a)(vi) which is in the following terms:
"20. AND IT IS HEREBY AGREED AND DECLARED that:
(a) Upon any default being made hereunder or event happening which would entitle the Mortgagee to exercise the power of sale hereby or by the said Transfer of Land Act conferred it shall be lawful for the Mortgagee or the agents of the Mortgagee at any time or times until the whole of the moneys hereby secured shall be paid to the Mortgagee and without prejudice to the said power of sale and all other powers rights and remedies conferred on the Mortgagee by this Mortgage or by the said Transfer of Land Act the said Property Law Act and any other Act having application to mortgage securities and without giving any previous notice of intention to do so to exercise all or any of the following powers namely: .
.
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(vi) By instrument in writing signed by the Mortgagee from time to time to appoint and remove a receiver and manager of the mortgaged premises or any part or parts thereof at such remuneration as may be fixed by the Mortgagee and to delegate to such receiver and manager any of the powers authorities and discretions conferred on or vested in the Mortgagee by this Mortgage or by any statute or otherwise at law or in equity. Such receiver and manager shall be deemed to be the agent of the Covenantor and the Covenantor shall be solely responsible for the acts and defaults of such manager and receiver. Such manager and receiver shall be entitled to exercise any such powers discretions and authorities delegated to him and shall out of moneys received by him pay and discharge his remuneration and all moneys expended in the exercise of his powers authorities and discretions and all rates taxes insurances and other outgoings which he shall think fit to pay and shall account to the Mortgagee for any surplus thereof."
The agreement between Sun-Life and Chellaston referred to in the amended statement of claim was dated 1 November 1990. The subject of the purchase comprised Stages 4, 5 and 6 of the Country Road Estate "plus all developed lots (estimated 32)". Settlement of Stages 4 and 5 was to be 2 November 1990, and for Stage 6, 14 January 1991. In order to secure its performance of the agreement, Sun-Life gave to Chellaston a mortgage over Stages 4 and 5 dated 1 November 1990. On 5 November 1990 Chellaston assigned the mortgage to Custom Credit. Sun-Life did not settle on Stage 6. The contract was determined and the land sold to Peet and Co. Ltd for $650,000 leaving what is said to be an entitlement to damages of $1,350,000, in favour of Chellaston and ultimately, Custom Credit. There has been no receiver appointed under the assigned mortgage.
On 14 February 1991, Alan Edson Ledger was appointed by Custom Credit as receiver under the terms of the mortgage D931809 from Chellaston. The appointment provided, inter alia, (referring to Chellaston as the Grantor):
"NOW THESE PRESENTS WITNESS that the Grantee in pursuance and exercise of the powers and authorities vested in or conferred upon the Grantee under or by virtue of the said Mortgage and also of all and every other power and authority in that behalf the Grantee thereunto enabling HEREBY APPOINTS you the said ALAN EDSON LEDGER as on and from the date hereof to be Receiver and Manager of all and singular the property AND the Grantee confers upon and vests in you the said ALAN EDSON LEDGER during the term of your appointment hereunder all and every the powers authorities and discretions vested in the Grantee under or by virtue of the said Mortgage (other than the power of appointing a Receiver) so far as the same may be lawfully delegated together with all and every the powers authorities and discretions conferred upon a Receiver as well by the said Mortgage as by statute and otherwise howsoever."
The Chellaston mortgage to Custom Credit under which the receiver was appointed was discharged in respect of Stage 6 on 28 April 1992. The question arises what, if any, standing does the receiver have to direct the affairs of Chellaston in this litigation?
The Standing of the Receiver
10. Custom Credit and Chellaston submit that Chellaston had mortgaged to Custom Credit all of its estate and interest in Stage 6. That estate and interest included Chellaston's rights under the agreement of 1 November 1990 with Sun-Life. Chellaston's contract to sell Stage 6 was said to be an interest in the land. Custom Credit had appointed Mr Ledger as receiver of Stage 6 to recover its advance to Chellaston. Custom Credit, it was submitted, has a right to be heard on the claim against Chellaston because the relief sought, if granted would affect the rights of Custom Credit. Sun-Life has effectively pleaded a claim to setoff its right to damages against Custom Credit's entitlement as the party entitled to pursue the claim for liquidated damages. The discharge of the mortgage over Stage 6, it was said, was a discharge only of the land as security for the performance of the covenants under the mortgage.
Reliance was placed on the statutory powers of a receiver under s.420 of the Corporations Law, which provides in the relevant parts:
"420(1) Subject to this section, a receiver of property of a corporation has power to do, in Australia and elsewhere, all things necessary or convenient to be done for or in connection with, or as incidental to, the attainment of the objectives for which the receiver was appointed.
