Camden Nurseries Pty Ltd v Aussie Growers (Aust) Pty Ltd

Louise Cassar (the third defendant) and her son Jake Cassar, were registered proprietors of land at Catherine Field (the Property) as tenants in common in equal shares. It remains charged by a first registered mortgage in favour of La Trobe Financial Asset Management Limited (the fifth defendant).

On 3 November 2016 companies associated with Ms Cassar, Aussie Growers (Aust) Pty Ltd (the first defendant) and Camden Herbs & Nursery Pty Ltd (the second defendant) entered into agreements (the Agreements) with Camden Nurseries Pty Ltd and Craig and Julie Wilson (the plaintiffs) pursuant to which the second defendant was to purchase land at Camden (the Camden Land) which Mr Wilson owned with his wife and the first defendant was to purchase a nursery business which the plaintiffs conducted on the Camden Land.

On 19 January 2017 a sequestration order was made in respect of the estate of Mr Cassar who was declared bankrupt. Christopher Palmer (the fourth defendant) was appointed as his trustee in bankruptcy. By operation of s 58(1)(a) of the Bankruptcy Act 1966 (Cth), Mr Cassar’s interest in the Property vested in the fourth defendant, as trustee. The fourth defendant became registered proprietor of the Property as a tenant in common with the third defendant.

The first and second defendant failed to complete the Agreements and failed to pay the balance of the deposits. On 16 February 2017, in return for an extension of time to complete the Agreements, Ms Cassar executed a Deed of Guarantee (the Guarantee) and granted a mortgage (the Mortgage) over the Property to the plaintiffs. Robert Pearson, solicitor, acted on her behalf.

The Guarantee provided that Ms Cassar guaranteed the “due and punctual performance” of the first and second defendants’ obligations under the Agreements and the notices to complete. She also indemnified the plaintiffs against any damage suffered by them arising from the default of the first and second defendants. The Guarantee also provided for the execution of the Mortgage.

Clause 6 of the Mortgage contained a prohibition on the mortgagor (Ms Cassar) selling or transferring the Property without the consent of the mortgagee or otherwise attempting to dispose or encumber it. Clause 9 of the Mortgage obliged the mortgagor to pay all costs associated with the enforcement of the Mortgage. It also provided that such costs were deemed to be principal moneys covered by the Mortgage. They are therefore secured by the third defendant’s share in the Property.

The first and second defendants failed to complete the Agreements within the extended time.

The second defendant obtained a valuation of the Property as at 31 March 2017 which valued it at $3.75m. This valuation was tendered by the plaintiffs in these proceedings.

On 7 April 2017 Mr Palmer provided a report to Mr Cassar’s creditors in which he reported that the value of the Property was between $2m and $2.5m and that the bankrupt’s equity in his share of the Property was between $62,756.94 and $287,756.94. Mr Palmer also reported:

On Friday 21 April 2017 Mr Pearson telephoned Liam Bailey, who, as the fourth defendant’s business partner, had day-to-day administration of Mr Cassar’s bankrupt estate. Mr Pearson asked Mr Bailey to delay the sale of the Property while he resolved an insolvent trading claim against Mr Cassar. Mr Pearson informed him that his clients (who were not specified, but whom I infer were the third defendant and Mr Cassar) expected to be able to refinance the Property and use the proceeds of the re-finance to fund an annulment of Mr Cassar’s bankruptcy.

Mr Bailey heard nothing further from Mr Pearson in the following weeks. Accordingly, he instructed solicitors to proceed with steps for the sale of the Property. Before proceedings were commenced by Mr Palmer, as trustee, the plaintiffs, as equitable mortgagees under the Mortgage, commenced proceedings, as referred to below.

By notice dated 12 May 2017 the plaintiffs’ solicitors terminated the agreements for the sale of the Camden Land and the nursery business.

