18 Woodville Holding Pty Ltd v Hua Cheng International Holdings Group Pty Ltd

By notices of motion filed on 11 March 2022 (in the case of the fourth and fifth defendants) and on 30 March 2022 (in the case of the second and third defendants), the second to fifth defendants seek security for their costs of these proceedings.

The first defendant, Hua Cheng International Holdings Group Pty Ltd (Hua Cheng), was the developer of a mixed residential and commercial project in Hurstville, New South Wales. By a loan agreement dated 4 July 2014, Super Vision Resources Ltd (Super Vision) loaned Hua Cheng the money to carry out the development. The loan was, among other securities, secured by a mortgage over the development in favour of Super Vision.

The development was completed and Super Vision became the registered mortgagee of the resulting strata title lots, including lots 44, 45 and 48 (the Lots). In January 2017, Hua Cheng defaulted in payment of the balance of the loan. In June 2017, it was placed into receivership and liquidation.

After recovering some of the amount owing to it from a guarantor, Super Vision, pursuant to a sale and purchase deed dated 24 September 2021, sold its remaining interests in the loan and mortgage to the plaintiff, 18 Woodville Holding Pty Ltd, for a total price of $5,100,000. 18 Woodville Holding was incorporated on 20 September 2021 to acquire the loan and mortgage. It is the trustee of the 18 Woodville Street Hurstville Unit Trust. The shares in 18 Woodville Holding and the unitholders in the trust are JBM International Pty Ltd and Wins Republic Pty Ltd. 18 Woodville Holding has a paid-up capital of $20. Each of JBM International and Wins Republic contributed by way of loan $1,550,000 to the purchase price payable under the sale and purchase deed. The balance of $2,000,000 was funded by a personal loan obtained by the directors of 18 Woodville Holding. In February 2022, 18 Woodville Holding raised a further sum of $1,700,000 from JBM International and Wins Republic to finance participation in a syndicated loan facility that was being organised by a property developer with development sites in New South Wales, Victoria and Tasmania.

Notice of the assignment to 18 Woodville Holding of the loan and mortgage was given to Hua Cheng on 28 September 2021 and a transfer of the mortgage was registered on 8 October 2021. Notice of the assignment of the loan and mortgage was served on the second to fifth defendants on 14 October 2021. Notices under s 57(2)(b1) of the Real Property Act 1900 (NSW) were sent to the second to fifth defendants (as caveators) on 3 November 2021.

The fourth to fifth defendants are currently in possession of lot 48. The second and third defendants are in possession of lots 44 and 45. They claim an equitable interest in the Lots as purchasers who have paid the full purchase price owing to Hua Cheng. They have lodged caveats in respect of the interests they claim. The fourth and fifth defendants (but so far not the second and third defendants) have filed a cross-claim seeking an order for specific performance of the contract by which they acquired lot 48, an order restraining the plaintiff from taking possession of lot 48 and an order requiring it “to take all necessary and incidental steps …” to permit the order for specific performance to be effected.

It is not entirely easy to understand on what basis the second to fifth defendants say their interests takes priority over the registered interest of 18 Woodville Holding. They appear to rely on s 42(1)(d) of the Real Property Act, which creates an exception to the paramountcy conferred on the holder of a registered interest by that section in the case of:

In the present case, the second to fifth defendants claim an interest as tenants at will. But plainly that tenancy may be terminated at any time. The second to fifth defendants’ real claim is as “owner” (to use the description set out in the caveats). But that interest is not registered and it is not protected by s 42(1)(d).

Security for costs is sought pursuant to Uniform Civil Procedure Rules 2005 (NSW) r 42.21(1) and s 1335(1) of the Corporations Act 2001 (Cth). It is not suggested that in this case that there is any relevant difference between the two provisions. Both raise two issues. The first is a threshold question of whether (to use the words of s 1335) “it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence”. The second is whether the Court should, in the exercise of its discretion, order security. The following matters, among others, are relevant to the exercise of the discretion:

In my opinion, the claim for security must fail.

I am not satisfied that the threshold requirement is met in this case. The second to fifth defendants submit that it is because 18 Woodville Holding is a trustee with a paid-up capital of $20. That alone is said to be sufficient to satisfy the threshold. That proposition is said to be supported by the judgments of Smithers J in Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) ATPR ¶40-584 at 46,729 and Goldberg J in Second Lenbourne Pty Ltd v Beagle Management Pty Ltd [1999] FCA 486 at [18]. In the former case, Smithers J said:

However, these general statements must be treated with some caution. They are to be understood as saying that, without more, proof that the plaintiff is a trustee company with nominal paid-up capital is sufficient to satisfy the threshold requirement of “credible testimony”. But proof of those matters is not conclusive. In my opinion, the correct position was stated by Barrett J in Transocean Capital Pty Ltd v AFSIG Pty Ltd [2006] NSWSC 806 who, after referring to the relevant authorities said (at [39]):

In the present case, the relevant trust deed is before the Court. Clause 71 of the trust deed provides:

In my opinion, there are also strong discretionary grounds for refusing relief in this case.

First, the dispute between the plaintiff and second to fifth defendants is essentially a priority dispute between them that ultimately requires resolution by the Court. This is not a case where 18 Woodville Holding has chosen to pursue a claim against the second to fifth defendants. Rather, it seeks to enforce its mortgage and the interests claimed by the second to fifth defendants stand in the way of it doing so. It is largely fortuitous that it is the plaintiff and they are the defendants. The second to fifth defendants would have needed to commence proceedings in order to perfect the title they claim. They would have needed to do so if they had been served with a lapsing notice under s 74J of the Real Property Act.

The second to fifth defendants submit that it is not necessary that they vindicate the priority they claim in order to defeat 18 Woodville Holding’s claim. They are simply resisting the claim on the basis that they are in possession of the Lots. But that submission represents an incomplete account of the position. The point is that the second to fifth defendants claim an entitlement to be in possession either as tenants at will or as persons who have bought and paid for the Lots and that that entitlement takes priority over the rights of 18 Woodville Holding. Necessarily, that involves a positive assertion of rights by the second to fifth defendants which must be made good if they are to succeed.

Second, in my opinion, on the available evidence the second to fifth defendants’ defence is weak. As I have explained, it is not apparent how any interest they have either as tenants at will or as purchasers takes priority over the registered interest of 18 Woodville Holding.

Third, even if the correct position is that the threshold requirement of s 1335(1) of the Corporations Act is satisfied, it seems to me for the reasons already given that if the second to fifth defendants are successful, they are likely to recover their costs without the need for security.

It follows that the notices of motion must be dismissed. There is no apparent reason why the second to fifth defendants should not pay 18 Woodville Holding’s costs of the motions.

Accordingly, the orders of the Court are: