Westpac Banking Corporation v Rafick Sayah - [2015] NSWSC 1167

Supreme Court

New South Wales

Medium Neutral Citation: Westpac Banking Corporation -v- Rafick Sayah [2015] NSWSC 1167
Hearing dates: 20, 21, 22, 23, 27, 28, 29, 30 July 2015
Decision date: 19 August 2015
Jurisdiction: Equity - Commercial List
Before: Hammerschlag J
Decision:
Judgment for Plaintiff for $1,467,506.28
Cross-Claims dismissed

Catchwords: CORPORATIONS – RECEIVERS AND MANAGERS – Corporations Act 2001 (Cth) s 420A – duties of receivers and managers in exercising a power of sale or otherwise dealing with property of a Corporation – obligation to obtain the market value or best price reasonably obtainable in the prevailing circumstances – obligation not to act wilfully or recklessly or sacrifice the interests of a mortgagor – complaint that receivers failed to sell property of a mortgagor company, being lighting, showerheads and insulation products useable in energy conservation schemes, at market value or for the best price reasonably obtainable – complaint that receivers sacrificed the interests of the mortgagor in settling an insurance claim for damage to insulation batts at an undervalue – position of guarantor of the debt owed by the mortgagor – HELD: Complaints not established – mortgagee entitled to judgment against guarantor
Legislation Cited: Corporations Act 2001 (Cth)
Category: Principal judgment
Parties: Westpac Banking Corporation – Plaintiff and First Cross-Defendant
Peter William Marsden – Second Cross-Defendant
David John Kerr – Third Cross-Defendant
Rafick Sayah – Defendant and First Cross-Claimant
Green Alliance Pty Ltd – Second Cross-Claimant
Representation:
Counsel:
K. Rees SC with J.A.C. Potts and C. Parkin - Plaintiff and Cross-Defendants
N.A. Cotman SC with C. Carroll - Defendant and Cross-Claimants
Solicitors:
D.L.A. Piper Australia - Plaintiff and Cross-Defendants
Fortis Law Group - Defendant and Cross-Claimants

File Number(s): 2013/93911

Judgment

HIS HONOUR: Green Alliance Pty Ltd (Green Alliance) is a company associated with Mr Rafick (Roy) Sayah, who is its sole director and secretary. Green Alliance is one of a number of companies in a group controlled by Mr Sayah known as the Alliance Network International Group.
Green Alliance’s business was the provision of services and supply and installation of household and commercial property energy efficient products and upgrades. Green Alliance held accreditation under the New South Wales Government Greenhouse Gas Reduction Scheme, the Victorian Energy Efficient Target Scheme (VEETS) and the Federal Home Insulation Program (HIP).
On 28 October 2009, the plaintiff (the Bank) and Green Alliance entered into a Business Finance Agreement (the facility), under which the Bank agreed to afford Green Alliance certain credit facilities with a limit of $4 million. The security taken was a fixed and floating charge over the assets of Green Alliance and a Guarantee and Indemnity (the Guarantee) from Mr Sayah executed on 10 November 2009 in respect of all liabilities and obligations of Green Alliance to the Bank then or in the future under or in respect of the facility or any amendment or replacement.
A primary purpose of the facility was to enable Green Alliance to buy insulation material, sometimes described as pink batts or batts, which it proposed to install under the HIP. The HIP was a Federal Government incentive pursuant to which rebates were, from 1 July 2009, available to installers of batts in residential properties. HIP was terminated on 19 February 2010, leaving many installers, including Green Alliance, with significant quantities of batts.
On 1 October 2010, the facility was converted into a bill facility to expire on 31 January 2011. The facility limit was reduced to $2.19 million and conditions were imposed on Green Alliance which required it to make principal reductions on 30 November 2010 and 31 December 2010 of $700,000 each, and $790,000 on 31 January 2011. On 1 October 2010 Mr Sayah executed a written document agreeing to a variation of the Guarantee to recognise the amendment.
Green Alliance defaulted in its obligations under the facility. Mr Michael Mulvihill, a Senior Relationship Manager in the Loan Management Group of the Bank, took over primary conduct of the Alliance Network International Group account. He instructed Mr Peter Marsden of accounting firm RSM Bird Cameron Partners (RSM) to perform an investigative accountant’s review of the group.
The report was provided on 11 April 2011. It indicated that Green Alliance was not trading and had no available funds or other source of funding. Mr Mulvihill decided that the Bank should appoint receivers to Green Alliance.
On 28 April 2011, acting under the fixed and floating charge, the Bank appointed Mr Marsden and Mr David Kerr as receivers and managers (the Receivers) over the assets and undertaking of various companies in the group, including Green Alliance.
The Receivers proceeded to realise assets of Green Alliance.
As at 10 July 2015 the amount owed under the facility by Green Alliance to the Bank was $1,467,506.28 (excluding legal fees), for which amount the Bank sues Mr Sayah in these proceedings under the Guarantee.
Mr Sayah does not dispute that he is liable under the Guarantee.
Additionally, by reason of guarantees given by it to the Bank for the obligations of other entities in the Alliance Network International Group, Green Alliance owes the Bank $5,346,012.42 as at 10 July 2015. In total Green Alliance accordingly owes the Bank $6,813,581.42, excluding legal fees.
By process described as a cross-claim, Green Alliance and Mr Sayah (collectively the Cross-Claimants) claimed damages and other relief from the Bank and the Receivers alleging that, in breach of duties both to Green Alliance and Mr Sayah:

the Receivers exercised a power of sale over Green Alliance’s property, being certain energy efficient lighting including compact fluorescent lamps (CFLs), energy efficient showerheads and batts which they sold for less than their true market value or at prices not being the best prices reasonably obtainable, having regard to the circumstances existing when the property was sold;

the Receivers compromised an insurance claim (the insurance claim) which Green Alliance had against Zurich Insurance (Zurich) for damage to batts for less than the claim was worth;

the Receivers failed, in breach of their fiduciary duty in equity or under the Corporations Act 2001 (Cth) (Corporations Act), to exploit an opportunity which Green Alliance had to participate in a scheme involving replacement of incandescent lamps with CFLs, known as the Bachat Lamp Yojana, in the Indian State of Tamil Nadu (the Tamil Nadu Lighting Scheme);

the Receivers failed to take steps to have registered with the Essential Services Commission of Victoria, and sell, 35,157 certificates (known as VEECS and commonly referred to as carbon credits) purportedly created by Green Alliance pursuant to the Victorian Energy Efficient Target Act 2007 (Vic), which enactment established the VEETS;

the Bank unduly directed or interfered with the actions of the Receivers and the Receivers acted as the agents of the Bank so as to render the Bank liable for damages; and

the default rate of interest under the facility was void as a penalty.

Mr Sayah also claimed that the Bank had acted contrary to its Voluntary Code of Practice.
The claim in relation to VEECS was manifestly insupportable and should not have been brought. It was abandoned after four days of hearing. The evidence established that after auditing Green Alliance’s claims, the Victorian authorities cancelled VEECS created by Green Alliance on the grounds that they appeared to be based on fictitious, even fraudulent, claims of light bulb installations. On 23 February 2011 Green Alliance was notified that its accreditation under VEETS had been suspended, and that it had a right of appeal. As part of an accommodation reached with the Victorian authorities, Green Alliance withdrew a substantial number of claims for VEECS. The VEECS to which the Cross-Claimant’s complaint ultimately related was the balance which the Victorian authorities continued to challenge. Green Alliance did not take up rights of appeal. Mr Sayah’s evidence was that he considered appealing but at the time Green Alliance did not have the funds to engage legal representation and commence proceedings. Green Alliance proffered no evidence that the VEETS concerned were genuine, yet persisted in the contention that the Receivers should have appealed.
On commencement of closing submissions, all contentions that the Bank itself had liability, including those based on assertions that the Bank had interfered with the Receivers, that the Receivers had acted as the Bank’s agents and that the Bank had acted contrary to its Voluntary Code of Practice, were abandoned. The claim that the default of interest was a penalty had to be abandoned because the Bank did not charge that rate.
More significantly, on the seventh day of hearing, during final submissions, and after a significant body of evidence including from forensic accountants directed exclusively to it had been heard, the pleaded case with respect to the Tamil Nadu Lighting Scheme was also abandoned. A proposed amended pleading was brought which sought to reframe it by alleging, not that the Receivers should have exploited the opportunity by taking steps to implement it, but that rather somehow they should have sold it (whatever it was – at one point, it was described by Counsel as Green Alliance’s capacity to negotiate and enter into agreements) to someone else. I refused the amendment. Senior Counsel for Mr Sayah and Green Alliance informed me that reasons were not required, no doubt, because leaving aside all other considerations, the proposed new case, as the old one, was manifestly bound to fail.
Ordinarily, in these circumstances I would not consider it necessary or appropriate to deal with the substance of the claim. In this particular case, however, I consider it necessary and appropriate to do so. It involved a claim, albeit not of dishonesty, of dereliction of duty on the part of the Receivers, which is a serious matter. On the basis of a forensic accountant’s report dated 11 July 2015, the Cross-Claimants quantified this claim at $8.5 million. It was reduced to approximately $6 million as a consequence of a subsequent report dated 18 July 2015. This represented the largest of the claims motivated by the Cross-Claimants. It had no substance. This should have been recognised, and the Receivers are entitled to exoneration on the merits.

