Gresham Property Investments Limited v Global Consulting Services Pty Limited; Global Consulting Services Pty Limited v Gresham Property Investments Limited

These proceedings concern the question who is entitled to the balance of the proceeds of sale of certain real property comprising the Pentridge Prison redevelopment in Coburg, Victoria (the Project) following sale of the property by receivers and the distribution to priority creditors of the amounts owing to them. The amount remaining to be distributed is approximately $3,000,000. The plaintiff, Gresham Property Investments Limited (Gresham), which provided financial advice and related services in connection with the refinancing of the Project, claims that it is entitled to have a debt owed to it paid in priority to the remaining creditors. That claim is disputed by the first defendant, Global Consulting Services Pty Ltd (GCS), and the second defendant, RGN Pty Limited (RGN), which both provided guarantees and security in respect of the refinancing.

The Project was undertaken by Pentridge Village Pty Ltd (PV) commencing in about 2000. PV was a joint venture company established by Piero One Pty Ltd (Piero), which held 52.2 per cent of the shares in PV, Brooklyn Timber Traders Pty Ltd (Brooklyn Timber), which held 11 per cent of the shares in PV, and Tower & Tower Developments Pty Ltd (Tower & Tower) which held 36.8 per cent of the shares. Piero was a company controlled by the Chiavaroli family. Brooklyn Timber was a company controlled by the Costa family. There were a number of investors in Tower & Tower including the Chiavaroli family, the Costa family, the Ballan family and a number of other small investors. The result is that the economic interest in the Project was as follows:

PV engaged West Homes Australia Pty Ltd to undertake the building work. West Homes was a Chiavaroli family-owned building and construction company.

Funding for the Project was provided by Capital Finance Australia Limited (CFAL), a subsidiary of the Bank of Scotland International. In about 2005, CFAL provided PV with a facility for $85,000,000 which was secured by a first ranking mortgage over the real property comprising the Project.

In about July 2006, PV sold three lots that formed part of the Project to the third defendant, Pierora Pty Ltd (Pierora), a company controlled by the Chiavaroli family, for $250,000. Pierora, which is now in receivership and liquidation, filed a submitting appearance.

By the second half of 2010, the Project was in serious financial difficulties. On 15 November 2010, CFAL agreed to an extension of its facility for 12 months from 1 July 2010 with a reduction in the facility limit to $80,000,000. The revised facility agreement contained a number of other terms which it was apparent PV would not be able comply with, the details of which are not relevant to the determination of the issues in this case.

A further extension of the CFAL facility until 30 June 2012 was granted on 12 April 2011. By that time, the amount owing to CFAL was $86,000,000, which was more than the value of the remaining assets in the Project on an as is basis.

In order to try to overcome PV’s financial difficulties, two steps were taken. First, in November 2011, the fourth defendant, PVS5 Holding Co Pty Limited (PVS5), was incorporated to acquire a number of lots that formed part of the Project. PVS5 was wholly owned by Mr Lino (Leigh) Chiavaroli. It is now in receivership and liquidation and also filed a submitting appearance. The purchase price paid for the lots acquired by PVS5 was $1,400,000. Approximately $1,000,000 of that amount was provided by Mr Leigh Chiavaroli. The balance was lent by RGN, a company controlled by Mr Romano Nenna, who at the time was providing financial advice to the Chiavaroli family in relation to the Project. As security for that loan, RGN was granted a mortgage over the lots acquired by PVS5.

Second, in February 2012 representatives of the Chiavaroli family commenced negotiations with CFAL to acquire its debt at a discount with the intention of refinancing the Project. That occurred in circumstances where other parties with an interest in the Project had indicated that they were not prepared to invest further money in it and were sceptical about its success. PV did, however, engage Gresham to assist in the refinancing. Under the terms of its mandate letter dated 21 May 2012, Gresham was to be paid a monthly work fee of $15,000 up to a maximum of $90,000, an arrangement fee of 3 per cent of any loan advanced by a lender introduced by Gresham and a success fee calculated as 40 per cent of the difference between the amount paid to acquire the CFAL debt and what was said to be an agreeable purchase price of $25,000,000.

