FEDERAL COURT OF AUSTRALIA

Mhanna v Sovereign Capital Limited [2004] FCA 1040

CORPORATIONS – leave sought to institute proceedings in the name of the company pursuant to s 237 of the Corporations Act 2001 (Cth) – purpose of proceedings to have an account taken as between mortgagor and mortgagee – statutory requirements satisfied – leave granted

MORTGAGES – an account may be ordered where there is no offer to redeem – offer to redeem required in ordinary circumstances – applicants unable to make offer in their own names – grant of leave to commence proceedings in the name of the company includes the authority to offer in the name of the company to redeem the mortgage – absence of offer to redeem no impediment to grant of leave

Corporations Act 2001 (Cth) s 236(1)(a), 236(2), 237, 237(2), 436C

Federal Court (Corporations) Rules 2000

Charlton v Baker (2003) 47 ACSR 31 referred to

Scandinavian Pacific Ltd v Burke (1991) 5 BPR 11,846 referred to

E Tyler, P Young and C Croft, Fisher & Lightwood’s Law of Mortgage (Australian Edition, 1995)

JOHN MHANNA & ANOR v SOVEREIGN CAPITAL LIMITED & ANOR

N 908 OF 2004

HELY J

13 AUGUST 2004

SYDNEY

THE COURT ORDERS THAT:

1.         Leave be granted to the first and second applicants to bring proceedings on behalf of Highwatch Pty Ltd (ACN 101 120 389) against the first respondent claiming the relief set out in the draft Amended Application annexed to the Notice of Motion filed on 26 July 2004.

2.         Leave be granted to the first and second applicants to file an amended application against the first respondent in the form of the draft Amended Application, subject to the replacement, where necessary, of the terms ‘applicant’ and ‘respondent’ with ‘plaintiff’ and ‘defendant’.

3.         Costs of the motion to be costs in the proceedings.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     Highwatch Pty Ltd (ACN 101 120 389) (‘Highwatch’) is the owner of a property at Chiswick, which it purchased on 7 February 2003 and is in the process of developing.  Highwatch borrowed monies from Sovereign Capital Limited (ACN 085 821 218) (‘Sovereign’) on the security of the property.  It also granted a fixed and floating charge in favour of Sovereign.  On 2 March 2004 Sovereign appointed Messrs Yates and Lombe as receivers and managers of Highwatch.  On 5 March 2004 Messrs Purchas and Dean-Wilcox were appointed administrators of Highwatch by Sovereign pursuant to s 436C of the Corporations Act 2001 (Cth) (‘the Act’).

2                     RPG Property Services was commissioned by the administrators to assess the value of the property as at 15 March 2004.  They assessed its value on a ‘forced sale’ basis as $8.25 million, and on an ‘as is’ basis at $10 million.  Other valuations of the property exist, including one which assessed its value in its existing condition at $12.9 million.

3                     On 6 April 2004 Highwatch received a letter of offer from Shakespeare Haney Securities Ltd (‘Shakespeare’) to refinance existing debt and provide construction finance totalling $14 million.  The offer was heavily conditional, being open for acceptance for ten days after which it would be deemed to have lapsed.  An amount of $25,000 was payable on acceptance.  The offer has not been accepted.

4                     Highwatch and Sovereign disagree as to the amount required to be paid in order to procure a discharge of Sovereign’s security.  Sovereign claimed a pay out figure of $8.815 million, whereas Highwatch contended that the amount payable was $7.614 million.  I was informed that this difference of over $1 million is largely referable to a dispute as to how interest under the mortgage should be charged.

5                     On 4 June 2004 an application by the first and second applicants was filed in this Court.  The first applicant was a director and shareholder of Highwatch between 25 June 2002 and 25 February 2004.  The second applicant has, since 25 February 2004, been a director and shareholder of Highwatch.  The application sought leave under s 237 of the Act to bring the proceedings on behalf of Highwatch, and claimed on behalf of Highwatch damages for misleading and deceptive conduct, and an account of the monies payable under the mortgage and charge.

6                     On 4 June 2004 a Deed of Company Arrangement (‘the DCA’) was entered into between Highwatch and the administrators pursuant to a creditors’ resolution which had been passed on 14 May 2004.  In substance the DCA required Highwatch to pay to the administrators within 30 days sufficient funds to enable repayment in full of the company’s secured and unsecured liabilities.  The administrators were empowered to grant an extension of time of one month for payment (cl 4.3(a)) but any greater extension required the authority of a creditors’ resolution (cl 4.3(d)).  Clause 7.1 provides that in the event that Highwatch breaches cl 4 of the deed, including without limitation the payment of any money to the administrators, then the administrators may convene a meeting of the creditors at which the creditors may resolve to do a number of things, including winding up the company and appointing the administrators as liquidators.  Clause 12 of the deed provides that the deed does not bind the secured creditor (that is, Sovereign) but that the amount to be paid by the administrators to the secured creditor is to be either the amount ‘ordered by the Court’ pursuant to these proceedings as the amount owed by Highwatch to Sovereign, or such other amount as may be agreed.

7                     On 6 July 2004 the administrators extended the date for payment of the monies due and payable under the DCA to 4 August 2004, being the day after the return date of a Notice of Motion filed by the first and second applicants.  The Notice of Motion seeks leave under s 237 of the Act to bring proceedings on behalf of Highwatch against the respondents in accordance with an annexed draft Amended Application.  The Amended Application no longer includes a claim for payment of damages to Highwatch for misleading and deceptive conduct.  The principal relief claimed in the application is:

‘Upon [Highwatch] undertaking to pay such sum as may be found to be due under Mortgage 9894089M and the Charge held by [Sovereign] over the assets of [Highwatch], an order that an account be taken as between [Highwatch] and [Sovereign] to determine the monies secured to [Sovereign] under the Mortgage and the Charge.’

8                     The first and second applicants are persons within s 236(1)(a), and hence may apply to the Court for leave to bring proceedings on behalf of a company: s 237(1).  Proceedings brought on behalf of a company must be brought in the company’s name: s 236(2).  Section 237(2) provides:

‘237(2)  The Court must grant the application if it is satisfied that:

            (a)        it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and

            (b)        the applicant is acting in good faith; and

            (c)        it is in the best interests of the company that the applicant be granted leave; and

            (d)        if the applicant is applying for leave to bring proceedings – there is a serious question to be tried; and

            (e)        either:

                        (i)         at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or

                        (ii)        it is appropriate to grant leave even though subparagraph (i) is not satisfied.’

9                     The weight of authority favours the view that leave may be granted even where the company is in liquidation: Charlton v Baker (2003) 47 ACSR 31.  By parity of reasoning, the fact that administrators have been appointed to Highwatch does not of itself preclude the granting of leave.  Furthermore, Charlton v Baker is also authority for the proposition that if the s 237(2) criteria are satisfied, the Court must grant leave.  There is no residual discretion.

10                  The administrators were appointed by Sovereign.  They are parties to the DCA which provides for the first and second applicants to bring these proceedings for the purpose of establishing the amount which Highwatch must pay to Sovereign in order to obtain a discharge of its securities.  These facts make it likely that whilst the company remains under the control of the administrators, the company will not itself bring the proceedings.  Paragraph (a) of s 237(2) is satisfied.

11                  Highwatch is attempting to refinance Sovereign’s debt.  The amount payable on discharge needs to be established before attempts to refinance can have any realistic prospect of success.  It was submitted that the application is premature, and should not be entertained until funds are in place to effect a refinancing.  I take this to be a submission that par (c) is not satisfied, but the submission is rejected for the foregoing reason.  As Highwatch appears to be insolvent, its ‘best interests’ must be regarded as reflecting the interests of the general body of its creditors.  The creditors voted in favour of the implementation of a DCA which provides for the institution of these proceedings as the means by which the quantum of the secured liability is to be determined.  Paragraphs (b) and (c) are thus satisfied.

12                  It was not submitted that Highwatch’s contention that the amount payable on discharge of Sovereign’s securities is about $1 million less than that claimed by Sovereign is spurious or without any arguable foundation.  Sovereign did, however, submit that par (d) is not satisfied, as, in its submission, a Court cannot order the taking of an account without an offer to redeem, and no ‘offer to redeem’ has been, or can be made to Sovereign.

13                  The proposition that a Court cannot order an account without an offer to redeem is probably an exaggeration of the true legal position.  In Scandinavian Pacific Ltd v Burke (1991) 5 BPR 11,846, Cole J said (at 11,851):

‘(13)    The offer to do equity by offering to pay such sum as is due upon taking of accounts must not be merely worthless verbiage, having the result of delaying judgment.  That, however, does not mean that every impecunious mortgagor is denied the opportunity of accounts, for it may be that his impecuniosity is due to the equitable delinquencies of the mortgagee; indeed, it may be that had a sale been effected at a proper value no debt at all would be due to the mortgagee.  Injustice flowing from refusal of accounts in such a circumstance must not be allowed.  Accordingly, in determining the exercise of discretion, the Court may have regard to the bona fides of the claim for accounts and the likelihood of success, the impecuniosity of the mortgagor and its cause, the interests of the mortgagee, and other matters (see, for instance, Buckley v Bennell Design & Constructions Pty Limited (1974) 1 ACLR 301 at 304; Rosenfield Nominees Pty Limited v Bain and Co (SC (NSW), Commercial Division, Giles J, 28360/88, unreported).  It is neither desirable nor possible to predict all matters which may be relevant to a particular exercise of discretion.’

14                  Nonetheless it is ordinarily the case that a Court will not order an account in the absence of an offer to redeem: E Tyler, P Young and C Croft, Fisher & Lightwood’s Law of Mortgages (Australian Edition, 1995) at 771, because an account will not be ordered if the mortgage is to remain on foot.  In the present circumstance, it is Highwatch as the mortgagor which must make the offer to redeem, and it is an offer which is made to the Court.

15                  The first and second applicants have no right to represent or to make offers on behalf of Highwatch, except to the extent (if at all) that the necessary authority in this regard flows from the grant of leave pursuant to s 237.  However, the authority to institute proceedings on behalf of and in the name of the company necessarily carries with it the authority to offer in the name of the company to redeem the mortgage, since the making of such an offer is a precondition to obtaining the relief which is sought to be achieved by the institution of the proceedings.  Paragraph (d) is therefore satisfied.  It was accepted in the course of argument that par (e) is satisfied.

16                  I grant leave to the first and second applicants to bring proceedings on behalf of Highwatch against the first respondent claiming the relief set forth in the draft Amended Application annexed to the Notice of Motion filed on 26 July 2004.  I grant leave to the applicants to file an amended application against the first respondent in the form of the draft Amended Application subject to the replacement, where necessary, of the terms ‘applicant’ and ‘respondent’ with ‘plaintiff’ and ‘defendant’ (as required by the Federal Court (Corporations) Rules 2000).

17                  Costs of the motion to be costs in the proceedings.

Associate:

Dated:              13 August 2004