THE LAW

The general law duties of a receiver in exercising a power of sale are analogous to those of a mortgagee. A receiver has a duty to act in good faith without willfully or recklessly sacrificing the interests of the mortgagor. A sale in disregard of the interests of the mortgagor, not caring whether a proper price is obtained, omitting to take obvious precautions to ensure a fair price, or being absolutely careless whether a fair price is obtained or not, is reckless and discloses a lack of good faith.
The principal remedy which a mortgagor has where a mortgagee or receiver breaches these duties is an equitable set off against the debt owed to the mortgagee of the amount of the undervalue. Subject to the terms of the guarantee itself, a guarantor has a right to have the correct amount of any credit ascertained and brought into account in calculating the amount of the liability of the principal debtor (or mortgagor) to the mortgagee, which in its turn determines the amount of the guarantor’s liability. If the mortgagor is entitled to have a further credit brought into account on taking of the mortgage accounts, the guarantor is entitled to get the benefit of the credit by relying on an equitable set off against the creditor’s demand.
The ambit of the duties of a mortgagee in possession or receiver in the exercise of a power of sale of property of a corporation is affected and to some extent enlarged, by s 420A of the Corporations Act, which provides:

(1)   In exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for:
(a)   if, when it is sold, it has a market value - not less than that market value; or
(b)   otherwise - the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.

(2) Nothing in subsection (1) limits the generality of anything in section 180, 181, 182, 183 or 184.

Under s 9 of the Corporations Act, controller, in relation to property of a Corporation, includes a receiver, or receiver and manager of that property.
For present purposes, ss 180, 181, 182, 183 and 184 of the Corporations Act are irrelevant. (Amongst others, they impose duties on controllers analogous to fiduciary duties at general law).
There is some debate in the authorities about whether s 420A gives a guarantor some direct right against a defaulting controller. I consider that the better view is that it does not. But it is not necessary for present purposes to intrude into that debate.

SALE OF PROPERTY

At the date of the receivership, Mr Sayah identified Green Alliance’s assets as 442,204 CFLs, 47,050 Eco Light T5 Series light fittings featuring an electronic ballast and reflector units, 46,800 Eco Tubes, 12,371 white and chrome shower fittings, and 42,000 (338,000 sq m) of insulation batts. Some of the batts were damaged and were the subject of the insurance claim. The T5 light fittings and eco tubes were sold together and I shall so refer to them as eco lights.
All of this stock was purchased to be used by Green Alliance in carbon credit generation enterprises or the HIP. Having regard to the removal of Green Alliance’s accreditation in VEETS and the termination of the HIP, Green Alliance in effect went out of business and was left holding the stock. Before the receivership, Green Alliance sold some of it. By the time of the receivership, Green Alliance was insolvent and its business was no longer a going concern.

Pre-Receivership Sales

In around September or November 2010, Mr Sayah reviewed the assets and stock of the group to ascertain what could be sold to increase liquidity. In about February 2011 he instructed Mr Steve Napoli, the General Manager of the Group, to contact GraysOnline, an Australian online auction company, with a view to selling assets including vehicles, computers and photocopiers.
GraysOnline conducts internet auctions, traditional auctions and the retail sale of assets via an internet platform. It has an industrial and commercial division which sells property spanning some 50 different categories including computer and electronics, manufacturing and engineering, building and construction and bulk manufactured goods. It has extensive market reach and uses a variety of advertising techniques. It is one of the largest online auctioneering sites with approximately one million unique visitors per month. It uses “Google” words placement so that when a search term is used on that search engine within certain categories, a link to the GraysOnline website will appear in the search results. GraysOnline has an extensive database mailing list comprising past users.
In about February 2011, Mr Napoli spoke with Mr Nigel Taylor, a project manager with GraysOnline, with a view to selling lighting and batts. Mr Taylor gave affidavit evidence. He was not cross-examined. Mr Napoli was not called.
Green Alliance occupied premises at Rosehill, Sydney, where lighting was stored, and a warehouse at Clyde, where batts were stored. Mr Taylor and a number of GraysOnline staff attended to catalogue the goods for sale. The first auction was advertised on the GraysOnline website and by email to building industry subscribers. Mr Napoli instructed that an online marketing campaign including a sales overview and email would suffice. The first auction opened on 24 March 2011 and ended on 30 March 2011. There were three more auctions, one ending on 18 April 2011 and two others ending on 21 April 2011. Showerheads, eco lights, CFLs, and some batts were sold. 600 eco lights were sold, one model at an average price of $1.92 and another at an average price of $3.69. 133 Showerheads were sold at an average price of $3.56. 1,250 bags of batts were sold for $12,820 (ex GST), at an average price of $10.26 per bag of 9 sq m each, or an average price of $1.14 per sq m.
No-one from Green Alliance queried, or complained, to GraysOnline about the auction process or results.

Receivership Sales

Shortly after the appointment of the Receivers on 28 April 2011, Mr Taylor spoke to Mr Richard Lock, a Senior Manager with RSM, and GraysOnline were invited to put forward a proposal for the sale of plant equipment and stock owned by the group. On 11 May 2011 GraysOnline sent a proposal to the Receivers. It was signed by Mr Ben Gibson, GraysOnline National Valuer and Project Manager. The proposal recommended an online onsite auction as the most effective means of sale of the assets to be promoted over two weeks via print media, direct mail, direct email and website exposure. It expressed the view that the batts located at Clyde had no commercial value and it was unlikely that they would be sold.
According to Mr Gibson, no sale proposal was required in relation to the batts because he understood them to be damaged and subject to an insurance claim.
GraysOnline did a high level stock take at Rosehill. The lighting was stored in boxes on pallets, principally had generic branding and appeared to be made in China. The evidence establishes that the lighting was indeed manufactured by a Chinese manufacturer, Xhangzhou Sailing Int’l Industry Co., Ltd (Sailing). It was apparently imported into Australia by a Company called Green Products, which is associated with Mr Sayah’s brother, Mr Brian Sayah, and sold to Green Alliance at a mark-up. In the warehouse at Clyde there were ceiling high rows of batts.
Mr Taylor prepared a valuation which included two values, a going concern value, being the value that a prospective purchaser of the business would attribute to the asset if the business was to continue and be sold as a going concern, and an estimated online auction realisation or sale value, which is appropriate where an asset is to be sold off separately from the business. The going concern value is significantly higher than the sale value. In order to calculate the sale value, Mr Taylor says, it is necessary to have regard to the prices paid for the asset and the price of similar or equivalent assets, either sold on the open market, or at a properly promoted auction sale. He says that to determine such a value one should, if possible, look at historical sale transactions and also have regard to the condition, location and other factors which may influence the value of the asset such as the relevant market conditions, the sale price of like assets, the nature of the asset, the condition of the asset, and the cost of selling the asset and holding the asset before sale.
Mr Taylor formed the view that the sale value was five cents in the dollar of cost price. Section 6 of the valuation set out the values of the lighting stock and shower fittings, including the cost price, which was shown as totalling $1,839,600, 5 cents in the dollar of which is $91,980. The document, however, contains a typographical error. The 5 cents in the dollar figure is shown as $9,198. A zero has been omitted. This error was carried over into a report which the Receivers gave to the Bank on 17 May 2011 in which they said:

It is apparent that even our conservative estimate of realisable values may have been considerably overstated and it may be that realisable (auction) values for all the above are now only $235k. We are currently investigating the differences between the book and market values.

On 25 May 2011, the Receivers informed the Bank that they had been advised that an online auction was the most effective means of sale, with a timeline from confirmation of instructions to the auction of approximately two weeks, with a further three weeks to allow collection of the sold items and accounting for the proceeds.
During late May and early June 2011, GraysOnline proceeded to implement the sale methodology they had recommended.
On 7 June 2011, Mr Sayah requested from the Receivers a copy of the asset listing for the proposed auction, to support “current negotiations” with Green Alliance’s outstanding clients.
The online auction of lighting and shower stock opened on 9 June 2011.
On 10 June 2011, Mr Napoli sent an email to over 50 energy efficiency industry participants informing them that Green Alliance was no longer participating in the energy efficient saving scheme and as such had surplus lighting stock for sale via GraysOnline. His email provided a link to the GraysOnline website. Mr Sayah gave evidence that he was happy to see the email go out, regarded it as likely to reach market participants, and expected that it would go to many of those accredited under the VEETS.
The auction was advertised on the GraysOnline website in early June 2011. Emails were sent by GraysOnline on 3 June and 9 June 2011 to approximately 23,840 customers of GraysOnline who subscribed to the Building Material category. An email was sent by GraysOnline on 6 June 2011 to approximately 80,599 customers who subscribed to the Industrial category. These emails forwarded the link to the Sales Overview and online auction. A glossy brochure was prepared and sent out by mail. The auction was advertised in the Sydney Morning Herald on 11 June 2011. The auction closed on 16 June 2011.
Mr Lock gave unchallenged evidence that prior to the auction he had a number of conversations with Mr Sayah who did not raise any objection concerning the auction, except that in around June 2011 Mr Sayah raised the issue of staggering the auction of the CFLs over a period of two weeks rather than one week. Mr Lock asked for, and accepted, GraysOnline’s advice that any potential increase in sales revenue by staggering would be more than offset by the additional staff costs. Mr Lock reported this to Mr Sayah by email on 10 June 2011. Mr Sayah responded by thanking Mr Lock for his response. He took the matter no further.
There were 2,921 unique individual visitors to the auction, who visited the auction 3,706 times. There were 1,282 bids on items in the auction.
Mr Sayah gave evidence that there was healthy interest in the auction, that it was well conducted and that he had no issue with it.
The Receivers’ returns show the results of the auction. The stock concerned realised $164,836, including buyers’ premium of 13.5% and GST. The figures are not in dispute and are as follows:

Number sold

Sale price

Sale price per unit sold

CFLs

435,000 (approx.)

$57,529

$0.13

Eco Lights

45,000

$95,276

$2.11

White and chrome shower fittings

10,650

$12,031

$1.13

Despite Mr Sayah’s own evidence that he had no issue with the auction, the Cross-Claimants aver that the Receivers failed, as required by s 420A of the Corporations Act, to take all reasonable care to sell the lighting and shower stock for their market value or for the best price that was reasonable obtainable having regard to the circumstances existing at the time of sale.
On 17 June 2011, Mr Gibson met with Mr Sayah to discuss the sale of undamaged batts held by Green Alliance. By all accounts, the termination of the HIP had caused a collapse in the market for batts. Mr Gibson gave evidence that from his understanding of the market conditions surrounding the oversupply of batts at the time and his experience of prior sales GraysOnline had with batts, he was of the view that the batts would yield a very low gross return, and the costs associated with the sale including cataloguing the insulation along with the holding costs incurred would result in them having no commercial value. He also understood that a large portion of the batts was damaged and subject to an insurance claim, significant rental was being paid in respect of their storage, and they were significantly aged. However, the Receivers considered that some of the stock had a limited value and it was put to auction. Between 24 June 2011 and 13 July 2011, the Receivers sold 3,328 bags comprising 26,856 sq m at an average price of $8.64 per bag or $1.07 per sq m.
A significant quantity of batts was left over. The Receivers sold (in effect, gave) what was left to Cold Water Creek, a company associated with Mr Sayah. Between 14 September 2011 and 23 December 2011, Cold Water Creek sold by online auction conducted by GraysOnline, 22,669 bags of batts for a total of $56,730, equating to an average price of $2.50 per bag, or 34 cents per sq m.
In their Amended Commercial List Cross-Claim Statement, the Cross Claimants particularised their complaint against the Receivers as: failing properly to liaise or consult with Green Alliance or Mr Sayah in relation to the sale; failing to take reasonable steps to ascertain the value of the property; failing to advertise properly; and failing to address the correct market in order to identify and realise the market value.
Little if anything was said in argument about failing to consult with Mr Sayah. Clearly, he was consulted. More than that, he was satisfied with the way things were handled.
In final submissions, the complaint was articulated as follows:

the lighting and shower stock comprised specialised goods with particular features, while also being capable as being presented as common or garden versions of the goods, “ie. as light bulbs or showerheads”. Their special feature was the ability to generate income from the receipt and sale of carbon credits on insulation under government schemes, alone or additional to the selling price of the goods. These particular attributes were evidenced by or embodied in certificates, registrations and marks as well as the identity of the manufacturer and their energy efficiency attributes;

the population of persons most interested in these special features were those able to undertake the government schemes, or suppliers to those persons. To extract the value of the goods, information needed to be communicated to this population, in particular the certifications, registrations and qualities of the goods;

the Receivers failed to advertise these attributes and to target this population;

the online auction presented the goods effectively as generic and required a purchaser who recognised the special value to only beat the price offered by the generic goods purchaser; and

the assessment of marketing strategy and approach appears to have been influenced by the extremely low value accidentally attached to the goods by GraysOnline.

For the reasons which follow, I reject not only the overall conclusion contended for, namely, that the Receivers failed to take all reasonable care to sell the lighting and shower stock at market value or the best price reasonably obtainable having regard to the circumstances existing at the time, but each element said to justify such a conclusion.
The Cross-Claimants called an expert valuer, Mr Shannon Burford of Clarity Valuations. He opined as to the market value of what was sold and the appropriate process by which it ought to have been sold. His valuation was, of necessity, sight unseen and three years after the event.
With respect to the eco lights, Mr Burford used three different calculations. The first was based on prices paid by Green Alliance in 2009, adjusted for CPI and reduced by 20% to reflect the ageing of the stock, being 2 years old at the relevant time. This resulted in a price of $9.60 per unit. The second was based on recent retail pricing from other suppliers to which he applied a 45% deduction said to be based on research which suggested that cost of purchases across the light and lamp retail industry averages 45% of sales revenue. This approach yielded $9.90 per unit. The third was based on the cost price used in the GraysOnline valuation, which adjusted for currency fluctuations, CPI and ageing, resulted in $9.00 per unit. Mr Burford adopted the third, being the most conservative of the three.
With respect to the CFLs, Mr Burford’s starting point was some invoices reflecting the sale to Green Alliance by Green Products in October and November 2008, and the GraysOnline stated cost price. He had regard to current retail prices for what he considered comparable products, including Philips, for sale at Bunnings (a large hardware chain), which was around $5-6 with considerable variances in different qualities and types. To this he applied the 45% purchase cost average which suggested an estimated cost price of $2.25 - $2.70. He also relied on an undated letter from Green Products as to its wholesale price for the entire year of 2011 which was between $2.15 - $2.75 excluding GST, and a letter from Mirabella (a well-known globe brand) dated 8 July 2014 that the wholesale price was in the vicinity of $2.20 - $2.50 plus GST. He also reviewed list prices ex-China. He concluded that the cost price used by GraysOnline and supplied via the Green Products invoices was acceptable and still current at the date of valuation. He took a price of $2.30 per unit, reduced it by 25% for ageing, coming to a “market value” of $1.75.
Mr Burford referred to the lack of prominence or express reference in some of the GraysOnline advertising material to the energy efficient lighting in the sale. His view was that considering the weighting of value in the lighting stock, this was a major oversight and may have led to light stock buyers missing the sale. He also opined that the lack of mention of the actual correct trademark branding or certifications under Government carbon credit generation schemes may lead to a failure to attract buyers from what he believes to have been the key market.
With respect to the showerheads, Mr Burford relied on the description and had regard to the cost price of $8.91 shown in the GraysOnline valuation. He was advised by Mr Sayah that the stock consisted of Mildon and PerfectFlow Ultimate products, apparently well-known brands, although there was no branding visible. He deducted 15% due to the fact that the stock was not labelled and a further 10% for ageing, arriving at a market value of $6.68 per head.
He expressed the view that given the quantity and nature of the lighting and showerhead stock, he considered the market (prospective purchasers) to be the continually expanding number of accredited participants in energy savings schemes in New South Wales and Victoria, and said that his recommendation would be to market by tender or expressions of interest to those accredited scheme participants. He would recommend a direct marketing campaign (including telemarketing) focussing on these participants whose areas of interest were readily available on various Government scheme websites, allowing for effective targeting which would reduce marketing costs and increase the effectiveness of the marketing dollar spent. This sales process, he opined, should take no longer than 4 - 6 weeks for the lighting and showerhead stock.
With respect to the batts, Mr Burford referred to the abrupt cessation of the HIP and to the fact that it left most of the industry in disarray. Stock was being purchased in bulk from numerous installers who found themselves heavily oversupplied after cancellation of the scheme. Based, apparently solely on a conversation with an industry participant Mr Sean Gooley, he says that stock was being purchased by re-marketers who would store the stock for extended periods and re-market it into the construction market, generally achieving prices of 30 - 50% of original cost. In his view the sale of Green Alliance’s remaining undamaged batts would take 6 - 9 months. However, the cost of storage and green Alliance’s capacity to store the stock over such a period would have to be considered further. In his opinion, the value of 30 - 50% of cost should have been “quite achievable” with a strong marketing strategy. He attributed a market value, based on a quantity of 10,072 bags, of $15.68 per bag including buyers premium of 13.5% and GST.
The Bank called an expert valuer, Mr Cameron Dunsford, of RHAS, part of the AON group of companies.
Mr Dunsford gave evidence that online auction was the most appropriate method of sale and that the method of sale and advertising in the present case was adequate. His reasoning was as follows:

the assets were fungible in nature and there was nothing particularly unique about them, being commodity-like and sold in markets in which many similar products are sold;

online auction has a wide reach and people can participate at a relatively reasonable cost;

online auction is flexible in offering small or large lots of product to the whole of the target market, and is particularly appropriate for the sale of assets which do not require inspection;

online auction offers a clean, quick and effective mode of sale, by which a successful bid creates an unconditional contract which can be automatically effected if credit card details are provided at the time of registration;

the amount realised by online auction is not limited by an asking price so that there is no upper limit to the proceeds that may be generated;

it was difficult to establish pre-sale market value by consideration of directly comparable sales evidence;

GraysOnline gave exposure to one of Australia’s most attended online platforms; and

the two week auction period provided the target market with a suitable amount of time to consider their purchase. Mr Dunsford’s experience is that the most effective time period to inform the target market is approximately 7 - 14 days before the auction commences.

Mr Dunsford’s evidence was that it is not probable that another method of sale would have generated higher net proceeds. He opined that it would not have been more appropriate to sell by private treaty because it would not have been possible to attribute an accurate asking price, the costs of private treaty were likely to be higher than the costs of an online auction and payment terms and completion date would have been more onerous than those offered in an online auction. He considered that it would not have been more appropriate to sell by way of tender because interested parties would be unaware of who else would be submitting a tender and therefore would be more likely to cap their offer at the amount they would like to pay, rather than the true market value. He considered that a tender process would not have generated the same sense of urgency as an online auction, and that a tender may deter buyers who assume that unrealistic expectations will have the result that items will not be sold or that the submission of a tender is merely the beginning of negotiations. He opined that a tender process is more laborious and time intensive for both the tenderer and the vendor. Additionally, he pointed out, if attempts to sell by private treaty or tender fail and an online auction follows, two sets of marketing costs will be incurred and the sense of urgency which often creates interest at an auction would be tempered by earlier attempts to sell the assets.
He accepted that telemarketing is a legitimate form of promotion but gave evidence that there is a belief that if goods have been on the market previously by other forms of advertising or promotion, and they are unsuccessful, it can affect the result when they do finally reach an unreserved auction situation because they have been “shopped around”, but that it is impossible to quantify the effect of this. He also gave evidence that such marketing may mean that the impact of a spontaneous short and succinct, “hit them in the face” type promotion or one-off event, would be lost but could not say with any confidence that the seller or vendor would end up in any worse position.
Mr Dunsford drew attention to the fact that online auction is considered to be an acceptable method of sale to achieve market value under the auspices of the International Valuation Standards Committee, whose guidelines are followed by the Australian Property Institute.
Mr Dunsford’s evidence was that the assets did not have a readily measurable market value but were sold for their true market value in circumstances where:

the lighting was of unknown brand, had no Australian approval mark on the item or the box, had no identification of the original equipment manufacturer on the product itself, was of unknown age (it not being known when Green Products had acquired them before selling them to Green Alliance) and condition, not sold with any warranty and was of unknown safety and performance;

the showerheads were “brandless”, had no identification of the manufacturer on the product, were of unknown age and condition, performance or specification, and were not sold with any warranty;

the market for batts had collapsed, the price had plummeted and the batts here were of unknown age and condition and were not sold with any warranty;

the target market was properly informed;

online auction was the most appropriate method of sale;

the auction was well attended; and

all the goods were sold.

Mr Dunsford’s research extended to ascertaining that the exact CFLs were offered on a different website at a retail price of 50 cents each, that Green Products had itself offered them online for $2.50 plus GST in packs of six (on the basis of Mr Burford’s 45% deduction at a wholesale price, the cost price would be $1.37), and that unknown brands of new CFL globes in packs of 5 to 50 had been advertised on ebay at prices ranging from $1.20 to $2.80.
Mr Dunsford did not consider that the price advised by the manufacturers for branded packaged showerheads was the correct starting point from which to make deductions for the absence of labelling and ageing. His view was that the discount to move from a branded packaged showerhead to an unbranded unpackaged one, and for ageing, was greater than that selected by Mr Burford. In his opinion the values ascribed by Mr Burford would not have been achievable given the various shortcomings of the stock, nor would the proposed methods of sale have been reasonable for the Receiver to undertake given the timeframes involved, accruing interest costs, and, in the case of the batts, substantial holding costs.
Green Alliance produced no documents evidencing the purchase of the showerheads. Mr Sayah gave evidence that, having looked at pictures of them, they were of the Mildon and PerfectFlow brands. Before the receivership, Green Alliance sold some of these with GraysOnline, using the same description as was used by the Receivers, for an average price of $3.56. The Receivers achieved somewhat less, despite the fact that the showerheads received top billing on some of the advertising material. On the other hand, after the Receivers’ auction, there were some that remained unsold.
I prefer Mr Dunsford’s evidence to that of Mr Burford. He was an impressive witness, entirely unshaken in cross-examination. In contrast, Mr Burford’s evidence was attendant with significant difficulties, not least of all that my distinct impression was that he was seeking to justify a position to assist the Cross-Claimants rather than assist the Court with a dispassionate independent expert opinion.
An immediate difficulty with Mr Burford’s opinion was that it was based on the false premise that the assets were owned by a business operating as a going concern, when in fact at the time Green Alliance had terminated all but a skeleton staff about a year before the sale, had no ongoing contracts, and was selling off its plant and equipment because it no longer had any need for them. He had not been instructed with these facts. When confronted with them, Mr Burford’s insupportable response was not to accept that Green Alliance was not a going concern.

I reject the contention that the lighting and showerhead stock were specialised goods with particular features or should or could reasonably have been advertised as such.
I reject the contention that the lighting stock had any special value which would have been recognised by a potential purchaser engaged in carbon credit schemes, or that such a purchaser would be prepared to pay more for it than a generic goods purchaser.
The eco lights and CFLs were of an essentially unknown brand and were in no way unique. Numerous other brands were available on the market and eligible to be used in various carbon credit schemes. As Mr Dunsford put it, there are warehouses all over Australia full of 15 watt CFL globes.
Moreover, there is significant doubt both as to whether the CFLs themselves were registered under VEETS, and whether they complied with Australian Electricity Safety Regulations. Mr Sayah gave evidence that at the time the CFLs had not received the relevant approvals for electrical safety from the Australian Government, although later he said he could not recall. The evidence did not establish that the eco lights complied with electrical safety requirements either. On 1 November 2012, the Receivers received a letter from Energy Safe Victoria referring to an investigation which had shown that such an eco light had been offered for supply without evidence of an Australian approval mark, and drawing attention to the penalties for non-compliance with legislation.
There was a VEET Product Register into which the CFLs were apparently never entered. On 3 April 2009, the Essential Services Commission gave permission to Green Alliance to use the CFLs even though they were not on the approved register, based on documentation received from Green Alliance and assurances that they met the requirements of the relevant regulations and the stated standards of performance. It was not established that those assurances were met. The CFLs did not bear the necessary approval mark required by the Electrical Regulatory Authorities Council. Moreover, there is a real question whether the permission could have availed some other acquirer of the goods two years later, or at all. It is also to be remembered that Green Alliance had been suspended from VEETS, although for different reasons.
Even assuming that the lighting had appropriate credentials, Mr Dunsford’s evidence, which I accept, is that Green Alliance’s competitors would have had good chains of supply in place and it would be unlikely that a major competitor would have interrupted its supply chain to be tempted by these lights. As to VEETS participants, Mr Dunsford considered that the bigger question was whether VEETS participants would put their business at risk in introducing non-approved three year old globes into their business model. As he further put it, “…a prudent competitor who was using approved globes from approved local channels of Mirabella or GE or Philips wouldn’t have gone near them, it would have posed a risk to their business to install globes with these question marks over them…”.
An additional consideration, although perhaps not weighty, is that competitors who got wind of the fact that Green Alliance was in strife might not wish to assist in buying what they perceived to be doubtful products.
It is also to be remembered that in Green Alliance’s pre-receivership online auctions of lighting stock, descriptions no different to those later used by GraysOnline during the receivership, were used.
With respect to the showerheads, Mr Dunsford made the same point that installers would have had their own supply chains and would not have necessarily broken them to make a few more dollars on a product that offered no warranty. The absence of packaging reduced the possibility of resellers moving them on because it would have made it more difficult to dispose of them as a particular brand.
I reject the contention that the Receivers failed to target the appropriate population of potential buyers. Green Alliance itself targeted over 2,000 industry participants, which Mr Sayah regarded as likely to reach energy efficient scheme market participants including many of those accredited in VEETS. Mr Dunsford gave evidence that he would expect an online auction to reach the appropriate target market, including the competitors and ex-competitors of Green Alliance. There is no evidence which persuades me that telemarketing would have made any positive difference, but it would have involved additional cost.
There are additional difficulties with Mr Burford’s evidence. In assessing the market value of the CFLs, Mr Burford relied, amongst others, on invoices rendered by Green Products to Green Alliance. Leaving aside the fact that transactions between Green Products and Green Alliance were not established to be at arms’ length, there was no evidence of the prices that Green Products itself paid Sailing. A notice to produce served on Green Alliance for such evidence yielded none. Mirabella is a well-known brand and would command significantly higher price than Green Products’ unbranded product.
There was, however, evidence in the form of a letter from Sailing dated 7 April 2010 that it would supply CFLs for the Tamil Nadu Lighting Scheme at US $1.30 which would be a new globe with a warranty. Given that at the time there was substantial parity between the US and Australian currencies, this on its own undercuts Mr Burford’s value of $1.75. Under cross-examination he agreed that the Sailing price would be a starting point from which there would have to be a substantial deduction for the three year old CFLs being sold by the Receivers.
With respect to the eco lights, Mr Burford based his valuation on the purchase price in February 2009 in US dollars converted to Australian dollars at the date of valuation, not taking into account that between February 2009 and the date of his valuation, the Australian dollar had significantly strengthened.
Mr Burford accepted that in preparing his valuation it would have been relevant to have regard to the prices obtained by Green Alliance for the eco lights shortly before the receivership, namely $1.92 for 4,000K eco lights and $3.69 for 3,000K eco lights, significantly lower than the $9 per unit assessed by Mr Burford. He accepted that this indicates that there should be a reduction but took the position that he was unable to say by how much, unless he knew a lot more about the circumstances of the sale. The average price achieved by the Receivers, for a significantly greater quantity, was $2.11 (not far off the median of $2.80 achieved by Green Alliance itself).
In my opinion the Receivers acted reasonably in accepting GraysOnline’s advice to go to online auction. The sales process, including the advertising, was reasonable and the prices obtained reflected the market value of what was sold or, if relevant, the best prices reasonably obtainable having regard to the circumstances prevailing at the time of sale.
Much was sought to be made by the Cross-Claimants of the error in omitting the zero in the GraysOnline valuation. They put that the figure in the report was so low, albeit erroneous, that it should have alerted the Receivers to the fact that online auction was not appropriate. There are at least five difficulties with this submission: the figure was erroneous and to suggest that the Receiver should have acted on it is to require them to act on an error; the amount achieved at auction well exceeded the actual 5 cents in the dollar figure; there is nothing to suggest that the Receivers did not properly consider and accept the advice that online auction was appropriate in the circumstances; the evidence does not establish that the advice was wrong; and finally, the evidence does not establish that any other method of sale would have yielded more.
Turning to the batts, the complaint in this regard can be briefly disposed of.
Firstly, there is no evidence which persuades me that any better outcome could have been achieved. The market for batts was flooded. Before the receivership Green Alliance had tried unsuccessfully to sell batts to building company Multiplex, and appliance store Harvey Norman. It turned to GraysOnline and during March and April 2011 sold batts at an average of $1.14 per sq m. The Receivers’ auction achieved prices in line with these for more than double the quantity sold pre-receivership, and Mr Sayah made no complaint.
Secondly, and more importantly, adopting Mr Burford’s suggested strategy of sale over 6 – 9 months would have put Green Alliance in a worse position, having regard to holding costs – the warehouse itself cost $16,845 per month including GST and outgoings. Both Mr Burford and Mr Sayah accepted this.
Thirdly, the prices achieved by Cold Water Creek selling over a period of more than three months were significantly lower than those achieved by the Receivers. Mr Burford’s assessment of $15.68 a bag is fanciful.

THE INSURANCE CLAIM

At the time of the receivership, Green Alliance owned a quantity of batts which were damaged by over-stacking in storage.
On 8 February 2011, under the signature of Mr Sayah, Green Alliance lodged a claim under a business insurance policy which it had with Zurich Business Insurance (Zurich). The policy covered Green Alliance for loss or damage at its business premises, but not damage caused by wear and tear, fading or gradual deterioration.
The Receivers engaged Professional Risk Managers (PRM) to provide specialist insurance advice and to conduct the claim on their behalf. Mr Zeshan Mantara was primarily responsible at PRM for dealing with the claim.
On 17 August 2011, Zurich accepted liability and granted indemnity under the policy but there was no agreement as to the quantum of the loss.
Lengthy negotiations between the Receivers and Zurich, material aspects of which are recounted below, followed, which resulted in the claim being settled for the sum of $475,000.
The Cross-Claimants contend that in settling the claim the Receivers did not act in good faith and willfully or recklessly sacrificed the interests of Green Alliance. For the reasons which follow, this complaint has no substance.
The Receivers and Zurich were at odds as to the value of what was damaged, in particular, what price per sq m should be adopted, and whether the damaged stock had a shelf life of 12 months.
On 6 October 2011, Zurich advised that an adjuster’s report had been received and they were waiting for sign-off to proceed with negotiating a settlement.
Based on information provided by Mr Sayah, Mr Marsden initially estimated the value of the claim to be $1.3 million. Mr Sayah provided information that the sq m cost of the material was $5.39.
On 17 October 2011, Zurich made a verbal offer via Mr Mantara of $400,000 to settle the claim.
Mr Mantara asked Zurich to put the offer, together with details, in writing.
On about 10 November 2011, Mr Mantara passed on Zurich’s comments and offer. Zurich’s stance was that it had determined that equivalent stock could be purchased at an approximate cost of $28 per bag or $3.11 per sq m, that only 60% of the stock was damaged and the stock only had a shelf life of 12 months, and account needed to be taken of the fact that the stock was of varying ages, with some stock approaching its use-by date, so that an adjustment for wear and tear was to be applied. In determining the cost of the stock, Zurich was apparently relying on a verbal quote from a building supplier called Base Build.
Mr Mantara went back to Zurich requesting further information, including whether Zurich had a quote indicating the current stock value and what the basis was of Zurich’s calculations for the settlement figure. He also asked for a copy of the policy wording.
On 3 November 2011, Mr Lock had asked Mr Sayah to advise on the average life span of a batt and the age of stock in the warehouse. On 28 November 2011, Mr Sayah wrote to Mr Lock that he would get back to him on the average life span of a batt and that the age of the stock in the warehouse at the time of the claim was one year and three months. He also informed Mr Lock that he could not find “any actual time for insulation storage duration” and provided a material safety data sheet to help explain the storage requirements.
As at 30 November 2011, Mr Mantara was still chasing Zurich for their calculations of the settlement sum.
On 1 December 2011, Zurich provided the information sought in respect of the basis for the offer. Its position was that:

the reported quantity of batts totalled $2,261,253 representing 354,428 sq m;

the quoted value was $28 per bag which equated to $3.11 per sq m;

only 60% of the batts had sustained damage;

the batts only had a shelf life of 12 months; and

the batts were of varying ages at the time of the insurance claim and some of the claim and some were approaching their "use-by" date.

Mr Sayah contended that 398,387 sq m were damaged but could not verify his calculation. Mr Mantara recommended against raising the discrepancy.
Mr Mantara advised that Green Alliance should reject Zurich’s position on shelf life on the basis that the claim had been made within 12 months of the purchase of the batts, and of those that had been tested by the insurer, 40% were found to be suitable for use. Mr Marsden accepted this advice.
On 16 December 2011, Mr Sayah provided to Mr Mantara quotes from two suppliers, CSR and Knauf, and on 20 December 2011 he provided one from Green Products.
Mr Marsden’s view, at this time, was that $600,000 would be a reasonable settlement figure and he reported this to the Bank on 22 December 2011. By 13 January 2012 the Receivers and Zurich were still at odds as to the price per sq m and the question of shelf life deterioration. Effort was devoted into preparing a response to Zurich. Mr Mantara was closely involved in this process. A claim for holding costs was proposed to be included.
Shortly before 24 February 2012 (some 15 months since the original claim had been made) Mr Mantara met with Zurich. He reported to Mr Lock, who in turn reported to Mr Marsden, relevantly, that Zurich had a written quote confirming their original verbal one, that details of stock deterioration was noted on the packaging of the batts, and that Zurich may concede storage/rental costs.
On 12 March 2012, Zurich communicated that:

it had obtained a quote for equivalent insulation at a price of $3.11 per sq m which it believed was fair and reasonable;

while the quote was lower than retail price, it reflected the cost of the batts if purchased in bulk including discounts;

as to shelf life, the packaging on the batts stated that "Performance of this product may be reduced if stored for too long in its compression packaging" and that external research confirmed that most products have a shelf life when compressed and stored. It concluded that batts may deteriorate from 6 to 12 months;

it assessed that the batts had been purchased by Green Alliance at least 10 or 11 months prior to the loss being incurred and as such a depreciation rate of 50 per cent was fair;

it would pay for some storage costs but noted that Green Alliance had a pre-existing lease until 24 February 2011 and rent before that period should be borne by Green Alliance; and

in the circumstances, an offer of $400,000 was fair and reasonable.

Mr Marsden considered the position. Zurich’s quote was from a builder, not a supplier, and it was unsigned and not on letterhead. He met with Mr Mantara to discuss the position. On 23 March 2012 Mr Mantara requested a meeting with Zurich. The meeting took place on 13 April 2012. Mr Marsden and Mr Lock attended. Zurich was not prepared to move.
On 18 April 2012 Mr Mantara reported to the Receivers, amongst other, that if they pushed Zurich too far, they may withdraw their offer on the basis that the batts had no value and push the Receivers to fight in Court.
Mr Marsden gave unchallenged evidence that he was concerned to avoid a situation where Zurich was no longer prepared to engage in settlement discussions such that the only recourse was to pursue legal proceedings. Litigation with an insurer could be very costly and time consuming. Further, there was no funding available to the Receivers to conduct litigation. In the event that the Receivers pressed for $1.2 million and Zurich had offered $400,000 the amount in dispute would in effect have been the sum of $800,000. It was his view that the costs to run a claim against Zurich could easily involve legal costs well in the hundreds of thousands of dollars and there was no certainty of succeeding in any claim.
In order to break the stalemate, Mr Marsden instructed that a further offer be put to Zurich to resolve the claim by in effect reducing the settlement sum by 25% to reflect any depreciation (Green Alliance had previously put forward a reduction of 5%).
On 14 May 2012, Zurich provided an email response to the offer. It attached a further quote, from Base Build, signed and on letterhead, confirming that their quote was for new insulation and the cost price of $28 plus GST per bag. Zurich's position on shelf life remained unchanged. It repeated its offer of $400,000.
On 25 May 2012, the Receivers reported to the Bank on the status of the claim against Zurich and that they now had the choice to take the matter further via the Ombudsman or the Courts, or accept the offer. The Bank gave its approval for them to accept the offer. However, they did not do so.
On 4 June 2012, Mr Lock spoke with Mr Mantara who advised that if the Receivers were to reject Zurich's offer then they would need to have detailed grounds to do so, including evidence that Zurich's quote of $28 per bag/$3.11 per sq m was incorrect and that their estimated depreciation/discount for stock life was excessive. Mr Lock suggested that Mr Mantara request a sample of the stock for inspection/analysis. Mr Mantara suggested that the Receivers get lawyers to review the case, although this seemed to negate the point in attending a dispute resolution process. Mr Lock reported this to Mr Marsden and suggested locating an industry expert who could provide a brief report for the Receivers.
On 28 August 2012, the Receivers made a counter offer to Zurich of $600,000. In support of this they put to Zurich that a fair representation of the claim was $617,049, based on a stock cost of $746,144 (60% of 354,428 sq m or 26,648 bags at $28 per bag), less 33.3% depreciation plus holding costs of $76,570. On 5 October 2012, Zurich responded by rejecting this offer but increasing its offer to $450,000 “in an effort to resolve this ongoing matter”. Mr Marsden thought that it was possible to extract a higher settlement and instructed Mr Lock to settle for $500,000.
On 22 October 2012, Zurich offered $475,000 as a final settlement, which the Receivers accepted.
Against this background, the Cross-Claimants put that the Receivers, in breach of their general law duty, wilfully or recklessly sacrificed Green Alliance’s interests by giving no consideration as to whether, and if so how, the balance of the value in the claim could be maintained for the benefit of the borrower or its guarantor, and that they settled for the “lowest version of the response to the admitted claim”. They put that, before settling, the Receivers should have taken legal and technical advice as to the merits of the claim, and if the advice was positive, litigated it. They put, in the alternative, that they should have taken steps to sell the claim to purchasers or financiers of litigation rights.
These submissions are without foundation.
Although in dealing with the insurance claim the Receivers were not exercising a power of sale, they were bound in dealing with it not wilfully or recklessly to sacrifice Green Alliance’s interests.
Far from the Receivers having sacrificed Green Alliance’s interests, I consider that they acted both reasonably and prudently in settling the claim.

In their offer to Zurich on 28 August 2012 to settle for $600,000, the Receivers assessed $617,049 as a fair representation of Green Alliance’s claim. During the hearing, the Cross-Claimants did not cavil with this approach. Indeed, counsel accepted it as the starting point.
The Cross-Claimants adduced no evidence which would enable the Court to conclude that Green Alliance had any prospect, let alone a reasonable one, of achieving a better outcome by litigation, even less so that someone would have been prepared to buy the claim for more than the settlement amount. Plainly, Zurich had an arguable position. The Cross-Claimant adduced no evidence to found a finding that had the Receivers sought further advice, it would have been positive.
Taking $617,049 as the reasonable starting point, the amount in dispute was only $142,049, well within District Court jurisdiction.
Court proceedings could have been lengthy and expensive. Green Alliance did not have the funds to prosecute a case. Mr Sayah gave evidence that he would have been prepared to put up $100,000. I do not believe this, given that he was not prepared to put up money for the VEETS appeal. There was no evidence as to his assets and $100,000 may well have been insufficient.
The Cross-Claimants adduced no evidence as to the likely legal costs of the case or what portion of them would have been irrecoverable even if they had won and obtained an order for costs. Expert evidence would have been necessary. There would have been additional Receivers’ costs incurred. There might have been an appeal. Green Alliance might have lost or done no better than what Zurich had offered, with the risk of an adverse costs order against it, possibly on the indemnity basis.
Notwithstanding that the Bank was prepared for the matter to settle for $400,000, the Receivers persisted and achieved a settlement of 77% of Green Alliance’s claim. I consider this to be a good result.
Even assuming funding had been available, in my view it would have been irresponsible to have opted for the vagaries and vicissitudes of litigation in the face of the offer even if they had had advice that Green Alliance’s prospects were good.

MR SAYAH’S POSITION AS GUARANTOR

As has been earlier mentioned, additionally to the amount owed under the facility, Green Alliance owes the Bank over $5 Million as guarantor for other companies in the group, which debt is secured, as is the facility, by the fixed and floating charge.
Any money recovered by Green Alliance from the Receivers would, to the full amount of Green Alliance’s indebtedness to the Bank, be an asset secured to the Bank under the fixed and floating charge. The fixed and floating charge and the Guarantee incorporate Memorandum of Common Provisions No. 9488920.
The effect of paragraph D6 of the Memorandum of Common Provisions is that the Bank may apply any money it receives or recovers in any way in respect of money owed by Green Alliance or Mr Sayah in paying whatever of the money they owe that the Bank chooses (despite any direction to the contrary).
Thus, unless Green Alliance recovered from the Receivers more than the amount owed by it as guarantor (as opposed to under the facility), Mr Sayah could not expect to benefit by any reduction in his personal liability because the whole amount could (and one would expect, would) be appropriated by the Bank to Green Alliance’s debt as guarantor.
Leaving aside the Tamil Nadu Lighting Scheme claim, which was always bound to fail, Green Alliance’s total claim against the Bank was significantly less than $5 million. Accordingly, unless Green Alliance succeeded in the Tamil Nadu Lighting Scheme claim, the practical reality is that Mr Sayah’s position as guarantor was never going to be assisted by these proceedings.

THE TAMIL NADU LIGHTING SCHEME

In about August 2009, Mr Sayah became aware of an international carbon emission reduction scheme proposed to be embarked upon by the Indian Government, to be coordinated and managed by the Indian Bureau of Energy Efficiency (BEE), a body established to assist that Government in developing policies and strategies to secure efficient use and conservation of energy.
The scheme was announced in 2007 to reduce electricity consumption by residential households during peak hours by promoting the use of energy efficient CFLs. It involved the replacement, at the same cost, of inefficient incandescent light bulbs for CFLs and the monitoring of their replacement. The cost differential was to be made up by a “project implementer” through carbon credits earned which could be traded in the international market. The scheme arose out of the ratification by India of the United Nations Framework Convention on Climate Change (UNFCCC) and its accession to the protocol that was adopted by the parties to that convention in 1997, known as the Kyoto Protocol.
The scheme was to be implemented by public private partnerships between the Government of India, private sector CFL suppliers and State level electricity distribution companies (DISCOMS). The CFL supplier would sell CFLs within a designated project area in a DISCOM region of operation, and BEE would monitor the electricity savings and certified emission reduction certificates (or carbon credits) which would be awarded under the UNFCCC which could be sold to electricity utility companies or traders.
In early March 2010, Mr Sayah travelled to India and participated in an Australian Trade Commission Mission.
At about this time, he was introduced to Mr Chris Winterbotham of Caldrex Capital who had experience in arranging funding for such projects.
Mr Sayah had discussions with the Bank’s Executive Director of Global Head Commodities, Carbon & Energy, Mr Geoff Rousel, about the possibility of the Bank getting involved and assisting in the program. The Bank expressed interest in purchasing carbon credits when they were ultimately generated, but did not wish to be involved in the initial funding of Green Alliance’s participation.
The arrangements which Mr Sayah had in mind were that Green Alliance’s participation would be funded by a significant investor, who would be an electricity utility company or trader, to whom the carbon credits would be sold. He prepared budgets which assumed that CFLs would be installed over two years and that carbon credits would start to be generated after that period. He envisaged funding amounting to 50% of the total expected carbon credit values. The budgets assumed in effect upfront financing of set up costs of $57.71 million and advance payment for CFLs of $40.422 million (that is finance of $98.132 million). The investor would additionally buy the carbon credits at an agreed price and would continue to receive a discounted transfer rate until the financing had been repaid. Thereafter the financier would buy them at an undiscounted price. Green Alliance would receive all its expenses and a 15% management fee. The budget assumed the value of a carbon credit to range between EUR 14.18 and EUR 19.63.
In May 2010, Green Alliance proposed to the Tamil Nadu Electricity Board (TNEB) an exclusive negotiation period, but this did not find favour.
Mr Sayah made a further visit to India in early July 2010. On 13 July 2010 Green Alliance received an invitation from the TNEB to express its interest in the scheme. On 17 August 2010 the BEE empanelled Green Alliance as a “Financier” in the scheme. Although from TNEB’s point of view Green Alliance was to be the Financier, it was understood that the finance was to come from an outside investor.
On about 9 September 2010, Green Alliance submitted its expression of interest to the TNEB. The expression of interest included confirmation that Green Alliance would use all reasonable endeavours to meet a detailed timeline which included the establishment of a bank guarantee for “non-performance penalty” for Indian Rupees (INR) 50 lakhs (meaning INR 5,000,000) – at the time approximately $100,000. Within one month of award of contract, signature of a bilateral agreement with TNEB and a tripartite agreement with TNEB and BEE within two months of award of contract and the securing of finance within four months of award of contract. It envisaged the delivery of CFLs to commence within eight months of award of contract. The expression of interest proposed that if there were disputes they would be resolved by arbitration subject to English law in the seat of Singapore.
On 19 November 2010, TNEB informed Green Alliance that it would be receiving an award letter for the implementation of the scheme in 40% of project areas covering 17 electricity distribution “circles” in the State of Tamil Nadu (covering in excess of five million households). TNEB said that the government of Tamil Nadu was keen on commencing the implementation of the scheme in those areas before December 2010.
On 1 December 2010, TNEB issued an award letter to Green Alliance accepting Green Alliance’s offer against the expression of interest “along with the subsequent negotiated terms for implementing” the scheme. The award letter required a security deposit of INR 50,000, in addition to the requirement for the bank guarantee for INR 5,000,000, and contained a submission to the exclusive jurisdiction of the Indian Courts.
On about 31 December 2010, Green Alliance paid a security deposit of INR 50,000 to TNEB, but it never established the required bank guarantee.
There is material which indicates that Caldrex and Green Alliance proposed that each would have 50% interest in the project but there is no agreement or draft agreement in evidence which gives any clue as to the precise nature of the contemplated agreements. Mr Winterbotham introduced as the potential financier a multinational electric utility company known as GDF Suez (through a subsidiary called Electrabel). GDF Suez’s position was that it had a risk limit on upfront funding of either EUR 500,000 or 50% of the total transaction value, whichever was less.
BEE apparently sent proposed bilateral and tripartite (template) agreements (between Green Alliance and BEE and Green Alliance, TNEB and BEE, respectively). GDF Suez had a number of significant difficulties, including key commercial terms which it did not consider were in line with internationally accepted norms for financing projects of this type. Additionally, GDF Suez had difficulty accepting Indian law as the governing law and with BEE’s insistence on New Delhi being the exclusive place for any arbitration. One of the things that Green Alliance itself wanted included in the tripartite agreement was a statement that it would use all reasonable endeavours to secure financing. One of the provisions in the draft bilateral agreement was that, subject to some exceptions, no party could assign its rights or obligations to any third party or create or permit any encumbrance over its rights without the prior written consent of the other party, such consent not to be unreasonably withheld.
At about the same time, GDF Suez proffered, through Mr Winterbotham, a draft Emissions Reductions Purchase Agreement for Green Alliance’s consideration. The document is engrossed with the words “DRAFT ONLY – UNDER REVIEW”. It contains a number of conditions precedent including validation of a project design document (being a description of the project prepared in accordance with international rules by an entity qualified to give such validations) and the provision of certain seller credit support documents. Events of default included a bankruptcy event in respect of a party which included a person becoming insolvent or unable to pay their debts when due. It contained a provision restricting assignment by the Seller (in this case, Green Alliance) without the prior written consent of the Buyer (in this case Electrabel).
On 23 February 2011, Mr Winterbotham conveyed GDF Suez’s attitude to BEE and TNEB and requested a statement that they were prepared to negotiate the agreements in order to move them to a reasonable commercial position that was “financeable using international norms”.
On 27 February 2011, Mr Winterbotham prepared an email to be sent to BEE and TNEB stating that a failure to reach agreement on key documents left Green Alliance in a position where they would regard the probability of financing the project as very low and the continued allocation of their valued resources as questionable. Mr Sayah approved the terms of this email. The evidence did not positively establish that the envisaged email was sent, but it did establish that the state of affairs as depicted reflected Mr Sayah’s view.
Apparently BEE was encountering difficulties with other proposed stakeholders in the scheme and proposed a national workshop on 16 March 2011 at New Delhi.
On 18 March 2011, Mr Sayah wrote to the Secretary, Ministry of Power of the Government of India. He expressed the view that the reason for the extended delays had arisen principally because the documents as drafted were not acceptable to international financiers and investors. He politely requested the Minister to intervene by appointing a separate grouping of legal firms (one Indian firm and one International firm familiar with European bankability requirements in CDM projects) to undertake a bankability review of the existing documents set and recommend drafting changes for bankability purposes. He referred to the fact that they had been told that the documents must stand where they are and that changes would not be entertained.
Mr Sayah wrote to Mr Winterbotham on 14 April 2011 that the agenda seemed “…pretty clear they are struggling to get things moving because of their lack of ability to change the documents”.
Green Alliance had an Indian representative who attended the workshop and provided Green Alliance with a report. Item 1 in the key note address was described as “difficulties encountered by all in entering Bilateral/Tripartite agreements”. As at 28 April 2011, that is, the date of the receivership, none of these agreements had been finalised, and they never were.
After Green Alliance’s file had, in view of its default, been transferred to Mr Mulvhill, he reviewed it. It included material concerning the scheme. He reviewed a credit paper prepared by Mr Alfred Cottilli, a Senior Relationship Manager at the Bank, which referred to the discussions Mr Sayah had had with Mr Rousel. Mr Mulvhill had a discussion with Mr Rousel and a discussion with Mr Sayah. In January 2011 he prepared a credit paper concerning the scheme and he obtained additional information from Mr Sayah. In April 2011 he prepared a further credit paper and highlighted his concerns in relation to Green Alliance and the scheme. He formed the view that the project was at a very preliminary and formative stage, and that Green Alliance or Mr Sayah had no ability to implement it in order to obtain any return for the Bank in the medium term or ever.
Mr Marsden became aware of Green Alliance’s involvement in the scheme at the time he was appointed investigating accountant. He discussed it with Mr Mulvhill and Mr Lock. Mr Marsden requested information about the venture from Mr Sayah and received some documents, including the work order and a draft budget. He formed the view that the business case for Green Alliance’s proposed expansion into India was at a very embryonic stage. His observations included that:

apart from the work order, no documentation had been entered into;

Green Alliance was in default of the timetable set out in the work order;

there was no evidence that the necessary internal or external funding had been or would be obtained by Green Alliance;

Mr Sayah had provided no information regarding how the project was to be funded;

there was no business or strategic plan and no international business program;

there were no documents evidencing consideration of the potential barriers to entry in a foreign market; and

Green Alliance did not have the cash or assets required to participate in the scheme.

On 11 March 2011, Mr Marsden met with Mr Sayah who told him, amongst others, that a general program in India had been approved but Green Alliance did not have funding and the project had not got off the ground, that they were trying to get funding through Electrabel but nothing had come through yet, that they had run out of cash, that if they could fix up the Indian venture they might be able to start generating cash, and that they could not commence setting up operations in India until all the funding was sorted out.
On 15 March 2011, Mr Lock met Mr Sayah who advised that he had refused to sign the documentation in relation to the Indian project and had requested amendments. He said that he needed a $1 million cash injection, although the cash flows showed $500,000 was needed.
He says that Mr Sayah did not raise the Tamil Nadu Lighting Scheme with him during the course of the receivership nor did he seek to discuss the project with him. He says that Mr Sayah never informed him that the prospect was an asset of Green Alliance. He observes that Mr Sayah did not list it as an asset of Green Alliance in the Report as to Affairs which he signed and that whilst Mr Sayah did make requests from time to time that he be authorised as a director to pursue matters or to assist with the receivership, he made no such request with respect to the Tamil Nadu Lighting Scheme.
During the accountants’ investigation period before the receivership, Mr Marsden concluded that the project was only at “an idea phase”, not at an implementation or completed phase and that Green Alliance had no readiness to expand internationally, including into India. In fact, Green Alliance was insolvent.
Mr Marsden says that, as receiver, he did not take any steps to realise or progress the Tamil Nadu Lighting Scheme because his view was that there was nothing to realise or progress. Progressing it, even if this were possible, would have resulted in Green Alliance incurring significant liabilities, obligations and undertakings, including raising substantial finance. It would have required entering into of agreements with Indian Government bodies, the commencement of operations in India including the hiring of a workforce to install light bulbs, entering into agreements with counterparties selling carbon credits if they were eventually obtained, and seeking extensive legal, commercial and strategic advice as to the merits of the project. He was also acutely aware of the possible personal liability he would incur if he had taken steps to implement the scheme. Throughout Mr Marsden was of the view that the Tamil Nadu Lighting Scheme was not an asset of any value nor a business that could be sold as a going concern.
Without doubt, Mr Marsden’s view was correct. By the time of the receivership, and for that matter at all material times, Green Alliance had no funding and no operative agreements with the Indians. In my view, by the time of the receivership it was apparent that there was no realistic prospect of either.
The Receivers had no obligation to carry on the business previously carried on by Green Alliance. The notion that Green Alliance had anything of value to sell is farcical. No reason was given why protagonists who wanted to install lights in Tamil Nadu could not themselves simply have agreed directly with the Indian authorities to do so.
The Cross-Claimants relied on the evidence of a forensic accountant, Mr Ralph Norris, who opined that the unformed opportunity had a value of $6 million. This evidence was entirely insupportable for reasons only some of which are mentioned below.
It was based on circular reasoning. The approach, whereby he was able to derive a positive value for this opportunity, was to assume that the necessary agreements would be entered into under which carbon credits would be generated and sold over a lengthy period of time resulting in significant revenue, calculate that revenue, and then discount it by an arbitrary percentage to take account of the fact that the agreements necessary to generate it in the first place had not been entered into.

As his circular reasoning reveals, his conclusion wrongly assumes that the value derived equates to damage caused to Green Alliance by the failure of the Receivers to take up the opportunity or sell it. The application of a discount to the ultimate presumed revenue is not a substitute for establishing, where agreements are necessary to create the commercial opportunity concerned, that on the balance of probabilities, they would have been entered into.
The unsoundness of his approach was further revealed by his reaction to the fact that Electrabel had made it clear that it was not prepared to provide the amount of the finance required and further was not satisfied with the terms or the various agreements being proposed. His manifestly untenable position was that one could still assume that those agreements might be entered into by conjecturing (as it happens without any evidentiary support) that someone senior in Electrabel might take a different view and countermand the position of the Electrabel officers who had conveyed that entity’s dissatisfaction, and simply apply a further discount to the projected revenue to take account of the risk that this might not turn out to be the case.

CONCLUSION

The Bank is entitled to judgment against Mr Sayah for $1,467,506.28, adjusted as necessary to the date of judgment.
The cross-claims are to be dismissed.
I will hear the parties on costs should this be necessary, and on any further issues that require to be dealt with. Thereafter short minutes are to be brought in.
The exhibits are to be returned.

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Decision last updated: 19 August 2015

Medium Neutral Citation:	Westpac Banking Corporation -v- Rafick Sayah [2015] NSWSC 1167
Hearing dates:	20, 21, 22, 23, 27, 28, 29, 30 July 2015
Decision date:	19 August 2015
Jurisdiction:	Equity - Commercial List
Before:	Hammerschlag J
Decision:	Judgment for Plaintiff for $1,467,506.28 Cross-Claims dismissed
Catchwords:	CORPORATIONS – RECEIVERS AND MANAGERS – Corporations Act 2001 (Cth) s 420A – duties of receivers and managers in exercising a power of sale or otherwise dealing with property of a Corporation – obligation to obtain the market value or best price reasonably obtainable in the prevailing circumstances – obligation not to act wilfully or recklessly or sacrifice the interests of a mortgagor – complaint that receivers failed to sell property of a mortgagor company, being lighting, showerheads and insulation products useable in energy conservation schemes, at market value or for the best price reasonably obtainable – complaint that receivers sacrificed the interests of the mortgagor in settling an insurance claim for damage to insulation batts at an undervalue – position of guarantor of the debt owed by the mortgagor – HELD: Complaints not established – mortgagee entitled to judgment against guarantor
Legislation Cited:	Corporations Act 2001 (Cth)
Category:	Principal judgment
Parties:	Westpac Banking Corporation – Plaintiff and First Cross-Defendant Peter William Marsden – Second Cross-Defendant David John Kerr – Third Cross-Defendant Rafick Sayah – Defendant and First Cross-Claimant Green Alliance Pty Ltd – Second Cross-Claimant
Representation:	Counsel: K. Rees SC with J.A.C. Potts and C. Parkin - Plaintiff and Cross-Defendants N.A. Cotman SC with C. Carroll - Defendant and Cross-Claimants Solicitors: D.L.A. Piper Australia - Plaintiff and Cross-Defendants Fortis Law Group - Defendant and Cross-Claimants
File Number(s):	2013/93911

Number sold	Sale price	Sale price per unit sold
CFLs	435,000 (approx.)	$57,529	$0.13
Eco Lights	45,000	$95,276	$2.11
White and chrome shower fittings	10,650	$12,031	$1.13