NR Addlestone Pty Ltd v Henry and Kogan

The first defendants, Mr Jonathan Henry and Mr Barry Kogan (the Receivers) are the receivers or controllers of the first to fifth plaintiffs. The sixth plaintiff, Mr Sam Fayad, is a director of the first to fifth plaintiffs. The second defendant and cross-claimant is a Korean bank, but neither the plaintiffs’ claim against it nor its cross-claim are relevant to the present application.

By their statement of claim filed on 6 May 2021 (the SOC) the plaintiffs allege that the Receivers breached their common law and statutory duties in connection with the sale of four properties owned by the first to fifth plaintiffs (the Properties).

This judgment determines a notice of motion filed on 12 July 2021 by the Receivers for orders including:

The SOC, as particularised, makes only two complaints:

For the purposes only of their motion which is the subject of this judgment, and in order to crystallise the plaintiffs’ first complaint, the Receivers conceded that as at the date of the sale of the Properties (which comprised four buildings containing residential units and some commercial property), the difference between the market value of two of the buildings included in the Properties, if sold as individual lots, and the combined purchase price for those properties was $12,640,000 (the Conceded Differential). I will continue to refer to the Properties as including all four developments. As the matter was argued before me, nothing turns on the fact that the Conceded Differential relates to only two of the four buildings.

Significantly for present purposes, the SOC makes no complaint about the adequacy of the marketing and sale process for the Properties undertaken by the Receivers (the Sale Process). In support of their present application, the Receivers filed a substantial amount of evidence which was not contested by the plaintiffs about the extent of the Sale Process.

The Receivers recognised that in order to succeed they had to satisfy the Court that, notwithstanding the exceptional caution with which the jurisdiction should be exercised, it was clear that the case brought against them in the SOC did not raise any real question to be tried or triable issue (I shall use these terms interchangeably). For the reasons which follow, the Court is satisfied that the Receivers have surmounted that high threshold.

In summary, the Court has concluded that, taking into account both the evidence adduced by the Receivers of the extensive nature of the Sale Process and the absence of any attack by the plaintiffs on the Sale Process, the two matters of complaint advanced by the plaintiffs in the SOC against the receivers do not give rise to a real question to be tried. In particular, whether a difference between the market price and the price realised by the Receivers for the Properties can give rise to a triable issue for breach of common law or statutory duty must be assessed in the context of the Sale Process.

The plaintiffs’ claim against the Receivers will be summarily dismissed. This will leave on foot the plaintiffs’ claim against the second defendant and the second defendant’s cross-claim.

Mr A Vincent of Counsel appeared for the plaintiffs. Mr P Newton of Senior Counsel appeared for the Receivers.

These are the relevant parts of the SOC, especially [26] and [30], and their respective particulars:

Although the argument proceeded on the basis of the Conceded Differential, it is necessary to set out briefly the evidence as to the value of the Properties.

The Properties comprised four primarily residential unit developments in Addlestone Road, Merrylands; Merrylands Road, Merrylands; Jenkins Road, Carlingford; and Durham Street, Mt Druitt.

The Receivers invited three well known valuers to submit proposals to value the Properties. Of those three, Savills were engaged to conduct the valuation. They in fact provided two valuations:

The Properties were sold on 12 April 2021 for $18,010,000. The two buildings in Merrylands were sold to Makhraz Development Group Pty Ltd (Makhraz Development Group) for $15,000,000. The other two buildings were sold to KYS Properties Pty Ltd (a company in the Capital Developments Group) for $3,010,000.

Two other matters are peripherally relevant to the question of valuation.

First, on 9 April 2021, through his solicitors, Mr Fayad offered to purchase the Properties for $17,400,000. The offer letter included this statement:

Second, Mr Fayad’s affidavit filed in relation to the Receiver’s motion attaches valuations obtained in 2019 and 2020 which, for example, give a total value for the Properties on an individual lot basis of $37,315,000. There is no suggestion that Mr Fayad put the Receivers on notice of those valuations before the Properties were sold by the Receivers. Mr Fayad’s affidavit also states that because the Receivers had proposed the Conceded Differential of $12,640,000, the plaintiffs had not yet obtained valuations as at the date of sale of the Properties by the Receivers.

Approximately two weeks after the plaintiffs’ summons was filed, the Receivers’ solicitors wrote to the plaintiffs’ solicitors setting out the steps that had been taken to sell the Properties. The Plaintiffs did not dispute that those steps had been taken for the purposes of the present application, so it is convenient to set out as a summary the relevant part of the Receivers’ solicitors’ letter:

The steps taken by the Receivers were then proved formally for the purposes of the present application in an affidavit of one of the Receivers, Mr Henry, which again it is convenient to reproduce and which the Court adopts as its findings of fact for the purposes of the present application (together with the fact of the valuations referred to in [14] above):

The extract in the preceding paragraph does not include those parts of the affidavit which were rejected or admitted only as going to Mr Henry’s state of mind. There was no dispute that the combination of the offers from Capital Developments and Makhraz Development Group was an increase of over $3,000,000 from the highest offer in the first round and $1,760,000 above the highest offer in the second round (which had increased from the first round).

In deciding to pursue the offers from Capital Developments and Makhraz Development Group, the Receivers also sought and acted upon advice from JLL contained in an email from one of its directors to an employee of the Receivers on 19 March 2021. That email included:

During the course of the contract negotiations with the successful tenderers, each of the tenderers, through their solicitors, identified individual nominees to whom particular lots were to be sold.

On 25 March 2021, a solicitor describing himself as acting for “Makhraz Development Group Pty Limited and its nominees” informed the Receivers’ solicitors that “individual contracts for sale should be entered into as per the attached excel schedule”. The attached spreadsheet (which was in evidence on the present application) identified each of the lots in the two Merrylands Properties, attributed a purchase price to each lot and identified a specific purchaser. There was no dispute that the purchasers were all persons or corporations related in some way to Makhraz Development Group. So much was apparent, for example, from the fact that a number of the purchasers had the surname Makhraz. The sum of the individual prices for each lot was the $15,000,000 tender price that had been accepted by the Receivers.

Similarly, on 26 March 2021 and 30 March 2021, a licensed conveyancer acting for Capital Developments identified individual purchasers for the lots to be purchased for a total equivalent to the tender price accepted by the Receivers. Again, there was no dispute that the individual purchasers were persons related to the principals of Capital Developments.

The method of giving effect to the sale of the Properties which are identified in the preceding two paragraphs is one of the two matters complained about by the plaintiffs. I will refer to it as the “Individual Sales”.

As I have set out in [3], the Receivers relied on r 13.4 or, in the alternative, r 14.28 of the Uniform Civil Procedure Rules 2005 (NSW).

Rule 13.4 provides:

Rule 14.28 provides:

There was no dispute about the principles which govern the Court’s powers of summary dismissal and strike out, including that the Court could receive evidence. I gratefully adopt as a convenient summary these paragraphs from the plaintiffs’ written submissions:

The parties were also in agreement that the common law principles governing the proper exercise of a mortgagee’s or receiver’s power of sale have their origin in the decision of the High Court in Pendleberry v Colonial Mutual Life Assurance Society Limited (1912) 13 CLR 676 and that the statutory duty was set out in s 420A of the Corporations Act 2001 (Cth). The latter provides:

There was also no dispute between the parties about the applicable legal principles as set out in Mr Newton SC’s written submissions, which the Court gratefully adopts:

The parties’ arguments each accepted that the Receivers had a very high threshold to meet in order to persuade the Court that there was no triable issue or reasonable cause of action disclosed. Without intending any disrespect to the careful way in which the arguments were presented both in writing and in the course of oral submissions, the decisive dispute between the parties may be summarised quite briefly.

Mr Newton SC submitted that the plaintiffs’ claim was a narrow one which relied on only two complaints. The first complaint was crystallised for the purposes of the argument by the Conceded Differential: the difference between the sale price achieved for the Properties ($18,010,000) and their market value, which for the purposes of this application the Receivers conceded was $12,640,000. The second complaint was the Individual Sales.

Dealing with the Individual Sales complaint, Mr Newton SC submitted that on any view what had occurred could not amount to a departure from the Receivers’ common law or statutory duties. The best price after a proper advertising and sales campaign had been obtained. That was the amount that was paid to the Receivers. The fact that the sale was effected by selling individual lots to purchasers nominated by the successful tenderers was a matter of mechanics and, for the purposes of any argument about breach of duty, was neither here nor there.

Insofar as the Conceded Differential was concerned, Mr Newton SC submitted by reference to the authorities summarised in [32] above, that the sale of a property well below or substantially less than its market value did not in and of itself establish a breach of duty. Having regard to the dicta of Hodgson CJ in Eq (as his Honour then was) and Cole AJA, while it may be accepted that the steps taken to sell a property and the comparison between the sale price and the true value of the property were interdependent, the starting point of any inquiry had to be the adequacy of the process of marketing and selling the subject property.

In terms of both the common law and statutory obligations, the essential issue was whether the Receivers had taken reasonable steps to obtain a proper price. The insuperable difficulty for the plaintiffs, it was submitted, was that they made no attack upon the adequacy of the Sale Process. In the absence of any such complaint, reliance upon the Conceded Differential was not sufficient to make out a triable issue of breach of duty. Furthermore, the unchallenged evidence demonstrated that the Sale Process was one which, beyond sensible argument, met the requirement to have taken all reasonable steps to obtain a proper price for the Properties, including that the sale price for the Properties exceeded Savill’s in one line valuation as at 25 March 2021 (see [14] above).

Reduced to its essentials, Mr Vincent’s response on behalf of the plaintiffs was to fasten upon the observation of Hodgson CJ in Eq in Stone that “if it is proved that the price obtained is substantially below the true value, that may be some evidence that proper steps were not taken” (emphasis added). Mr Vincent relied on the Conceded Differential for the proposition that there was evidence, therefore, that proper steps had not been taken so as to give rise to a triable issue. Even if, taking into account the Receivers’ evidence about the Sale Process, the plaintiffs’ prospect of success might appear to be slim, in accordance with the principles identified in [30] above, that was not sufficient to dismiss summarily or strike out the plaintiffs’ claim.

The Court accepts Mr Newton SC’s submissions.

In setting out the reasons for that acceptance, I begin by emphasising that I have approached the exercise of the Court’s discretion with, at the forefront of my consideration, the warnings in cases of the highest authority that the jurisdiction to dismiss a claim summarily is to be exercised with the utmost caution and only when the Court is well satisfied that the plaintiff cannot possibly succeed. Approaching the present application with the requisite caution, the Court is nevertheless satisfied that the Receivers have demonstrated that the claim brought against them in the SOC cannot possibly succeed for the following reasons.

It is convenient first to deal with the plaintiffs’ complaint about the Individual Sales. For the reasons given by Mr Newton SC set out in [35] above, the Court is well satisfied that complaint cannot sensibly be made to call the Receivers’ sale of the Properties into question. The Receivers were paid the price nominated in the successful tenders as a result of the Sale Process. The fact that the successful tenderers’ nominees had not themselves participated in the expressions of interest process is irrelevant. The plaintiffs would equally have had no basis for complaint if the successful tenderers had purchased the Properties and then onsold them to their nominees.

Turning to the plaintiffs’ main complaint, it might be thought that the Receivers’ willingness to argue their application on the basis of the Conceded Differential was a bold forensic move. It was obviously driven by their confidence in the adequacy of the Sale Process, something which the plaintiffs did not challenge in the SOC.

The difficulty for the plaintiffs is that their argument could only succeed if the Court accepted that a substantial difference between the market price and the sale price achieved for the Properties was in and of itself sufficient to create a triable issue of breach of duty by the Receivers. However, that is not the law.

Without elevating Hodgson CJ in Eq’s expression “may be some evidence” into a statutory formulation, his Honour’s explanation of the correct approach makes clear that the primary focus of any attack upon the exercise a mortgagee’s power of sale must begin with the marketing and sale process. At its highest in some cases, an amount as large as the Conceded Differential could support the conclusion that the proper steps had not been taken in the sale of the Properties. But to focus only upon the Conceded Differential is to “put the cart before the horse”.

The “horse” in this case must be the adequacy of the Sale Process. As I put to Mr Newton SC in the course of argument, the Receivers’ evidence as to the Sale Process was not going to get any better at a final hearing. In the present application the Receivers had put before the Court the evidence that they would rely upon at a final hearing. That evidence disclosed that the Sale Process had been a substantial one, conducted with the benefit of valuations from Savills and the advice of JLL as the real estate agent. The parties accepted that the Court was entitled to take judicial notice, as it does, that these are reputable and experienced international firms. A significant number of inquiries and several tenders were ultimately received over more than one round. The Receivers had also acted upon the advice set out in [22] above and had achieved a sale price which exceeded the Savill’s in one line valuation as at 25 March 2021 (see [14] above]. No aspect of the Sale Process was challenged by the plaintiffs in the SOC or in the course of argument on the present application.

The strength of the Receivers’ evidence about the Sale Process, leading to the findings of fact set out in [20] above, and the absence of any complaint about the Sale Process leads the Court to the conclusion that both of the complaints made in the SOC are manifestly groundless and bound to fail. That conclusion remains the same even when the Conceded Differential is taken into account because the Court is well satisfied that the Receivers have demonstrated beyond sensible argument that the Sale Process which they undertook satisfies both the common law obligation to take reasonable precautions to obtain a proper price and the statutory obligation to have taken all reasonable care to sell the Properties for not less than their market value. Putting it slightly differently, even if the Conceded Differential is accepted as some evidence that the Receivers had not met their common law or statutory duties, it is decisively outweighed by the evidence as to the Sale Process so that there is no triable issue of breach of duty.

The Court’s conclusions may be summarised as:

Mr Vincent submitted that if the Court was satisfied that his clients’ case as currently pleaded did not disclose a reasonable cause of action, the Court should not summarily dismiss the claim. Instead, in the exercise of its discretion, the Court should strike out the relevant paragraphs of the SOC with leave to replead. This would enable the plaintiffs to review material with which they have now been provided by the Receivers to decide whether they have an arguable claim based upon the Sale Process.

Substantially accepting Mr Newton SC’s submissions, the Court rejects Mr Vincent’s submission for the following reasons.

The plaintiffs had been put on notice of the Sale Process in the letter from the Receiver’s lawyers on 28 April 2021 (set out in [19] above).

The plaintiffs’ SOC filed on 6 May 2021 made no attack on the Sale Process. The Court was not referred to any request by the plaintiffs to delay the filing of their SOC to enable them to assess the information they had been given about the Sale Process or to any subsequent indication that they were proposing to make amendments complaining about the Sale Process.

On 13 May 2021, the Receivers sought further particulars of the allegations in [26] and [30] of the SOC. Other than referring the Receivers to the valuations obtained by Mr Fayad in October and December 2020 (referred to in [18]), no further particulars were provided by the plaintiffs.

Mr Henry’s affidavit giving details of the Sale Process (extracted in [20] above) was filed and served on 12 July 2021 with the Receivers’ notice of motion the subject of these reasons. In the course of discussion about a timetable for evidence, the plaintiffs’ solicitors wrote to the Receivers’ solicitors on 16 July 2021, including (emphasis added):

No evidence of the kind referred to the italicised passage in the preceding paragraph has been adduced by the plaintiffs.

On 29 July 2021, the Receivers’ solicitors wrote to the plaintiffs’ solicitors and, relying on Mr Henry’s affidavit, put that “it is clear … that the Receivers took all reasonable steps to sell the Properties” and invited the plaintiffs to advise “if they intend to seek leave to amend their statement of claim to plead any acts or omission of [the Receivers] that may constitute a breach of their statutory or equitable duties and provide a copy of the draft amended statement of claim.” This drew a response on 4 August 2021: “Our clients do not intend to amend the SOC. The allegations of breach are adequately pleaded and particularised.”

On 17 September 2021, approximately two months after their solicitors referred to the possibility of obtaining expert evidence about the Sale Process, the plaintiffs issued a notice to produce to the Receivers for the documents referred to in Mr Henry’s affidavit evidencing the Sale Process. Those documents were provided on 30 September 2021. There was no suggestion that there had not been full compliance with the notice to produce.

It is significant that at no time, including after receiving the documents on 30 September 2021, did the plaintiffs complain that they required more time to adduce the expert evidence of the kind that was referred to in their solicitor’s letter of 16 July 2021 going to the Sale Process.

Mr Vincent put that, notwithstanding nearly four weeks had passed, his clients had not had an opportunity to consider the documents that had been produced on 30 September 2021 in relation to the Sale Process. However, there was no evidence that the plaintiffs had even retained experts to assist them in that task or, for that matter, whether they had ever sought such expert advice after the Receivers’ notice of motion had been filed or at any other time. Nor did the plaintiffs apply to have the hearing of the present motion adjourned while the documents were reviewed.

Mr Vincent’s submission for strike out with leave to replead may have had some force if it had been supported by affidavits from relevant experts to the effect that they had been retained and, in the absence of even a preliminary expression of opinion, indicating how long they would require to provide their advice to the plaintiffs. However, in the absence of such evidence, Mr Vincent’s submission was, with respect, no more than a plea to the Court to give his clients an opportunity to see if they could find a case based on a deficiency in the Sale Process without the slightest evidence to suggest that that they had expert advice that such a case might be found.

Given the interlocutory history which I have set out in the preceding paragraphs, it would not be consistent with the overriding purpose to keep the present proceedings against the Receivers on foot while the plaintiffs look for a cause of action. Summary dismissal of their case in these proceedings will not prevent the plaintiffs from commencing fresh proceedings if they eventually come to the view that they have a proper basis on which to complain about the Sale Process. I note that Mr Newton SC indicated, in answer to a question from me, that his clients would take no point relying upon the plaintiffs’ implied undertaking (see Hearne v Street (2008) 235 CLR 125; [2008] HCA 36) if the plaintiffs wish to continue to review the documents that have been produced to them in these proceedings in relation to the Sale Process.

The plaintiffs’ claim against the Receivers will be summarily dismissed. The parties will be given an opportunity to make submissions as to costs and any further orders, including as to how the balance of the proceedings are to be progressed.