By statement of claim filed on 23 May 2017 the plaintiffs sought liquidated damages against the first and second defendants for the unpaid portion of the deposits. As against Ms Cassar, they sought judgment in the total amount under the Guarantee and enforcement of the Mortgage. Neither the first or second defendants filed a notice of appearance.

Ms Cassar was personally served with the statement of claim on 8 June 2017. By email sent on 26 June 2017, Mr Pearson wrote to the plaintiffs’ solicitors and confirmed that he acted on behalf of Ms Cassar. He did not, however, file a notice of appearance until 7 December 2017 (see below).

At some time on or prior to 6 September 2017 Ms Cassar and her husband spoke to Robert Marjan, their long-time personal and business associate, about the financial difficulties of the family and her desire to refinance the Property. I accept Mr Marjan’s evidence about his knowledge of these matters and the proposed transaction with respect to the Property referred to below:

By email dated 6 September 2017 Mr Pearson sent an email in the following terms to Robert Marjan concerning a proposed sale of property by Ms Cassar:

Mr Marjan deposed in his affidavit that the email accurately set out his instructions to Mr Pearson. Mr Marjan accepted in cross-examination that the matters in 1.-3. set out in the email extracted above represented his instructions to Mr Pearson for the transaction and his understanding of Ms Cassar’s instructions. It was common ground that there was nothing in the documents produced in answer to the subpoena issued to Mr Pearson for his file which was inconsistent with the instructions set out in the above email.

After Mr Marjan had given Mr Pearson those instructions, Mr Marjan arranged for the sixth defendant to be incorporated and for his wife, Maysa Marjan, to be appointed as a director. These steps were taken in order for the sixth defendant to be the party nominated as the purchaser of Ms Cassar’s interest in the Property. Mr Marjan discussed the instructions he had given to Mr Pearson with his wife, who agreed and understood that those instructions had been given as to the basis of the transaction. Mr Marjan confirmed that his wife was comfortable with the instructions he had given and wanted to proceed on that basis. Mr Marjan also confirmed that he had discussed with Ms Cassar, through her husband, the basis for the transaction as reflected in 1.-3. above. Mr Marjan accepted that he knew that Mr Pearson was Ms Cassar’s solicitor and was content for Mr Pearson to act on his behalf as well. Mr Marjan said in cross-examination that he wanted the contract to be executed “very quickly”.

On 20 September 2017 the Court ordered default judgment against the first defendant in the sum of $92,226.46; against the second defendant in the sum of $352,723.72; and against Ms Cassar for the total of those sums, being $444,950.18.

By contract dated 21 September 2017 the third defendant purported to agree to sell the Property to Marjan Corporations Pty Ltd (the sixth defendant) (the September 2017 Agreement). As the third defendant’s share in the Property was limited to a half share as tenant in common with Mr Palmer, she could not lawfully transfer the Property. Accordingly the September 2017 Agreement could, at best, amount to a sale of her interest in the Property. The purchase price in the September 2017 Agreement was said to be $3.5m of which $500,000 was to be paid as a deposit. The date for completion was said to be six weeks from the date of the agreement, being 2 November 2017.

Mr Marjan’s affidavit evidence was:

Mr Marjan’s evidence is that, although his wife was the sole director of the sixth defendant, he directed and managed its affairs. Subsequently, he and his wife decided that it would be preferable that he be appointed sole director and this occurred about a month after the September 2017 Agreement.

Mr Marjan deposed in his affidavit as to the amount of the purchase price. He also deposed as follows:

Mr Marjan deposed as to the amount of the purchase price in his affidavit as follows:

It was put to Mr Marjan in cross-examination that the price of purchasing Ms Cassar’s half interest was very high, to which he responded that he had sighted a valuation of the Property at $5.3m. When the valuation referred to above as at 31 March 2017 of $3.75m was put to him he said:

On or about 26 September 2017 Mr Pearson made a statutory declaration in support of a caveat based on the September 2017 Agreement and arranged for the caveat to be lodged.

By amended statement of claim filed on 10 October 2017 the plaintiffs maintained the claim for relief in the original statement of claim for an order for sale of the Property and added a prayer for an order for possession of the Property.

On 22 November 2017 Mr Pearson wrote to Mr Bailey. He raised the issue of an insolvent trading claim against Mr Cassar which had been notified by the liquidators of the first defendant. He concluded the letter as follows:

At the end of November 2017 the plaintiffs’ solicitors did a routine search of the title to the Property and discovered that a caveat on the basis of the September 2017 Agreement had been lodged by Mr Pearson. The plaintiffs’ solicitors also sought leave for a subpoena to be issued to Mr Pearson for his conveyancing file relating to the September 2017 Agreement. The file was produced before the sixth defendant became a party to the proceedings.

On or around 30 November 2017 Mr Bailey, who had learned of the September 2017 Agreement (possibly from the plaintiffs’ solicitors), spoke to Mr Pearson again. The following exchange occurred:

On 1 December 2017 the plaintiffs approached the Duty Judge for leave to file a further amended statement of claim which added the sixth defendant to the proceedings and which claimed an order pursuant to s 74MA of the Real Property Act 1900 (NSW) that the caveat be withdrawn. Leave was granted.

On 7 December 2017 the matter came before the Duty Judge for directions. Mr Pearson appeared on behalf of the third defendant and filed a notice of appearance in these proceedings on her behalf. The sixth defendant was directed to file and serve a notice of appearance by 8 December 2017, together with evidence on which it proposed to rely. I note that the direction for the sixth defendant to file a notice of appearance does not appear to have been complied with. Notwithstanding this apparent non-compliance Mr Pearson appeared on behalf of the third and sixth defendants on 13 December 2017 (see below).

On 8 December 2017 the National Australia Bank (NAB) wrote to Mr Marjan relevantly as follows:

An undated letter in identical terms, except for the absence of the paragraph commencing “Following receipt. . .” was annexed to Mr Marjan’s affidavit.

On 11 December 2017 the sixth defendant was served with a notice to produce for communications regarding the purchase of the Property, the use of the deposit and the following documents:

No documents were produced in answer to the notice to produce, although the document dated 8 December 2017 from the NAB, which was annexed to Mr Marjan’s affidavit, would appear to fall within the notice to produce.

Mr Marjan’s evidence was that on 12 December 2017 he submitted a formal loan application to the NAB for an amount of $2.5m. The document was not in evidence. Accordingly, it is not possible to determine whether it corresponded with the letter referred to above and amounted to an application for finance to assist the third and sixth defendants to own the Property together. Such an application would be consistent with the instructions recorded in the email of 6 September 2017 and inconsistent with the September 2017 Agreement.

As referred to above, at the hearing of the proceedings before me as Duty Judge on 12 December 2017, Mr Pearson appeared on behalf of the third and sixth defendants. Mr Marjan was cross-examined by the plaintiffs’ counsel about the transaction in the following exchange:

In re-examination, the following exchange occurred:

I do not regard Mr Marjan’s evidence in re-examination as undermining the admissions made by Mr Marjan in cross-examination as to the true terms of the transaction, which were that he and the third defendant would become joint owners of the Property as tenants in common. The evidence is ambiguous since it is not clear whether Mr Marjan was confirming that he intended to go through with the transaction as described in the email of 6 September 2017 or the transaction provided for in the September 2017 Agreement. Having regard to the evidence in his affidavit, his evidence in cross-examination and the lack of any indication that his answer in re-examination was inconsistent with his previous evidence, I formed the impression that, when acceding to a leading question in re-examination from his solicitor, Mr Pearson, Mr Marjan was intending to confirm that he wanted to become the co-owner of the Property with the third defendant (whatever may have been Mr Pearson’s intention in asking the question).

The first matter to be addressed is whether the September 2017 Agreement was intended to have legal effect in accordance with its terms. The plaintiffs and the fourth defendant contended that it was not and was, accordingly, a sham. The third and sixth defendants contended that the September 2017 Agreement was intended to operate in accordance with its terms and was a bar to the orders sought by the plaintiffs.

The approach to be taken to determine whether a transaction is a “sham” is well established. In Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471; [2004] HCA 55, the High Court (Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ) said at [46]:

Thus the test for whether a transaction is a “sham” is whether there was a common intention among the participants to the transaction to give to others the appearance of creating legal rights and obligations different from the actual legal rights and obligations which they intended to create: Snook v London & West Riding Investments Ltd [1967] 2 QB 786 at 802 (Diplock LJ) and Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 at 453-454 (Lockhart J, Foster J agreeing); 467-468 (Beaumont J, Foster J agreeing).

In the present case, the third defendant had significant financial problems. Her share in the Property was encumbered and Mr Palmer owned the other share because of her son’s bankruptcy. She wanted to develop the Property and obtain a substantial profit but knew that she would lose the chance of doing so if the Property was sold either by Mr Palmer or by the plaintiffs after an application under s 66G of the Conveyancing Act 1919 (NSW). The only way she could buy time was to work out a way of owning the Property with someone who had the wherewithal to keep creditors at bay. However, if the sixth defendant had approached Mr Palmer to purchase his share, the third defendant would still have been subject to the risk that the plaintiff would sell the Property in the exercise of its power of sale under the Mortgage (following a s 66G order).

I am satisfied on the basis of the evidence of Mr Marjan and the surrounding circumstances, that Ms Cassar agreed with Mr Marjan that a company which he controlled would be incorporated (the sixth defendant) and that she and that company would together own the Property. The common intention of the third and sixth defendant was that they would, together own the Property and develop it to their mutual benefit and profit. I am satisfied that there was no intention that the third defendant’s share in the Property would ever be transferred to the sixth defendant.

The narrative set out above reveals significant material from which it can be concluded that the third and sixth defendants intended that their dealings should have an operation entirely different from and inconsistent with that which would flow from the terms of the September 2017 Agreement. I regard the following matters as significant, in themselves and taken together.

The instructions given to Mr Pearson by Mr Marjan, which accorded with his discussions with the third defendant (and her husband), did not involve a transfer of the third defendant’s interest to the sixth defendant. Rather, they involved the co-ownership of the Property by the third and sixth defendant, which could only, in the circumstances, have been achieved by the transfer of Mr Cassar’s interest (then vested in the fourth defendant as his trustee) to the sixth defendant. A transfer of the third defendant’s share in the Property to Mr Marjan’s company would have been entirely inconsistent with the common arrangement. I also regard it as significant that Mr Pearson assured Mr Marjan in his email of 6 September 2017 that he appreciated that “there is a high degree of trust involved in this transaction” and would “do everything possible to ensure that it is put into effect in accordance with your instructions in a way that keeps your interests secure”. Mr Pearson was, relevantly, the agent of both the third and the sixth defendants and his statement to that effect was, in my view, highly incriminating.

I regard the reference to the “high degree of trust” as indicating that Mr Pearson realised that it involved a high degree of trust for Mr Marjan to commit his company to buying real property at an exorbitant price from the third defendant when his true intention was to become co-owner with her of the whole of the Property. This context also explains why Mr Marjan expressed the purpose of the caveat in his affidavit as being “to secure the released deposit” (see [9] of his affidavit extracted above), as distinct from to secure performance of the September 2017 Agreement, since he had actually paid the $500,000 and appreciated that he needed security for it given the third defendant’s financial difficulties.

The purchase price for the third defendant’s share was, on all the evidence, exorbitant. Even on the basis of the valuation of $5.3m, which Mr Marjan had apparently sighted but which was not in evidence, the third defendant’s half share would not be worth $3.5m. While Mr Marjan hoped to make money out of developing the Property, he knew of the third defendant’s financial problems. There was no apparent reason for him to pay a price which was so substantially above the market price of the Property. I infer that there were at least two reasons for the specification of such high price for a half share in the Property. First, the contract on its face purported to be an agreement to transfer the whole of the Property. The value of the whole of the Property was in the order of $3.5m (having been valued as at 31 March 2017 at $3.75m and by the trustee at up to $2.5m). The September 2017 Agreement was to be used to obtain finance and therefore there was an imperative that it appear to be a commercial, arms-length dealing. Further, the price was one which, had it been associated with a genuine transaction, would have inclined the plaintiffs and the fourth defendant to forbear from challenging it since it would have been in their interests to allow it to be completed.

It is also of importance that neither Mr Marjan (nor Mr Pearson) communicated at all with the fourth defendant, who had title to the other half of the Property.

The September 2017 Agreement provided for a settlement date within six weeks of the contract date. Mr Marjan did not even submit a loan application to the NAB for the funds for the purchase until after the sixth defendant had been joined to the proceedings, which was a month after the settlement date nominated in the agreement.

Moreover, I am not satisfied that the NAB was told that the sixth defendant proposed to buy the third defendant’s share in the Property, as opposed to the whole Property. The appearance of the September 2017 Agreement was misleading in that it implied that the third defendant owned and would transfer the Property. She did not, as the title search reveals, have title to the Property, but only to her undivided share as tenant in common with Mr Palmer. It appears that the NAB understood the transaction to be that the third and sixth defendants would together refinance the whole of the Property. The NAB’s understanding accorded with the true agreement and was inconsistent with the September 2017 Agreement. There is no indication that the September 2017 Agreement was ever stamped.

There was obvious urgency in the execution of the September 2017 Agreement. Both the third defendant and Mr Marjan (who was relevantly the mind of the sixth defendant) knew of the third defendant’s financial problems and the risk that the Property might be sold by either the plaintiffs as equitable mortgagees or the fourth defendant (following an application by either of them for an order under s 66G of the Conveyancing Act). They appreciated that either of these possibilities would have the effect of thwarting their common intention to develop the Property as co-owners for mutual profit. The sixth defendant was plainly not a bona fide purchaser for value without notice.

Mr Pearson, who acted for both the third and sixth defendants on the September 2017 Agreement, had acted for the third defendant on the Mortgage and can be taken to have appreciated that the September 2017 Agreement contravened cl 6 of the Mortgage. Mr Pearson knew from his conversation with Mr Bailey on 21 April 2017 that the fourth defendant proposed to sell the Property. He also knew that the plaintiffs had commenced the proceedings and were seeking an order for sale. Had the plaintiffs become aware that the September 2017 Agreement was to be executed, they could have moved to restrain it on the basis that its execution by the third defendant was a breach of her obligation under cl 6 of the Mortgage. By seeking to rely on the September 2017 Agreement in these proceedings to prevent orders for sale and possession of the Property, the third defendant was apparently attempting to profit from her own breach.

I also regard it as significant that neither the third defendant nor Mr Pearson gave evidence. They were both persons whom the third and sixth defendants could have been expected to call to rebut the inference that the September 2017 Agreement did not reflect the parties’ true agreement. In these circumstances I draw the inference that their evidence could not have assisted the cases of the third and sixth defendants: Jones v Dunkel (1959) 101 CLR 298.

I note that there was a considerable impediment to Mr Pearson giving evidence in these proceedings and remaining on the record for the third and sixth defendants (leaving aside any question of conflict between the positions of the third and sixth defendants and indeed, Mr Cassar, for whom it appears Mr Pearson also acted): rule 27.2 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 (NSW) and Barrak Corporation Pty Ltd v The Kara Group of Companies Pty Ltd [2014] NSWCA 395 at [47]-[49] (Adamson J, Barrett JA and Sackville AJA agreeing). This impediment does not prevent the inference being drawn in circumstances where Mr Pearson acted for both parties on what I have found to be the actual transaction while at the same time preparing the documentation (which was inconsistent with the actual transaction) which became the September 2017 Agreement and arranging for its execution.

