Terry Clark and Associates Pty Ltd v Carez Nominees Pty Ltd and Andrew Ryrie Campbell No. SCGRG 93/1802 Judgment No. 4552 Number of Pages 7 Injunctions Interlocutory Injunctions (1994) 13 Acsr 314

[1994] SASC 4552

COURT IN THE FULL COURT OF THE SUPREME COURT OF SOUTH AUSTRALIA KING CJ(1), BOLLEN(2) AND MULLIGHAN(3) JJ

CWDS
Injunctions - interlocutory injunctions - action for declaration of invalidity of appointment of receiver under mortgage - allegation of want of good faith - whether duty of good faith in circumstances arguable case - balance of convenience - appeal against interlocutory injunction dismissed.

HRNG ADELAIDE, 7, 9 February 1994 #DATE 13:5:1994
Counsel for appellant:     Mr J R Mansfield QC with
   Mr S Palyga
Solicitors for appellant:    Mitchell Sillar Lynch and Meyer
Counsel for respondent:     Mr W J Wells QC with
   Mr A Luckhurst-Smith
Solicitors for respondent: Ward and Partners

ORDER
Appeal dismsised.

JUDGE1 KING CJ The plaintiff Terry Clark and Associates Pty Ltd instituted the action by Summons dated the 8th October 1993 claiming an order that the appointment by the first defendant of the second defendant as receiver of the plaintiff was invalid, an injunction restraining the first defendant from appointing a receiver and an injunction restraining the second defendant from purporting to act as such. Two orders have been made by a Master. The defendants appeal against the first of the orders; the plaintiff appeals against the second.

2. The essential facts and history of the proceedings were set out by the learned Master in his reasons for making the second order. In the course of those reasons he referred to the plaintiff as "Associates".
    "Associates is a company through which Terrence Benjamin
    Clark (hereinafter referred to as 'Terry') operates an
    insurance business. The first named defendant Carez
    Nominees Pty. Ltd. (hereinafter referred to as 'Carez')
    is a company of which the directors are Carol Evelyn
    Clarke (hereinafter referred to as 'Carol') and Esio
    Marcel (hereinafter referred to as 'Esio'). Terry and
    Carol were formerly (sic) married, but are now divorced.
    Carol and Esio have a de facto marital relationship and
    conduct a real estate business, known as L.J. Hooker
    Westlakes. At a time when Terry and Carol were married
    and living together, they and Esio became involved with
    others in relation to a business, which I will refer to as
    'Rapid Wall'. In order to finance Rapid Wall, money was
    borrowed from the Commonwealth Bank. Subsequently, at a
    time when Terry and Carol had separated, further money was
    borrowed from the Commonwealth Bank. The Commonwealth
    Bank took various forms of security in relation to the
    funds borrowed. The securities included inter alia
    interlocutory guarantees from Carol Clarke and E. Marcel
    Estates Pty. Ltd. (hereinafter referred to as
    'Estates'), E. Marcel Constructions Pty. Ltd.
    (hereinafter referred to as 'Constructions') and
    Associates. These guarantees were secured by mortgage
    debentures given by the various companies. There was
    default in relation to the loans at a time when there was
    an amount of $228,000.00 owing to the Commonwealth Bank.
    On 20th August, 1993, the Commonwealth Bank assigned to
    Carez the debt of $228,000.00, together with all security
    supporting the same including the guarantees. By a Notice
    of Demand dated 5th October, 1993, Carez demanded of
    Associates payment of the amount of $228,000.00 and gave
    notice that, should Associates fail to comply with the
    demand, Carez would regard the failure as default under
    the mortgage debenture, which was then held by Carez and
    that Carez would take such steps as may be necessary to
    enforce the mortgage debenture. The Notice of Demand was
    served on the registered office of Associates on 5th
    October and a copy served on Terry personally on 6th
    October, 1993. The Notice of Demand required payment
    within 24 hours of the sum of $228,000.00. Associates did
    not make payment within 24 hours. By a notice, dated 7th
    October, 1993, Carez appointed Andrew Ryrie Campbell as
    receiver and manager of Associates. By an application
    issued on 8th October, 1993, Associates sought orders, as
    follows:-
    '1. A declaration that a purported appointment by the
    first defendant of the second defendant as a receiver to
    the plaintiff is invalid.
    2. An injunction restraining the first defendant by its
    servants, agents or otherwise howsoever from appointing a
    receiver to the plaintiff.
    3. An interlocutory injunction restraining the second
    defendant by its servants, agents or otherwise howsoever
    from acting as a receiver in respect of the plaintiff and
    in particular from taking or attempting to take possession
    of the assets and records of the plaintiff.'

