Yellowrock Pty Ltd v Liberty Services Pty Ltd
[2000] VSC 123
•6 April 2000
| SUPREME COURT OF VICTORIA | |
| COMMERCIAL & EQUITY DIVISION | Not Restricted |
No. 8081 of 1999
| YELLOWROCK PTY LTD (ACN 005 747 268) and ANOR | Plaintiffs |
| v | |
| LIBERTY SERVICES PTY LTD & ORS (ACN 064 512 858) | Defendants |
| A N D B E T W E E N | |
| MOUNT BARKER ORCHARDS PTY LTD (ACN 056 289 224) | Plaintiff by Counterclaim |
| v | |
| YELLOWROCK PTY LTD (ACN 005 747 268) and ANOR | Defendants by Counterclaim |
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JUDGE: | Eames J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 4 April 2000 | |
DATE OF JUDGMENT: | 6 April 2000 | |
CASE MAY BE CITED AS: | Yellowrock v Liberty Services | |
MEDIUM NEUTRAL CITATION: | [2000] VSC 123 | |
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Injunction – serious question to be tried – balance of convenience.
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APPEARANCES: | Counsel | Solicitors |
For the Plaintiffs | Mr P. Hayes QC with | Sherrill O'Connor–Sraj |
| For the Defendants | Mr S. Palmer | John Preat |
| For the 3rd Defendant to counterclaim | Mr M. Osborne | Madgwicks |
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HIS HONOUR:
The Defendants, being seven parties, seeks an interlocutory injunction to restrain the Plaintiffs and a Receiver from proceeding to advertise and sell an apple orchard property owned by Mount Barker Orchards Pty Ltd. The Receiver, the third defendant by counterclaim, was appointed by the plaintiffs on 17 December 1999 pursuant to a mortgage dated 28 June 1994, which provided for his appointment in the event of default by the mortgagor, Mount Barker Orchids Pty Ltd (“MBO”). The mortgage secured the obligations of MBO which the plaintiffs claim arise under both a Deed of Guarantee and Deed of Put Option. In order to understand the competing contentions it is necessary to briefly trace the complex legal relationship which was created between the parties, and others.
In May 1994 the plaintiffs, Yellow Rock Pty Ltd (“Yellow Rock”) and Pro-Plas Pty Ltd (“Pro-Plas”), as share farmers, engaged Liberty Services Pty Ltd (“Liberty”) to manage an apple orchard leased by Yellow Rock and Pro-Plas from MBO for a period of five years. Liberty was to manage the orchard owned by MBO at Harcourt. MBO also owned an adjoining property. The directors of Liberty and MBO were common, namely Anthony Loftus and Peter Plevritis. In March 1999 a new company, Bitters Pty Ltd (“Bitters”) was formed with Plevritis as sole director. It was to manage the orchard on a day to day basis, and was to indemnify MBO and Liberty for any matters arising out of the day to day share farming business.
The arrangement for the apple orchard venture was supported by contractual arrangements of such complexity and artificiality as to strongly suggest that the entire exercise was little more than a tax avoidance device. That suggestion has been disputed on both sides, it being asserted that it was a lawful tax deferral scheme which had been undertaken.
Pursuant to the terms of the share farming agreement under which Yellow Rock and Pro-Plas engaged Liberty to manage the apple orchard leased from MBO, an initial management fee of $1.875 million was to be paid to Liberty to manage the apple orchard for the first year of the share farming agreement. In addition to that fee Liberty was to be entitled to one half share of the value of the apple crop in the first year, and thereafter its remuneration was to be payment of a sum equal to one half of the cost of production and one half of the value of the apple crop. The seeming generosity of those arrangements is offset by the fact that after the initial management fee was paid, a sum of $1.3 million was to be advanced under a loan agreement whereby Liberty would lend that sum to another company, Wydome Pty Ltd (“Wydome”). Wydome is a company associated with the plaintiffs. Wydome was to make that sum available to the plaintiffs so that they could pay the management fees due by them to Liberty.
At the same time as these other arrangements were put in place Wydome and MBO were party to a Deed of Put Option pursuant to which if the sharefarmer/plaintiffs had not within five years received an amount equal to lease payments and the total management fees which it had paid, then Wydome could require MBO to acquire the interest of the share farmers in the share farming agreement.
Pursuant to yet another document, a Deed of Guarantee, MBO guaranteed the share farmers that by the end of five years they would receive not less than the payment of $650,000 plus interest at the rate of 15% per year. Those guaranteed returns were subject to a set off, in respect to amounts owing by Wydome to Liberty.
By a deed of mortgage the obligations of MBO were secured under the Put Option and also under the guarantee.
The Plaintiffs served notice under the Put Option because MBO had not paid the share farmers the whole of the lease payments and management fees which had been payable by the share farmers to MBO and Liberty respectively. Clause 1 of the Put Option required MBO, upon service of notice on it, to acquire the interests of Yellow Rock and Pro-Plas in the share farming agreement. In that event MBO was to pay the whole of any lease payments made by the share farmers to MBO and the whole of the management fees paid under the share farming agreement, but could deduct any amounts received by the share farmers under the share farmer agreement. The notice under the Put Option was served on 25 May 1999 but MBO has failed to acquire the interests of Yellow Rock and Pro-Plas in the share farming agreement.