(2) Without limiting the generality of subsection
(1), but subject to any provision of the court order by which, or the instrument under which, the receiver was appointed, being a provision that limits the receiver's powers in any way, a receiver of property of a corporation has, in addition to any powers conferred by that order or instrument, as the case may be, or by any other law, power, for the purpose of attaining the objectives for which the receiver was appointed: .
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(k) to execute any document, bring or defend any proceedings or do any other act or thing in the name of and on behalf of the corporation; .
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(p) to appoint a solicitor, accountant or other professionally qualified person to assist the receiver; .
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(3) The conferring by this section on a receiver of powers in relation to property of a corporation does not affect any rights in relation to that property of any other person other than the corporation.
(4) In this section, a reference, in relation to a receiver, to property of a corporation is, unless the contrary intention appears, a reference to the property of the corporation in relation to which the receiver was appointed."
The directors of Chellaston submit that the powers of a receiver appointed pursuant to a registered mortgage are limited to such powers as are necessary to protect the interest in the land of the secured creditor appointing the receiver except insofar as such powers are extended by the mortgage itself. They point out that the mortgage has been discharged and the subject land, that is Stage 6 of the development, sold.
The powers of a receiver appointed under a mortgage as extended by the provisions of s.420 of the Corporations Law are considerable. The powers derived from the mortgage are those expressly conferred by it. Those derived from the statute are limited by the purpose of attaining "the objectives for which the receiver was appointed". Neither the powers conferred by the mortgage nor those granted by statute authorise the receiver to operate generally as a receiver and manager of all the company's property and affairs.
The relationship between the powers of a receiver appointed under a mortgage or debenture and the residual powers of a company's directors was discussed by Owen J in Re Geneva Finance Ltd (receiver and manager appointed) (1992) 10 ACLC 668. His Honour referred to the judgment of the Court of Appeal in Newhart Developments Ltd v. Co-Operative Commercial Bank Ltd (1978) 1 QB 814 and a somewhat divergent view expressed by Browne-Wilkinson VC in Tudor Grange Holdings Ltd v. Citibank NA (1991) 4 All ER 1. I accept, with respect, the general proposition stated by Owen J at 679, when his Honour said:
"It is a question of fact to be decided in each case whether the purported exercise of power by the directors is detrimental to the functions of the receiver. If it is, the directors must defer to the receiver. If it is not, it does not offend the principle which Newhart (supra) enunciates."
In that case the directors of the company sought access to its books and records. A receiver and manager appointed under a debenture trust deed sought directions from the Court on the question of access. His Honour quoted with approval a passage from the judgment of Shaw LJ in Newhart at 819 which was in the following terms:
"(A receiver has a) duty...to protect the interests of the mortgagee or debenture holders, as the case may be. In so far as it is requisite and necessary for him, in the course of his dealing with the assets of the company, bringing them in and realising them, and so on, to bring actions as well, he is empowered to do so by the debenture trust deed in the name of the company. That makes it possible for him to institute such proceedings without exposing himself to the risk of a liability for costs if those proceedings should fail. But the provisions in the debenture trust deed giving him that power is an enabling provision which invests him with the capacity to bring an action in the name of the company. It does not divest the directors of the company of their power, as the governing body of the company, of instituting proceedings in a situation where so doing does not in any way impinge prejudicially upon the position of the debenture holders by threatening or imperilling the assets which are subject to the charge."
Stephenson LJ in a passage at 822, also quoted by Owen J, said:
"I am thankful that the view which I take of the case prevents me from holding that (the receiver) has to be put into that position and has to weigh the conflicting interests of the debenture holders, who appointed him, and of the company, whose agent he is expressly made, in continuing or comprising this suit."
Owen J saw his task as being to look at the effect which the proposed exercise of power by the directors would have on the receiver's functions rather than to concentrate on the identification and delineation of the residual duties reposed in the directors.
The claim against Chellaston in this case is a claim, inter alia, for damages for misleading or deceptive conduct on its part and in which its former director was said to be a party. It is apparent that the outcome of the action may, according to the relief (if any) that is granted, affect in a practical way Chellaston's entitlement to damages arising out of the termination of the contract with Sun-Life and therefore Custom Credit's ability to recover under Chellaston's covenants as mortgagor. This is so notwithstanding that a discharge of the mortgage between Custom Credit and Chellaston has been registered. Sun-Life's cause of action against Chellaston in my opinion however, has no legal connection to Custom Credit's rights under the original mortgage. It may have a consequential impact upon Custom Credit's recovery. Importantly in this case, the interests of Chellaston in the action are distinct from those of Custom Credit. Indeed, given the nature of the allegations against Custom Credit in the amended statement of claim, their interests may be in conflict. In the circumstances, I consider that the receiver's powers do not authorise him to conduct the defence of these proceedings on behalf of Chellaston. The retainer of the solicitors presently on the record for Chellaston is therefore properly challenged. In my opinion the directors of Chellaston are entitled to the orders sought.
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