That matter came before me, as a specially returnable
    matter, on 8th October, 1993, when I made an order for an
    interlocutory injunction. The order restrained the second
    defendant from acting as receiver and manager of
    Associates, and in particular, from taking, or attempting
    to take, possession of the assets and records of
    Associates. Further consideration was adjourned to 13th
    October, 1993. On that occasion, the matter was argued
    more fully and I made orders setting aside the appointment
    of Andrew Ryrie Campbell as receiver and manager 'On the
    grounds that:-
    1. The notice given to the company was inadequate.
    2. That the appointment was made in bad faith.' That
    decision is the subject of an appeal, issued on 27th
    October, 1993, which has yet to be heard. On 22nd
    November, 1993, Carez gave notice of demand to the
    guarantors, Estates, Constructions and Associates, seeking
    payment of the amount of $228,000.00. That notice of
    demand to guarantors is the notice 'CM 14', referred to in
    paragraph 2 of the present application. No payment has
    been made to Carez by any of the guarantors. By a notice
    dated 2nd December, 1993, Carez made demand of Associates,
    virtually in the same terms as the notice of 5th October,
    1993, save that the notice gave three days for payment of
    $228,000.00."

3. The second order made by the learned Master was that the plaintiff's application be dismissed and that the plaintiff pay the defendant's costs of the application and order.

4. There was some debate as to whether the first order was intended to be interlocutory or final, particularly in the light of its terms and the manner in which it was referred to in the Master's reasons for the second order. Mr Mansfield QC for the plaintiff conceded that it must be interlocutory and sought only to defend it as such. I think that it could only be interlocutory. The application before the Master was for interlocutory relief. There was no application for judgment. Moreover, although the terms of the substantive parts of the order do not indicate its interlocutory character, the order for costs was that "the costs of this application be costs in the cause." That order as to costs is inconsistent with an intention to make a final order. Moreover further consideration of the application was adjourned. This court is therefore confronted with an appeal against the grant of interlocutory relief in relation to the first appointment of a receiver and the refusal of interlocutory relief in relation to the second appointment.

5. Mr Mansfield QC who appeared for the plaintiff has conceded that the notice point which formed one of the grounds for the first order has ceased to be of significance because ample time has now elapsed since the second notice. The real issue now relates to the alleged want of bona fides.

6. As these were applications for interlocutory relief, the issues for the decision of the Master were whether the material before him raised serious questions to be tried and where the balance of convenience lay. His Honour appears not to have approached the matter in that way. No reasons for the first order were given, but the reasons given for the second order indicate that the Master approached the matter as if it were an application for judgment and not an application for interlocutory relief. He did not consider either of the issues which must be determined on an application for an interlocutory injunction. These appeals must be determined therefore not on the principles applicable to an appeal against an exercise of discretion in a matter of practice and procedure, but as an original determination of the issues. Mr Wells QC for the first defendant submitted that want of bona fides does not in law provide a ground for restraining a mortgagee's exercise of its contractual right to enforce the security by appointment of a receiver. He submitted that a contractual right, once it arises, is exercisable regardless of motive and cited Allen v Flood (1898) AC 1 per Wills J at p.46, Lord Herchell at pp 123-124 and Lord Macnaghten at p.152, Lucke, "Good Faith and Contractual Performance", Essays on Contract, (1987) at pp.174-5 and Salmond on Jurisprudence (12th ed) pp 375-6. He contended that there was no implied contractual obligation of good faith because the requirements for the implication of such a term could not be met; Codelfa Construction Pty Ltd v State Rail Authority NSW (1981-1982) 149 CLR 337 at 346-7. He argued that the equitable duty of good faith in relation to the exercising of mortgagee's rights and remedies applies only to the manner of exercise of those rights and remedies, not to the decision to exercise them. He also contended that, general principles aside, sections 232, 418A and 420A of the Corporations Law covered the field in relation to the property of corporations and left no room for a limitation on the decision to execute the rights and remedies, arising out of an obligation of good faith.

7. Mr Mansfield QC, on the contrary, contended that a secured creditor generally owes to a guarantor a duty to exercise its powers under the security in good faith, or at the least not to do so in bad faith. He cited dicta in Shamji v Johnson Matthey Bankers Limited (1986) 1 FTLR 329 at 333 and Re Potters Oils Ltd (No. 2) (1986) 1 All ER 890 at 894 which convey the suggestion or implication that the obligation of good faith applies to the exercise, and not merely the manner of exercise, of a mortgagee's rights.

8. The argument for the plaintiff goes further than the general proposition as to good faith to which I have referred. Mr Mansfield QC pointed out that if the corporate veil were removed, it would be revealed that the real mortgagees were Mrs Clarke and Esio Marcel and the real guarantor was Terry Clarke. These individuals were partners or joint venturers in the "Rapid Wall" enterprise in the course of which the monies were borrowed. Mr Mansfield QC contended that that relationship gave rise to fiduciary obligations affecting the debt, the security and its enforcement which bind the first defendant in relation to its enforcement of the security against the plaintiff. Moreover the liability of the plaintiff on the guarantee arises out of the default of the principal debtors including Mrs Clarke and Esio Marcel. They are therefore seeking to take advantage of and to benefit from their own default. Mr Mansfield QC argued that, quite apart from his general proposition as to the obligations of good faith, these special considerations gave rise to such an obligation in the present case.

9. It is not the function of the Court on these appeals to determine finally whether, as a matter of law, the first defendant was under an obligation to exercise good faith in relation to the appointment of a receiver. Having considered the authorities cited and the arguments addressed to us, I am satisfied that there is a serious question of law to be determined. I think moreover that the contention regarding the effect of the Corporations Law is seriously debatable.

10. There was sufficient evidentiary material before the Master to raise serious questions as to whether the acquisition and enforcement of the security were not devices to enable Mrs Clarke and Mr Marcel to take advantage of and to profit from their own default at the expense of their former partner or joint venturer and also as to whether the motivation was to embarrass Mr Clarke financially so as to gain the ascendancy in certain Family Court proceedings. I think that there is a serious issue as to bona fides.

11. I have refrained from discussing either the legal or factual issues in the case in detail and have made no attempt to reach any final conclusion as to them. It is sufficient that I have reached the conclusion that there are serious issues to be tried in relation to the relief claimed in the plaintiff's action.

12. The appointment of a receiver would ruin the plaintiff's business. There is no evidence that the maintenance of the status quo would cause any corresponding hardship to the defendant. The balance of convenience is plainly in favour of the maintenance of the status quo.

13. I consider therefore that appropriate orders ought to have been made to preserve the status quo pending trial.

14. Mr Wells QC argued that the order setting aside the appointment of the receiver was not an appropriate interlocutory order and was beyond the power of the Court. It is unnecessary for me to consider the question of power to make such an interlocutory order, because I consider that the order made went beyond what is necessary to protect the plaintiff's position pending trial. That purpose could be achieved by an appropriately framed injunction against any further action in pursuance of the power to appoint a receiver or any exercise of the power of a receiver. Although I agree in substance with the plaintiff's argument in support of the grant of interlocutory relief, I consider that the order should be reformed.

15. I would therefore allow the appeal of the defendant Carez Nominees Pty Ltd against the first order for the purpose of setting aside the order made and substitute for it an order in the following terms:
    Order: (1) that the first defendant be restrained, pending
    the trial of this action, from taking any further action
    in the exercise of its power to appoint a receiver of the
    plaintiff;
    (2) that the second defendant be restrained, pending the
    trial of this action, from, by itself its servants agents
    or otherwise howsoever, acting as a receiver of the
    plaintiff and in particular from taking or attempting to
    take possession of the assets and records of the
    plaintiff;
    (3) that the costs of and incidental to the application
    and order are costs in the cause.

16. I would allow the plaintiff's appeal against the second order and substitute an order in the same terms as the first order. The defendant Carez contended that any injunction should be on terms that the plaintiff pay into Court the amount alleged to be due namely $228,000.00. I do not think that such a condition would be appropriate in the circumstances. Both injunctions should, however, be conditional upon the usual undertaking as to damages.

JUDGE2 BOLLEN J I agree with the reasons of the Chief Justice and the order which he proposes. I think that there are serious questions to be tried not only as Mullighan J suggests on the fiduciary obligation but on the issue of a general duty not to appoint a receiver other than in good faith. As we are not called upon to decide these issues I do not elaborate.

JUDGE3 MULLIGHAN J I agree that the appeals should be allowed and orders made as proposed by the Chief Justice. The plaintiff has established that there is a serious question to be tried and the balance of convenience is plainly in favour of the maintenance of the status quo for the reasons expressed by the Chief Justice.

2. I merely wish to make one observation. I prefer to base the decision as to whether there is a serious question to be tried on the contention that upon removing the corporate veil, the relationship between Mr. Clark, Mrs. Clark and Mr. Marcel gave rise to fiduciary obligations which bind the defendant with respect to the enforcement of securities against the plaintiff. The Chief Justice has identified and described that issue in his reasons for judgment and I agree with what he has said. The plaintiff has not established, in my view, that there is a serious question to be tried with respect to any general obligation on the part of the defendant to act in good faith to the plaintiff apart from the question of an obligation which arises out of any fiduciary duty. There is no obligation on the part of a creditor to act in good faith when giving notices of demand or in exercising rights under securities. A contractual right or remedy, once it arises, may be exercised regardless of motive: Allen v. Flood (1898) AC 1 per Wills J at p 46, per Lord Herschell at pp 123-124 and Lord Macnaghten at p 152, Salmon on Jurisprudence 12th Ed. at pp 375-376 and Z cke "Good faith and contractual performance" Essays on Contract, Ed. Finn Ch.5 at pp.174-175. I do not think there is support for the contention that the exercise of the contractual right under the mortgage debenture to appoint a receiver and manager must be exercised in good faith in either Shamji v Johnson Matthey Bankers Ltd (1986) FTLR 329 or Re Potters Oils Ltd (No 2) (1986) 1 All ER 890.

3. Close analysis of both of these cases does not establish that a creditor has an obligation to act in good faith in the exercise of the right to appoint a receiver except in the limited way suggested in Shamji, i.e. not to appoint an incompetent and matters of that nature. In Re Potters Oils Ltd (No 2) (supra) the issue was whether a receiver appointed by a particular creditor pursuant to a debenture was entitled to be paid his remuneration by the liquidator of the company out of the proceeds of sale of the assets which were the subject of the security, it having been contended that the appointment of the receiver was unnecessary. Hoffman J considered the rights of the creditor. He said at p.894:
    "The debenture holder is under no duty to refrain from
    exercising his rights merely because doing so may cause
    loss to the company or its unsecured creditors. He owes a
    duty of care to the company but this duty is qualified by
    being subordinated to the protection of his own interests.
    As Salmon LJ said in Cuckmere Brick Co Ltd v Mutual
Finance Ltd (1971) 2 All ER 633 at 643, (1971) Ch 949 at
    965: 'If the mortgagee's interests, as he sees them,
    conflict with those of the mortgagor, the mortgagee can
    give preference to his own interests.'"

4. Having accepted that the creditor was entitled to appoint the receiver, he went on to say, with respect to the matter in issue, the receiver's remuneration, at pp.894-895:
    "The power to agree the receiver's remuneration, like other
    powers of the mortgagee, has no doubt to be exercised in good
    faith and with regard to the qualified duty of care to the company
    to which I have already referred. The receiver as agent for the
    company is also entitled to be indemnified out of the assets
    subject to his receivership for expenses properly incurred as such
    agent."

5. This reference to the exercise of powers in good faith must be seen in the context of the duty of care to the company, which involved the agreement as to the remuneration of the receiver, not as to whether to exercise the power under the debenture to appoint the receiver.