The summary, above, barely touches upon the complexity of the arrangements, but is sufficient for present purposes.
In 1996 the parties came into dispute as to the proceeds of sale of the 1995 and 1996 crops. The plaintiffs sued Liberty in the County Court seeking sums said to be due to them with respect to the crops for 1995 and 1996. That action is not yet concluded. In 1999 the plaintiffs made a demand on MBO under the guarantee, seeking $650,000 plus interest, and gave a notice under the deed of Put Option demanding that MBO acquire the plaintiffs’ interest in the orchard. There was no response to the notices and on 18 November 1999 the plaintiffs served a notice on MBO under the mortgage that it would exercise the power of sale under the mortgage. On 17th December 1999 the receiver was appointed.
On 3 February 2000 Beach J dealt with an application brought by the plaintiffs for an extension of injunctive relief granted earlier by his Honour, which restrained the defendants from disposing, dealing with or dissipating the proceeds of the 1999 crop. His Honour rejected the application. Beach J ordered that the plaintiffs file a statement of claim, which they have done. The plaintiffs claim an account and damages and other relief.
The interlocutory proceedings before me, brought by the second defendant (MBO) is for an injunction restraining the proposed sale of the property which is leased from MBO for the share farming arrangement. Counsel for the defendants relied heavily upon findings and remarks of Beach J in his reasons for decision, in particular in support of the contention that there is a serious question to be tried. His Honour, in refusing to grant the relief sought by the plaintiffs, in that instance, cast doubt on the strength of the plaintiffs’ case and held that the matters relied upon by counsel for the defendants were strongly arguable and that the prospects of the defendants successfully defending the proceedings were high. Although his Honour was speaking in the context of a different claim brought by the plaintiffs, to that which is now specified in the statement of claim counsel for the defendants before me submitted that the remarks extended to the issues now addressed in the application brought by the defendants, and it seem to me that the remarks of Beach J can be taken to have extended to these issues, or at least some of them. Counsel for the plaintiffs and for the receiver submitted, however, that there was not an arguable case, and that Beach J had been wrong in so concluding in the application which had been before him.
To support their contention that there was not an arguable case, counsel for the parties in opposition contended that their entitlement to force a sale is properly founded on the mortgage, by reference both to the Deed of Guarantee and to the Put Option, and that there is no possible answer to those claims.
The obligation under the Deed of Put Option has not been met, so it was submitted. MBO has not paid the sharefarmer/plaintiffs the whole of the lease payments and the management fees paid by them to MBO and Liberty. Under the Put Option MBO is required to purchase the interest of the plaintiffs in the share farming agreement for the sums stipulated. That has not occurred, and there is no contention otherwise, so it is submitted.
As to the Guarantee, it is submitted that MBO guaranteed returns to the plaintiffs at the expiration of 5 years, which have not been paid. MBO was to deduct from the amounts due by it to the plaintiffs amounts owing by Wyndome to Liberty. Whilst that amount would have been greater than the sum due to the plaintiffs by MBO, the deduction does not arise, so it was submitted, because by Clause 6 of the Loan Agreement when notice is given under the Put Option, Wyndome is not then required to pay Liberty any sums borrowed by it from Liberty. MBO is, thus, in default under the guarantee, so counsel for the Plaintiff and Receiver submitted.
In response, Counsel for the defendants submitted that there was a serious question to be tried, a conclusion correctly reached by Beach J, as is apparent once the relevant documents are examined. Counsel for the defendants submitted that whilst the Put Option provided that that in the event of the lender, which was Wydome, serving notice pursuant to clause 1 of the Deed of Put Option, MBO was required to acquire the whole of the plaintiff’s interests in the lease and share farming agreement, clause 3 of the Put Option provided the consideration for the acquisition by MBO of the plaintiffs’ interest in the agreement was to be the payment by MBO to Wydome, not to the plaintiffs, for the whole of the monies paid by the plaintiffs under the agreements, less amounts received by the plaintiffs under the share farming agreement (and other sums specified). Thus, so it was contended on behalf of the defendants, MBO was not indebted to the plaintiffs under the Put Option. Its only liability could be to Wydome. Wydome is not one of the nine parties in the proceedings.
As to the Guarantee, MBO contends that it is not liable there, either, because it is entitled to set off any money owing by Wydome to Liberty as against any amount it might owe to the plaintiffs. Since the debt of Wydome to Liberty is greater than any amount it may owe the plaintiffs then there can be no liability under the Guarantee.
The respective contentions of the parties as described above depend not merely on the terms of very complex cross-documentation, but may well also depend on findings of fact, after hearing witnesses. In my view there is a serious question to be tried.
I turn, then, to the balance of convenience.
On behalf of the applicant, MBO, it is submitted that it will suffer irreparable loss if the property is sold at the auction, which has been advertised for 14 April 2000. It was submitted that MBO would suffer harm and so too would “those other persons who derive their income from the operation of the orchard”. In an affidavit filed only after the hearing before me had commenced, and in response to remarks made by me, Michael Loftus deposed that the adjoining properties are run together, and are dependent one on the other. The adjoining land derives its water from an irrigation source on the mortgage land and it was claimed that it was not economically viable to obtain water from another source. Mr Loftus deposed that access to the mortgage land was essential to operate the adjoining land and that “without access to the water, the neighbouring property would be worthless” a proposition rightly criticised as being a manifest exaggeration. It was contended that the three employees were being paid. There was no suggestion advanced, however, that any employee would be disadvantaged by virtue of a sale of the property. He asserted that MBO, Bitters and “their principals and employees derive their income from the operation of the orchard as a going concern”. It was contended that unless the adjoining properties were in the same hands the value of each would be reduced and issues of water rights and reticulation would be a problem.
On behalf of the plaintiffs it was submitted that the balance of convenience favours the refusal of the injunction, and permitting the sale to proceed. It is submitted that damages are an adequate remedy, and that there is no special value to the plaintiffs for the maintenance of title to this land.
The Receiver submitted that delay will cause major difficulties in that the crop is to be picked in May; the receiver is in no position to pay workers to do so, nor to pay those workers who are apparently on the property. The receiver can not run the farm.
Mr Rodbard-Bean, for the plaintiffs, submitted that it was of importance that the defendants were not offering to pay any money into court in the event that the injunction was granted. He submitted that the defendants were only disputing the quantum of the plaintiffs claim, not liability. In those circumstances, he submitted, the mortgagor in default had to pay into court the monies claimed to be owing: Inglis v Commonwealth Trading Bank of Australia[1]; Nicholas John Holdings Pty Ltd v ANZ[2]; Henry Roach Petroleum Pty Ltd v Credit House (Vic) Pty Ltd[3]. I do not accept that those cases are applicable here, because the dispute is not one only as to quantum, but as to liability also.
[1] (1971) 126 CLR 161, at 164-5, per Walsh J.
[2] [1992] 2 VR 715.
[3] [1976] VR 309.
There is, however, a factor relating to the financial position of the defendants which is of importance on the balance of convenience. An undertaking as to damages was made on behalf of the defendant companies making the application for an injunction. During submissions it was indicated that Anthony Loftus and Michael Loftus would also personally give undertakings as to damages. I was told that they were the ultimate beneficiaries of the assets owned by the various entities on the defendant's side, but I was given no indication that their undertakings are of value, and I am not prepared to assume that they are. I say that because this entire arrangement reeks of artificiality and it was a scheme which was created within the camp of the defendants, in particular by Michael Loftus.
In an affidavit of Garry Reichert, a director of the plaintiffs, sworn 24 March 2000, he deposes that Michael Loftus introduced himself as a non-practising lawyer who had expertise in tax effective schemes. The defendant MBO is a company with $2 paid up capital. Its shares are held by a New Zealand company called Horticulture Holdings (Aust) Ltd, registered in New Zealand. That company is a trustee company, and its sole director is Michael Loftus. The assets of MBO are wholly charged under a fixed and floating charge to Unicrest Solutions Pty Ltd, which has a paid up capital of $2. Its shares are owned by Michael Loftus. The assets of Unicrest Solutions are wholly charged under a fixed and floating charge to Hemisphere Finance (NZ) Limited, a company incorporated in New Zealand. The assets of Hemisphere are wholly charged to Kirk Holdings Limited, a company incorporated in Western Samoa. Its sole director lives in Thailand. The sole shareholder of Hemisphere (NZ) is Kirk Holdings. Kirk Holdings, although incorporated there, does not trade in Samoa, but as an international company is not liable for tax. Liberty Services is a $2 company, its current shareholders being Michael and Anthony Loftus. It is subject to a fixed and floating charge to the National Australia Bank. There is considerable evidence that MBO is unable to pay debts, and its undertaking is likely to be worthless.
In my opinion, the balance of convenience falls in favour of refusing the application for an injunction to restrain the sale. The likely consequences of a sale do not seem to me to be as severe as is asserted. The application does not seek removal of the Receiver, and if the sale does not proceed it is difficult to see how the value of the crop can be gained unless there is an injection of funds, which does not appear to be likely from any source. Should the second defence to the action succeed, but the property have been sold, I consider that damages will be a quite appropriate remedy, and that the retention of the property is not of importance for ensuring that the second defendant would reap the benefit of a successful outcome in the litigation.
I should add, that although I have ruled that there is a serious question to be tried, my own consideration of the issues which were before me (and which were not identical to those which were before Beach J in the application which he considered) would not lead me to the same conclusion as his Honour concerning the prospects of a successful defence to the action. I would, respectfully, not endorse the remark of Beach J to the effect that the prospects of the defendants successfully defending the action were high. The case for the second defendant may be arguable, but given the obfuscation of the documentation in this case (which is the product of the design of the scheme by Michael Loftus), and the very strong impression that the documentation hides, rather than illuminates, reality, I would not express any degree of confidence as to the eventual outcome of this case.
I conclude that the application for injunctive relief made by the defendants should be dismissed, with costs.
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