In April 2012, CFAL sold the whole of its Australian property loan portfolio (including the CFAL facility) to AET SPV Management Pty Ltd (AET), which was a consortium led by Morgan Stanley. Despite the sale, the Chiavaroli family was successful in negotiating an agreement to acquire the CFAL debt at a discount and, on 2 August 2012, AET agreed to assign the CFAL debt and associated securities to Daimleigh Capital Pty Limited (Daimleigh) as trustee for the Daimleigh Capital Unit Trust for an assignment price of $16,100,000, subject to certain adjustments. Daimleigh was a company that was wholly owned by the Chiavaroli family.

On 13 August 2012, Daimleigh wrote to PV referring to the assignment and stating that it would use its best endeavours to waive existing breaches of the facility agreement and to extend the facility for a period of time. The letter recorded in paragraph 4 the following:

The assignment was completed on 28 August 2012. At the same time, Daimleigh entered into a number of facility agreements to borrow money to finance the assignment price and provide additional funds for ongoing work on the Project.

The first facility, for $15,000,000, was advanced to Daimleigh by CVS Lane PV Pty Ltd (CVS Senior), which was a lender that had been introduced by Gresham. The loan was secured by a mortgage over all the property owned by PV in the Project. It was also guaranteed by a number of companies associated with the Chiavaroli family as well Mr Piero (Peter) Chiavaroli and Mr Leigh Chiavaroli.

The second loan was advanced by CVS Lane PV Mezz Pty Ltd (CVS Mezz). It was for $4,000,000. However, the facility agreement provided for payment of an establishment fee of $1,000,000, leaving a balance of $3,000,000. The loan was secured by a second ranking mortgage over all the property owned by PV in the development. It was also secured by property owned by Pierora and PVS5, including it appears the property in the development acquired by those companies from PV. RGN agreed to subordinate its security over the PVS5 lots to rank behind CVS Mezz. Under the terms of the facility agreement, the loan was guaranteed by PV and a number of other companies in which the Chiavaroli family had an interest including Piero, Pierora and PVS5. Clause 21.1(b) of the facility agreement provided:

The evidence is that Pierora and PVS5 were reluctant to provide security and Mr Nenna, on their behalf, sought to modify this clause to require that resort first be had to the security provided by PV and that resort only be had to the further securities if that security was insufficient. However, that suggestion was rejected by CVS Mezz.

The third loan was advanced by GCS, a company controlled by Mr Gerry Carcour, who was a close personal friend of Mr Nenna. It was for $2,000,000 payable in two tranches. The loan was secured by a third ranking registered mortgage over the property owned by PV in the Project together with a second ranking registered mortgage (behind that of CVS Mezz) over the property owned by Pierora.

At the same time, the parties entered into an Intercreditor Deed which set out the priority of the lenders and noted the securities that each had obtained.

In August 2012, a dispute arose concerning the question whether Gresham was entitled to be paid its success fee. That dispute was resolved on the basis that Daimleigh agreed to pay Gresham the sum of $1,420,000 plus GST. Daimleigh did not have the money at the time to pay that amount. Consequently, Gresham agreed to lend the amount to Daimleigh. The parties entered into a formal loan agreement dated 16 October 2012. Under the terms of that agreement, PV, Piero, Tower & Tower and Regent Way Pty Ltd, another Chiavaroli family company, agreed to guarantee repayment of the debt and PV agreed to mortgage a number of lots in the development as security for the loan. Gresham also took a fixed charge over the remaining property belonging to PV.

On 15 November 2012, the loan agreement between CFAL and PV was varied. Under the terms of that variation, Daimleigh, as the assignee of CFAL’s rights, agreed to extend the facility, waive certain breaches and, in its absolute discretion, provide further funding to PV to enable it to complete the Project.

On 2 June 2014, the Intercreditor Deed was amended and restated (the Amended Deed) to include Gresham as a party. The parties to the Amended Deed include PV, Daimleigh, CVS Senior, CVS Mezz, Gresham, GCS and a number of other parties as guarantors. The parties did not include Pierora.

Clause 2.3 of the Amended Deed provides:

The “Third Subordination Period” is defined to mean the period commencing on the date that CVS Senior and CVS Mezz have been paid in full and ending on the date that the debt owed to Gresham is paid in full. The Fourth and Fifth Debts are defined respectively as the debts owed to GCS and Daimleigh. The Fourth and Fifth Creditors are GCS and Daimleigh respectively.

Clause 5 of the Amended Deed provides, in effect, that if, during the Third Subordination Period, GCS or Daimleigh receive an amount in breach of the subordination provisions of the deed, they must pay that amount to Gresham.

Clause 8.2 of the Amended Deed provides:

“Secured Property” is defined in cl 1.2 to mean:

Clause 8.5 relevantly provides:

The effect of the various agreements was that the secured creditors ranked in the following order in relation to the secured property:

Despite the refinancing, the Project was not a success and, on 17 July 2014, receivers were appointed to each of PV, Pierora and PVS5 among other companies. On 31 July 2015, all of the lots in the Project were sold in one line for $26,500,000. After the payment of the amounts owing to CVS Senior and CVS Mezz, there is a balance remaining of approximately $3,000,000. The question is whether Gresham is entitled to be paid the amount owing to it out of that balance in priority to GCS and RGN.

The receivers have notionally allocated the amount received to each lot based on the value of that lot. As between the lots owned by PV, Pierora and PVS5, that allocation is as follows:

Gresham seeks a number of declarations, the effect of which is to give it priority to the amount held by the receivers over the defendants.

By their Amended First Cross-Claim Cross-Summons, GSC and RGN seek the following declarations:

GSC also seeks the following declarations:

Gresham’s position is relatively straightforward. It claims that it has priority under the terms of the Amended Deed over GCS in relation to the amount held by the receivers, at least insofar as that amount is referable to the sale of property owned by PV. It has priority over RGN in relation to the amounts recovered in respect of the property owned by PV because RGN held no security in respect of that property.

GCS and RGN dispute those conclusions. Their case has two steps. First, they contend that, in accordance with general law principles, as between PV, Pierora and PVS5, PV was the primary obligor in relation to the CVS Mezz debt and consequently that debt should be discharged first from the proceeds of the sale of property owned by PV (after the payment of CVS Senior). On that basis (and using the receivers’ apportionment), of the total sale price of $26.5 million, approximately $24.1 million (that is, 90.9% of $26.5 million) was referable to the sale of property owned by PV. The total debt owed to CVS Senior and CV Mezz was approximately $23.5 million. Consequently, in accordance with general law principles, after payment of that amount, the remaining amount secured by mortgages over the lots owned by PV was $600,000. Gresham has priority over that amount. However, the balance of the sale price was secured by mortgages over the lots owned by Pierora and PVS5. Gresham has no security over those lots whereas GCS and RGN do.

The second step in the argument is the contention that the Amended Deed does not affect the position. It cannot affect the position of RGN because RGN is not a party to it. It does not affect the position of GCS because, properly construed, the Amended Deed is only concerned with priorities in relation to property owned by PV.

I do not accept the first step in the argument advanced by GCS and RGN. However, I accept the second.

There can be no question in this case that each of PV, Pierora and PVS5 were guarantors of the debt owed by Daimleigh to CVS Mezz and that therefore, absent the application of some exception, as between themselves, each was liable to contribute equally to the discharge of that debt: Gibbs CJ stated the relevant principle in these terms in Mahoney v McManus (1981) 180 CLR 370 at 376:

A number of exceptions exist to this general principle. GCS and RGN rely on three in this case. The first is where there is an express agreement to the contrary. The second is where the parties evince a common intention (falling short of an agreement) to the contrary. In relation to these two exceptions, see Muschinski v Dodds (1985) 160 CLR 583 at 597 per Gibbs CJ; 617 per Deane J; [1985] HCA 78; Parker v Alessi [2011] NSWSC 947 at [130] per Bergin CJ in Eq; AMP Bank Limited v Brown and Kavanagh [2017] NSWSC 313 at [40]ff per Kunc J; J D Heydon, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s Equity: Doctrines & Remedies (LexisNexis Butterworths, 5th ed, 2015) at [10-150]. The third exception is where one surety has obtained the whole benefit of the guarantee: see Official Trustee in Bankruptcy v Citibank Savings Ltd (1995) 38 NSWLR 116 at 126 per Bryson J.

GCS and RGN rely on two pieces of evidence to establish that there was an express agreement that any liability of PV, Pierora and PVS5 should be borne first by PV. First, they refer to a conversation deposed to by Mr Leigh Chiavaroli, which Mr Chiavaroli says occurred on 10 August 2012 between him and Mr Gesualdo (Gerry) Costa. Mr Chiavaroli says that in that conversation he said that his father (Peter) “wants it noted between you and him as you are the other director of Pentridge Village that these assets [that is, those of Pierora and PVS5] are put up to be called on only at the last resort”. According to Mr Chiavaroli, Mr Costa replied “I am happy to agree to this on behalf of Pentridge Village, but we get paid first and you come later”.

Second, GCS and RGN rely on the letter dated 13 August 2012 from Damleigh to PV which purported to confirm an agreement between PV and Mr Peter Chiavaroli that Pierora’s assets were only to be used if PV’s assets were insufficient.

There is a tension between these two pieces of evidence. The first suggests the agreement was reached between Mr Leigh Chiavaroli and Mr Costa. The second suggests that the agreement was reached between Mr Peter Chiavaroli and PV. That point aside, I do accept that either piece of evidence is evidence of an agreement.

The conversation needs to be treated with some care. Mr Chiavaroli deposed to it in June 2017, approximately five years after it is supposed to have occurred. It is apparent from Mr Chiavaroli’s evidence that it occurred at a very busy time. It is unrealistic to suppose that Mr Chiavaroli could recall precisely what was said; and there is therefore little point in analysing carefully the words he deposes to. It is apparent that the Chiavaroli family was reluctant to make its own assets available as security for the proposed loans, and in that context it is plausible as part of the negotiations that Mr Chiavaroli raised with Mr Costa the possibility that the agreements provide that recourse be had first to assets owned by PV. It is also plausible that Mr Costa said that such a proposal was acceptable to him. However, it seems to me implausible that Mr Chiavaroli and Mr Costa had a conversation in which they reached an agreement that was to operate immediately and independently of what was to be contained in the formal agreements recording the loan and the terms on which security was to be provided. Rather, each party to the conversation was expressing his then current thinking on the terms of the agreements as part of a negotiation.

The language of the conversation deposed to itself is not consistent with an agreement. Mr Chiavaroli said that his father wanted something noted. Mr Costa replied that he was happy to agree to that – suggesting that they were discussing a term to be included in the agreement. In fact, the Chiavaroli interests requested that a term be included in the facility agreement making it clear that the debt was to be satisfied first from the assets of PV, but that request was rejected by the lender. Consequently, the term sought by Mr Chiavaroli and accepted by Mr Costa was ultimately rejected.

The letter dated 13 August 2012 also appears to be setting out the current state of the negotiations rather than recording the terms of an agreement that was to operate independently of or in addition to the formal agreements then being negotiated. In any event, the letter alone is inadequate to prove the existence of the agreement. The fact that one party asserts an agreement is not sufficient to prove its existence. There is no evidence that PV replied to the letter or any other evidence that PV agreed to what was proposed in the letter. Mr Peter Chiavaroli did not give evidence. The alleged agreement is difficult to reconcile with cl 21.1(b) of the CVS Mezz facility agreement, to which each of Damleigh, PV and Pierora was a party. Absent any other evidence, I do not accept that an agreement was reached in the terms alleged in the letter; and if it was, in my opinion, it was superseded by the terms of the facility agreement, which said nothing to suggest that Pierora’s obligations to CVS Mezz under that agreement were secondary to those of PV.

In relation to the second exception, GCS and RGN submit that it is necessary to have regard to all the surrounding facts and circumstances in determining whether the parties intended their liabilities to be co-ordinate; and that the question of intention was one that was to be determined objectively. That much may be accepted. However, the starting point in this case is that each of PV, Pierora and PVS5 guaranteed the debt of Daimleigh to CVS Mezz. Consequently, they are liable to contribute equally unless a contrary intention is evident from the facts of the case.

In the present case, GCS and RGN rely on two main matters. The first is the Chiavaroli family’s reluctance to provide security over their own assets in support of the loan. The second and more important group of facts is that the money was on-lent to PV, the facility was provided to assist with the funding of project costs for the development undertaken by PV and, under the terms of the CVS Senior facility, the project funding provided by CVS Mezz was to be paid into a Restricted Cash Account and could only be used in meeting approved project costs.

In my opinion, these matters fall well short of establishing that PV, Pierora and PVS5 shared a common intention that PV would bear the primary liability as between them in respect of the CVS Mezz debt. The reluctance of Pierora and PVS5 to provide guarantees is irrelevant. The fact is that they did provide guarantees and it is difficult to see why a reluctance on their part to do so reflects a common intention that their liability be secondary. Moreover, the evidence is that PV was also reluctant to refinance the CFAL debt. It was that reluctance that led to the involvement of Daimleigh and, presumably, Pierora and PVS5. Consequently, PV was in a similar position to Pierora and PVS5 in that respect.

As to the other matters relied on, it is not correct to say that all of the CVS Mezz facility was used to fund further work on the Project. Part of it was used to fund the acquisition of the CFAL debt. In any event, it is difficult to see why objectively the guarantors must have had a common intention that the primary liability to repay the debt as between them was to be thrown on PV simply because the funds were to be used to complete the Project. A submission to that effect ignores the commercial realties. PV was a joint venture vehicle in which the Chiavaroli family had a majority interest. It required additional funds to complete the Project for which it had been established. The other persons with an interest in the joint venture were reluctant to incur further liabilities. As a result, the Chiavaroli family used an entity it controlled (Daimleigh) to acquire the existing debt and to raise additional capital to on-lend to PV to enable PV to complete the Project or at least advance it to a stage where further moneys could be borrowed. Ultimately, one of the new lenders (CVS Mezz) required Chiavaroli-controlled entities as well as PV to guarantee the loan that the lender agreed to make to Daimleigh (another Chiavaroli-controlled entity) and to provide security in respect of those guarantees. It is difficult to see why those facts point to, let alone establish, a common intention between PV and the Chiavaroli-controlled entitles (Pierora and PVS5) that PV should be primarily liable for a debt that Daimleigh could not repay. That is particularly so in circumstances where, because of the amount of the CFAL debt that had been acquired by Daimleigh and remained owing by PV, most if not all of the benefits of completing the Project would be realised by Damleigh and not PV. It may be that, having regard to their respective interests, there was a commercial justification for an arrangement in which PV bore the primary liability. But that is a long way from saying that the relevant circumstances establish that that is what the parties must have intended.

The conclusions of the previous paragraph also dispose of the third way in which GCS and RGN put their case. They submitted that this case was analogous to the facts in Official Trustee in Bankruptcy v Citibank Savings Ltd (1995) 38 NSWLR 116. In that case, Mr and Mrs Panebianco had guaranteed amounts lent by Citibank Savings to Wytoe Pty Ltd. Wytoe was a vehicle through which Mr and Mrs Panebianco’s son, Ralph, and his wife carried on business. They were its only directors and shareholders. Ralph and his wife had also given guarantees. Their trustee in bankruptcy sought to recover contribution from Mr and Mrs Panebianco. Bryson J rejected that claim. In doing so, his Honour applied the principle stated by the High Court in Israel v Foreshore Properties Pty Ltd (1980) 54 ALJR 421; 30 ALR 631 (at 636 per Aickin J, with whom Gibbs, Stephen, Murphy and Wilson JJ agreed) that where a person undertakes the obligation of surety without consideration it is entitled to an indemnity from the person who made the request: at 135. However, his Honour also indicated that he would have been prepared to reject the claim on the basis that it was Ralph and his wife, not the parents, who stood to benefit from the borrowings: at 135

Here, the suggestion appears to be that the position of Pierora and PVS5 is analogous to the position of the parents and that of PV to those of the son and daughter-in-law in Citibank. However, that is not the case. It is plain that Pierora and PVS5 gave guarantees because they were Chiavaroli-controlled entities and the Chiavaroli family were the principal beneficiaries of the loan from CVS Mezz because of their majority interest in PV and their control of Daimleigh. Consequently, the third exception to the principle that co-guarantors are liable equally to repay the guaranteed debt has no application in this case.

There is a suggestion in the submissions of GCS and RGN that the liabilities of PV on the one hand and Pierora and PVS5 on the other are not co-ordinate because those liabilities have different qualities. PV was carrying out the Project. The arrangements that were put in place enabled Daimleigh to borrow additional money for the purpose of on-lending it to PV. Pierora and PVS5 became involved because the lender sought additional security. Consequently, the interests of PV and of Pierora and PVS5 were quite different.

In my opinion, a submission in those terms is inconsistent with the principles stated by the High Court in Albion Insurance Company Limited v Government Insurance Office of New South Wales (1969) 121 CLR 342; [1969] HCA 55. That case concerned contribution between insurers, not guarantors. However, there is no suggestion that the general principles of contribution are different in the two types of cases. In that case, Kitto J stated the principle in these terms (at 352):

In the present case, the liabilities of PV, Pierora and PVS5 are co-ordinate because each is liable for precisely the same debt owing by Daimleigh to CVS Mezz. The fact that that liability might be governed by different terms or arose for different reasons does not alter the position.

As I have said, it is plain that RGN is not a party to the Amended Deed. Consequently, the Amended Deed cannot affect the priority of Gresham over the rights of RGN. RGN has no security over the PV property. Gresham has no security over the PVS5 property. The result is that, to the extent that any amount held by the receivers after payment to CVS Mezz of the amount owing to it is referable to the PVS5 property, RGN is entitled to that amount. However, that amount appears to be zero. Of the amount recovered by the receivers, $821,500 (3.1% of $26.5 million) related to property owned by PVS5. After allowing for the exercise of rights of contribution, one third of the amount owing to CVS Mezz must be borne by PVS5 and, to the extent that there is a shortfall, the amount of that shortfall must be borne equally by PV and Pierora. The $821,500 that was recovered appears to be less than the one third to which CVS Mezz is entitled.

So far as GCS is concerned, the critical question is whether the Amended Deed only gives Gresham priority over the amount recovered by the receivers that is referable to property owned by PV or whether it gives priority to Gresham over GCS in respect of the amount recovered by the receivers that is referable to property owned by Pierora as well, although whether the answer to that question makes any practical difference in this case is unclear.

In my opinion, the correct answer to that question is that the Amended Deed only gives Gresham priority over the amount recovered by the receivers that is referable to property owned by PV.

Clause 2.3(d) of the Amended Deed relevantly provides that until Gresham is paid in full, the Fourth and Fifth Creditors (that is GCS and Daimleigh) may receive and retain payment of the following amounts in relation to their respective Debts:

It is plain that cl 2.3(d) prevents the payment to GCS of the amount remaining from the sale of property belonging to PV until Gresham is paid in full. That is an amount that is derived from PV. PV is a party to the Amended Deed. Consequently, the exception set out in cl 2.3(d)(i)(A) applies.

However, neither of the exceptions applies to the amount remaining from the sale of property belonging to Pierora. As to sub-para (A), if GCS is paid an amount referable to the sale of the properties owned by Pierora, that is an amount received by GCS in relation to its Debt (that is, an amount Damleigh is liable to pay GCS) that is derived from Pierora. It is derived from Pierora because Pierora provided a guarantee and security to GCS in respect of that debt. It is difficult to see how it could be said to be derived from anyone else. However, Pierora is not a party to the Amended Deed.

As to sub-para (B), Gresham held no security over the Pierora property.

The conclusion of the previous paragraphs is supported by cl 8.2. That clause sets out the order of priority in respect of all “Secured Property”. However, as observed earlier, the land owned by Pierora does not fall within the definition of “Secured Property”. The only Secured Property held by GCS was the mortgage it held on the property owned by PV and the guarantee given to it by PV.

It follows that after CVS Mezz is paid in full, GCS is entitled to be paid any remaining amount referable to the sale of property belonging to Pierora. It is not entitled to be paid anything from the remaining amount referable to the sale of property belonging to PV.

On the conclusions I have reached, Gresham is entitled to priority over GCS and RGN in respect of that part of the amount realised by the receivers that is not required to discharge the debts owed by CVS Senior and CVS Mezz and is referable to the sale of lots belonging to PV. It is not entitled to make a claim in respect of other amounts held by the receivers. In calculating the amount held by the receivers that is referable to the sale of lots belonging to PV, the amount payable to CVS Mezz should be borne equally by PV, Pierora and PVS5 and, to the extent that there is any shortfall in the amount realised from the sale of lots owned by PVS5, equally by PV and Pierora.

The parties should, within 28 days of the date of this judgment, bring in short minutes of order to give effect to this judgment. I will hear the parties in relation to any dispute concerning the terms of the short minutes of order and costs if costs cannot be agreed at a time to be fixed with my Associate.