In conclusion I am satisfied that the September 2017 Agreement is a sham in that it did not reflect the true agreement between the parties and was not intended to operate in accordance with its terms. Accordingly, it was incapable of creating an interest in the Property and therefore did not confer a caveatable interest on the sixth defendant. In these circumstances, the plaintiffs are entitled to an order that the sixth defendant withdraw the caveat.

The plaintiffs have established their entitlement to exercise the power of sale over the third defendant’s interest in the Property as well as their entitlement to possession of the Property, subject to the consent of the fourth defendant, which I note has been given. Their entitlement arises from the Mortgage and is not, for the reasons given above, subject to the September 2017 Agreement.

I am satisfied that the plaintiffs have complied with the appropriate procedure for the enforcement of equitable mortgages outlined by Campbell J in King Investment Solutions v Hussain [2005] NSWSC 1076. All relevant parties have been joined, including the fourth defendant as the registered proprietor of the third defendant’s tenant in common and the fifth defendant as first registered mortgagee. There is evidence of the value of the Property as at 31 March 2017 and evidence of the debt secured by the Mortgage.

I am satisfied that, in addition to declarations regarding the entitlement of the plaintiffs and the fourth defendant to exercise their respective powers of sale of the Property, it is both necessary and appropriate to make an order for possession and for a writ of possession to be issued forthwith to permit the sale of the Property to occur as soon as reasonably possible. Vacant possession is a normal incident of sale and is therefore associated with the power of sale conferred on all mortgagees by s 109(1)(a) of the Conveyancing Act: Harden Shire Council v Richardson [2012] NSWSC 622; (2012) 188 LGERA 200 at [167] and [194]-[196] (Johnson J), which was followed in Baker-Crooks v Separovich [2017] NSWSC 708 at [24]-[25] (Davies J). The plaintiffs, as mortgagees for sale, owe a duty to take reasonable care to ensure that the Property is sold at the market value: Commercial and General Acceptance Ltd v Nixon (1981) 152 CLR 491 at 495 (Gibbs CJ); [1981] HCA 70. The fourth defendant, as trustee in bankruptcy, also owes duties with respect to the sale of the Property. These respective duties can best be discharged if the plaintiffs and the fourth defendant have vacant possession of the Property.

I am informed that the Property is vacant rural land on which there is a disused house which is not fit for occupation. In these circumstances I am satisfied that it was not necessary for any notice to be given to any occupier since there is none.

The position of the plaintiffs on costs is protected by cl 9(iii) of the Mortgage which requires the third defendant to pay costs associated with the enforcement of the Mortgage, which are secured by the Mortgage over the Property. Nonetheless it is appropriate to order the third defendant to pay the plaintiffs’ costs on the basis of ordinary principles that costs follow the event: Uniform Civil Procedure Rules 2005 (NSW), r 42.1.

The position of the fourth defendant is different, since his costs are not protected by the Mortgage. Mr Cominos, who appeared on behalf of the fourth defendant, contended that it was appropriate that the third defendant pay the fourth defendant’s costs of the proceedings. Mr Palmer was joined to the proceedings as a necessary party since he holds a share in the Property as tenant in common. He co-operated with the plaintiffs throughout and supported the relief claimed. I am satisfied that it is appropriate that the third defendant be liable for the fourth defendant’s costs.

I note that the plaintiffs have sought an order that the costs be “fixed by the Court” which I take to be a reference to the power of this Court to specify a gross sum in respect of costs pursuant to s 98(4) of the Civil Procedure Act 2005 (NSW). The present case seems to me to be an appropriate one for such an order. I have made provision in the orders set out below for such an application to be made, if any party wishes costs to be specified rather than assessed.

For the reasons given above, I make the following declarations, orders, notations and directions: