In the matter of Fearndale Holdings Pty Ltd (admin apptd) (recs & mgrs apptd)

1. [1]

   This is an application to determine whether the Court should adopt a referee’s report of Mr Gregory Burton SC. By way of background to the application, Fearndale Holdings Pty Ltd (admin apptd) (recs & mgrs. apptd) (“Fearndale”) owned certain land at Luddenham in New South Wales, which has now been sold by the administrator appointed to Fearndale. The Plaintiffs in the proceedings, the Messrs Harpley, are directors of Fearndale and own a substantial percentage of its shares, and they participated in the reference.

2. [2]

   Fearndale guaranteed certain obligations of another entity, Equivest Holdings Pty Limited (“Equivest”) under two loans made by Australia and New Zealand Banking Group Limited (“ANZ”) to Equivest, to which I will refer as the “Term Loan” and the “Overdraft Facility” respectively. The terms of those arrangements were originally set out in a letter of offer dated 12 August 2011 from ANZ to Equivest (Ex ALI-1, 329); the terms of Fearndale’s guarantee of Equivest’s performance of its obligations under the Term Loan and Overdraft Facility were set out in a Corporate Guarantee and Indemnity also dated 15 August 2011 (Ex ALI-1, 607); and the land owned by Fearndale was mortgaged (Ex ALI-1, 228) to secure its obligations under that guarantee. The terms of the loans were then varied by a letter dated 15 March 2012 from ANZ to Equivest (Ex ALI-1, 338). The letter of offer and variation letter also incorporated other terms and conditions set by ANZ, including ANZ’s General Service Fees and Charges (Ex ALI-1, 508).

3. [3]

   On or about 10 December 2014, ANZ assigned the Term Loan, the Overdraft Facility, Fearndale’s guarantee and the mortgage and its rights thereunder to a Defendant in the proceedings, Consolidated Capital and Funding Pty Ltd (“CCF”). It is common ground that Equivest and Fearndale did not make payments to ANZ or CCF in respect of the Term Loan and Overdraft Facility from at least 19 December 2014.

4. [4]

   Disputes arose between, inter alia, Fearndale and CCF and, by orders made by consent on 2 May 2018, Leeming JA (sitting at first instance in the Corporations List) ordered, inter alia, that there be a referral under rr 20.14, 20.15 and 20.17 of the Uniform Civil Procedure Rules 2005 (NSW) to a referee for hearing and determination of the reasonable and proper amounts to which CCF was entitled to receive out of the proceeds of the sale of the land owned by Fearndale in satisfaction of its entitlements under the guarantee and mortgage, including receivers’ fees and expenses.

5. [5]

   After a lengthy process, including submissions and an oral hearing involving cross-examination, Mr Burton delivered a comprehensive report on 8 July 2019. The referee first determined the amount of principal payable to CCF, which was conceded, and certain additional amounts to be added to the principal. The referee determined that interest was to be allowed at a rate of 8.66% per annum compounding with daily rests from 19 December 2014 to and including 19 January 2015 and at a rate of 11.66% compounding with daily rests from 20 January 2015. The referee also determined the amount of receivers’ fees and expenses and the administrator’s fees and expenses and CCF’s legal expenses and management expenses that were properly recoverable. The referee determined that CCF was not entitled to receive certain other amounts that it had claimed and expressed a provisional view as to costs of the reference, at the parties’ request, namely that CCF should pay 30% of the Plaintiffs’ costs of the reference on the ordinary basis as agreed or assessed. There is now no contest as to the substantial majority of those matters. As I noted above, the matter is now listed for the Court to determine whether to adopt, vary or reject the referee’s report.

6. [6]

   By the time of this hearing, CCF had assigned its interest in the relevant loan and securities to Australian Lending Investment Pty Ltd (“ALI”), and ALI participated in this hearing and filed a Notice of Contention on 20 November 2019 in substantially similar form to that which had previously been filed by CCF. That Notice of Contention raised three issues, as to the calculation of interest on the loans, as to whether two additional fees were recoverable by CCF, and as to the referee’s provisional view as to costs. Each of those applications was pressed, and I will deal with them in turn.

7. [7]

   The Plaintiffs also filed a Notice of Contention which took objection to the referee’s determination of the basis on which interest should be calculated and contended for a different result as to costs of the reference from the preliminary view that the referee had expressed. The Plaintiffs ultimately did not press either of those matters at the hearing before me. I note, for completeness, that ALI fairly conceded, and I noted in the course of the hearing, that an adjustment should be made to the amount owing by Fearndale to ALI in respect of monies paid by the liquidator of another entity, Epic Mining Pty Ltd to CCF in the amount of $100,000.

Applicable legal principles

1. [8]

   It was common ground between the parties that the Court has a judicial discretion to adopt, vary or reject the referee’s report, in whole or in part, under r 20.24 of the Uniform Civil Procedure Rules. That rule provides that:

2. [9]

   In Chocolate Factory Apartments Pty Ltd v Westpoint Finance Pty Ltd [2005] NSWSC 784 at [6]-[8] (to which Mr Ashhurst, who appears with Mr Afshar for ALI, refers), McDougall J summarised the principles applicable to the Court’s discretion in the adoption or rejection of a referee’s report, observing that:

3. [10]

   Those principles have since been adopted on many occasions: New South Wales v Bovis Lend Lease Pty Ltd [2007] NSWSC 1045 at [7]; Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWSC 1302 at [12]; Corbett Court Pty Ltd v Quasar Constructions (NSW) Pty Ltd [2008] NSWSC 1163 at [30]–[31]; Sangain Pty Ltd v Italform Pty Ltd [2009] NSWSC 74 at [14]; and see Mainteck Services Pty Limited v Stein Heurtey SA [2013] NSWSC 266. In Bellevarde Constructions Pty Ltd v CPC Energy Pty Ltd [2008] NSWCA 228 at [47]-[48], Spigelman CJ and Allsop P (with whom Campbell JA agreed) referred, without criticism, to that approach and observed that:

4. [11]

   In Illawarra Hotel Company Pty Ltd v Walton Construction Pty Ltd [2013] NSWCA 6 at [16], Barrett JA (with whom Meagher and Ward JJA agreed) also observed that:

5. [12]

   Mr Ashhurst also refers to Depofo Pty Ltd v Barnes [2019] NSWSC 949 at [35], where Kunc J observed that, to reject a report based on a finding of fact, it must be shown that that finding was one “which no reasonable tribunal of fact could have reached”. Mr Ashhurst also submits, and it is uncontroversial that, the express terms of the relevant financing documents should be construed in accordance with the usual principles that apply to construing commercial contracts.

The referee’s calculations of the rate of interest

1. [13]

   The Plaintiffs point out that the claim for interest raised by CCF for the referee’s determination was a claim for interest at rates set in a letter dated 18 February 2015 to Equivest, of 20.67% from 20 February 2015 and 30.67% from 1 July 2018, and CCF did not put the arguments before the referee which ALI now advances in this hearing. I accept Mr Ashhurst’s submission that these arguments are fairly raised before the Court, so far as they address the approach to interest adopted by the referee when he did not accept either the Plaintiffs’ or CCF’s contentions, and are relevant to whether his report should be adopted, varied or rejected in respect of this issue.

2. [14]

   As Mr Ashhurst recognised in his opening outline of submissions, the referee made several findings in his report, anterior to the finding in paragraph 147 of that report which is now challenged by ALI. The referee made findings (which are not challenged) as to the absence of evidence of the interest rate for the Term Loan and Overdraft Facility prior to the assignment to CCF, and found that a base interest rate of 7.66% and a margin for non-performing loans of 4% were consistently set out in ANZ’s documents. Mr Ashhurst also referred to the referee’s analysis of the position emerging from the transaction documents at paragraphs 136-140 of his report, and to the basis on which the referee rejected CCF’s claim to substantially higher interest rates as set out in a letter dated 18 January 2015 to Equivest. ALI does not challenge the referee’s findings in that respect.

3. [15]

   In paragraph 147 of his report, the referee then set out his conclusion that:

4. [16]

   By its Notice of Contention, ALI contended that that finding should be set aside or varied, because the referee:

5. [17]

   In oral submissions, Mr Ashhurst clarified that paragraph (a) quoted above should be limited to a contention that the rate of interest for the Overdraft Facility for the period to 18 January 2015 should have been 9.67% per annum, and that ALI did not contend that there was any error in the referee’s calculation of the interest rate payable under the Term Loan for that period. Mr Ashhurst also significantly narrowed the challenge to the referee’s findings set out in paragraph (b) above.

6. [18]

   Mr Ashhurst submitted, first, that the referee had erred in finding in paragraph 147 that the interest rate payable for the Term Loan from 19 February 2015 should be 11.66%, and submitted that it should instead be 12.66%, made up of a base rate of 8.66% (which would correspond to a base rate of 7.66% and the additional margin of 1% payable when the loan was not in default) and the default margin of 4%. Mr Ashhurst originally submitted that the referee had simply made a mathematical error, on the basis that the base rate plus 4% would total 12.66% rather than 11.66%. That does not seem to me to be correct, because the referee had distinguished between the base rate of 7.66%, the additional margin payable when the loan was not in default of 1%, and the default margin of 4%. The sum of the base rate of 7.66% to which the referee referred in paragraph 147 and the default rate of 4% to which he also referred in that paragraph was 11.66% and not 12.66%. Any error in that calculation would only be demonstrated if the base rate was 8.66% not 7.66% or the 1% margin payable prior to default should be included in that calculation in addition to a base rate of 7.66% and the default rate of 4%.

7. [19]

   In oral submissions, Mr Ashhurst submitted (T18) that ANZ had varied the margin to 1% making the base rate 8.66%. However, he did not identify any contractual step that amounted to a variation, as distinct from the addition of the 1% margin to the existing 7.66% base rate to calculate the total interest rate payable in the period prior to default, and I am not satisfied that such a variation to the base rate was established. Absent a variation of the base rate, the approach for which ALI contends — of taking a pre-default base rate of 7.66% and adding both the margin of 1% applicable prior to default and the default margin of 4% to derive the higher interest rate of 12.66% — is merely an alternative which the parties could have put to the referee (although CCF did not) and the referee could have adopted. The existence of that alternative does not undermine the referee’s finding of an 11.66% rate, by not adding both the 1% margin and the 4% default margin to the base rate.

8. [20]

   While the approach for which ALI contends was a possible approach, the referee rightly recognised that his task was to determine a reasonable rate for interest. It seems to me that to do so by adding the default rate to the base rate to derive the rate of 11.66%, as he did, and not also add the additional 1% margin applied prior to default, does not involve any error of principle, misapprehension of the evidence or unreasonableness.

9. [21]

   Next, ALI contends that the interest rate for the Overdraft Facility should be 9.67% for the period to 18 February 2015 and 13.67% thereafter, rather than the same interest rates that applied to the Term Loan. In oral submissions, Mr Ashhurst noted that the Term Loan and the Overdraft Facility had been addressed in paragraph 147 of the referee’s report by applying the same interest rates. Mr Ashhurst submitted (T19) that that approach reflected the referee’s finding in paragraph 116 that CCF had combined the two loans in setting the 20% interest rate it claimed on 20 January 2015, and that the referee had rejected that approach and instead calculated the interest rate by reference to the loan documentation. Mr Ashhurst also submitted (T19) that:

10. [22]

    It seems to me that, contrary to this submission, the referee had reached his finding that the reasonable rates for the Term Loan and the Overdraft Facility were the same, as determined by paragraph 147 in his report, on the basis of the manner in which the principal of the loan was treated by CCF, as to which he made findings in paragraph 116 of his report. I can see no reason that the referee could not properly have regard to the practice adopted by the lender in, as he noted, treating the loan principal as an entire sum and then determine which of several possibilities was a reasonable interest rate on that principal.

11. [23]

    Mr Ashhurst submitted (T25) that the referee had simply overlooked that the rates charged under the Term Loan and the Overdraft Facility are not the same rate. I do not accept that submission. As I noted above, the referee had noted the approach taken by CCF, which had not distinguished between the principal amounts referable to the Overdraft Facility and the Term Loan in calculating interest, and indicated that he would take the same approach. Once the referee took that approach, different approaches could then have been adopted to determine a reasonable rate of interest to be applied to both the Term Loan and the Overdraft Facility, including applying the lower interest rate applicable to the Term Loan to the whole of the principal amount (as the referee did), applying the higher interest rate applicable to the Overdraft Facility to the whole of the principal amount (although that approach might well have been inconsistent with CCF’s statutory and general law duties) or applying a blended or weighted interest rate to the whole of the principal amount. The availability of alternative approaches does not demonstrate error in the approach that the referee adopted.

12. [24]

    No error of principle, misapprehension of the evidence or unreasonableness is shown in the referee’s accepting CCF’s treatment of the principal sum as entire for the purposes of interest, and then applying the lower interest rate applicable under the Term Loan rather than the higher interest rate applicable to the Overdraft Facility to that principal amount. That approach was not complex and required no further explanation that was given in paragraphs 116 and 147 of the referee’s report. The Court should not adopt the different approach for which ALI now contends.

13. [25]

    The referee’s report should be adopted without amendment in respect of interest rates.

Fees

1. [26]

   ALI rightly recognised that the referee had rejected some of the fees charged by CCF in a letter dated 18 January 2015 to Equivest (“18 January 2015 letter”), but contended that he had not had regard to a “business select fee” of $32 plus GST and an “administration charge” of $187.50 per quarter, for which the ANZ documentation provided. I do not accept that submission, because the referee had recognised the potential for such a fee, but found that the basis for charging it was not established. The referee had referred, in paragraph 107 of his report, to the 18 January 2015 letter which had noted the facilities were in default and had referred to the fees and charges that would be applied from 18 February 2015, if the default was not rectified, including the “monthly business select fee” and a range of other fees. The referee had then referred, at paragraph 157 of his report, to two fees applicable by the ANZ documentation and, at paragraph 158, observed that:

2. [27]

   That paragraph plainly referred to the earlier fees, including those which ALI now contends should have been allowed. The referee then concluded, as a factual finding, that there was inadequate substantiation in the terms required by the power to recoup expenses, and the assertion of such expenses in the 18 January 2015 letter was insufficient for that purpose. The referee also observed at paragraph 161 of his report that:

3. [28]

   Accordingly, CCF’s claim that the referee had not had regard to the relevant fees is not correct. He had found, as a matter of fact, that they were not substantiated and should be discarded. ALI did not, and could not, show any evidentiary or other basis for the Court to reach a different conclusion as to that question of fact. The basis for this challenge is also not established, and the referee’s report should be adopted without amendment in respect of fees.

Costs

1. [29]

   The referee had, at the parties’ invitation, expressed a provisional view as to the costs of the reference, although he noted that it was a matter for the Court to deal with those costs which had not been referred to him by the consent order of 2 May 2018. I will first address the applicable principles, which are not controversial in this application and which the parties did not consider it necessary to address in submissions, before turning to the referee’s provisional view and the parties’ submissions. I have drawn on my summary of these principles in Lukaszewicz v Polish Club Limited [2019] NSWSC 860 at [2]ff in doing so.

2. [30]

   The Court has discretion to determine by whom, to whom and to what extent costs are to be paid, and costs will ordinarily follow the event unless it appears to the Court that some other order should be made as to the whole or any part of the costs, in accordance with r 42.1 of the Uniform Civil Procedure Rules. A successful party has a “reasonable expectation” of being awarded costs against an unsuccessful party, unless there is good reason for that presumption to be displaced: Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 at [44], [134]. In Commonwealth of Australia v Gretton [2008] NSWCA 117 at [121], Hodgson JA (with whom Mason P agreed) observed that:

3. [31]

   In Bostik Australia Pty Ltd v Liddiard (No 2) [2009] NSWCA 304 at [38], the Court of Appeal noted that, in relation to trials, it may be appropriate to deprive a successful party of costs or a portion of the costs if the matters upon which that party were unsuccessful took up a significant part of the trial, either by way of evidence or argument. In Re Employ (No 96) Pty Ltd (in liq) [2013] NSWSC 456 at [8], to which the Court of Appeal referred with apparent approval in Correa v Whittingham (No 2) [2013] NSWCA 471 at [35], I noted that the Court may limit the costs awarded to a party, or not award costs to a party, if its conduct obscured the issues, caused unnecessary evidence to be led or inappropriately prolonged proceedings and increased their cost.

4. [32]

   I also addressed the circumstances in which costs could reflect a mixed result of proceedings in Re Metal Storm Ltd (subject to deed of company arrangement) [2014] NSWSC 1170 at [47] as follows:

5. [33]

   In Ryde Developments Pty Ltd v The Property Investors Alliance Pty Ltd (No 2) [2018] NSWCA 40 at [6]–[7], the Court of Appeal in turn noted that:

6. [34]

   In Mobis Parts Australia Pty Ltd v XL Insurance Company SE (No 2) [2019] NSWCA 19 at [5], the Court of Appeal noted that:

7. [35]

   Turning now to the referee’s provisional view and the parties’ submissions, the referee referred to the manner in which the reference was conducted and observed that the bulk of the affidavit evidence and some documentation focused on highly contested items on which CCF had not succeeded and that (at [353]):

8. [36]

   Mr Ashhurst challenged that observation, but it seems to me to have been correctly made. The referee’s report referred to cross-examination at the hearing directed, for example, to the range of substantial expenses claimed by CCF. As Mr Coles points out, matters may well have been able to have been dealt with on the papers had those claims not been pressed. Had an oral hearing still been required, it would plainly have been much abbreviated had CCF not pursued the claims upon which it failed.

9. [37]

   The referee then referred to several other matters relevant to an assessment of costs and observed (at [356]-[357]) that:

10. [38]

    In its outline of submissions, ALI submitted that:

11. [39]

    The Plaintiffs in turn referred to the range of claims made by CCF and rejected by the referee, including its claim to interest at a rate of 20.67% from 20 January 2015 to 30 June 2018 and 30.67% from 4 July 2018; a large number of fees set out in a letter dated 19 December 2014 to Equivest; consultant’s fees claimed by companies associated with CCF of over $995,000; a claim to 10% of the contract price on sale of the land; and a claim to the costs of the reference. That is, on any view, a significant number of unsuccessful claims for a large amount in total.

12. [40]

    ALI responds, in submissions in reply, that the reference was not necessitated by conduct of CCF, but reflected consent orders made by Leeming JA on 2 May 2018 to which I have referred above; that CCF made certain claims, in pursuit of which it was unsuccessful, but those claims had a reasonable basis; that the amount established by CCF was significantly more than the amount of $1.8 million, being a limit for which the Messrs Harpley had unsuccessfully contended in the reference. In a schedule to those submissions, ALI refers to a number of submissions advanced by the Messrs Harpley which were unsuccessful, as well as to their submissions that were successful or partly successful.

13. [41]

    The referee’s provisional view as to costs is supported by a concession in ALI’s outline of submissions (from which Mr Ashhurst later sought to retreat, at least to some extent) that the costs of the hearing were incurred “primarily” in relation to CCF’s unsuccessful claim that it was entitled to 10% of the proceeds on the sale of the land owned by Fearndale. So far as ALI submits that CCF had achieved a better result than that for which the Messrs Harpley contended, that submission neglects the other matters which the referee had rightly regarded as relevant, and in particular the extent of time which had been devoted to dealing with the issues on which CCF failed and the fact that CCF had not achieved, in respect of numerous claims, the position for which it contended.

14. [42]

    Having regard to these principles and the evidence as to the conduct of the reference, it seems to me that the referee’s preferred position was appropriate, and the position for which ALI contended, that each party pay its own costs would not fairly reflect the outcome of the reference. The issues on which CCF failed occupied an extensive amount of time in the reference, and in the oral hearing, and the costs order made should reflect that result. While the Messrs Harpley had significantly contributed to delays in the reference, and also failed on several issues, the referee has taken account of that matter in allowing them only a portion of their costs of the reference. I am comfortably satisfied that the Court should make orders for the costs of the reference in accordance with the referee’s preliminary view.

15. [43]

    A further issue arose as to whether ALI could take advantage of any right of CCF to recover costs of the reference under the mortgage documents, although ALI did not seek to have the Court determine that issue. While ALI contended (as I noted above) that the Court should make no order as to the costs of the reference, Mr Ashhurst submitted that ALI would have a separate contractual entitlement to recover the costs of the reference under the mortgage documentation. The question of ALI’s ability to rely on its contractual rights is relevant now, so far as Mr Ashhurst raises the possibility that it might impinge on the orders the Court should make. That question will also arise in addressing the distribution of monies paid into Court by Fearndale’s administrator or if ALI seeks to rely on those rights in a manner inconsistent with the Court’s orders, and the Plaintiffs then seek an interlocutory or final injunction to prevent its doing so, and I should address the parties’ submissions in that regard.

16. [44]

    In oral submissions, Mr Ashhurst submitted (T29) that, in reaching his provisional view as to costs:

17. [45]

    Mr Ashhurst also submitted (T29-30) that:

18. [46]

    While there was a degree of ambiguity in that submission, I do not understand ALI to be contending that it had an entitlement to costs that CCF rather than it had incurred in the reference, but rather to contend that it had the benefit of any contractual entitlement of CCF to recover the costs that CCF had incurred in respect of the reference. The latter formulation highlights the question whether CCF had such an entitlement under the financing documentation in the relevant circumstances.

19. [47]

    Mr Ashhurst referred to clauses 9.2(e) and (f) of ANZ’s memorandum of mortgage (Ex ALI-1, 566) which provided that the mortgagee will reimburse ANZ for its expenses in relation to the “contemplated, actual or attempted enforcement of, or exercise of, its powers under this mortgage” and for the “contemplated, actual or attempted preservation or maintenance of any Property [as defined]”. Mr Ashhurst also referred to cl 15.1(e) of the Corporate Guarantee and Indemnity given by Fearndale to ANZ (Ex ALI-1, 622) which similarly required Fearndale to reimburse ANZ for its expenses in relation to the “contemplated, actual or attempted enforcement or exercise, preservation or consideration of ANZ’s rights, powers or remedies under this Guarantee”. Mr Ashhurst also referred to cl 15.2(c) of the guarantee which required Fearndale to indemnify ANZ against any loss, cost, charge, liability and expense (including legal costs on a full indemnity basis) in respect of any “exercise or attempted exercise of any right, power or remedy under this Guarantee…”. It is not immediately apparent why CCF’s participation in a Court-ordered reference would properly be characterised as the enforcement of, or exercise of powers under the mortgage or guarantee, still less the preservation or maintenance of “Property” as defined in that mortgage, or the exercise of rights, powers or remedies under the guarantee.

20. [48]

    Mr Ashhurst relies, in order to establish a wider basis for CCF to recover costs, on an observation of Hodgson J in Project Research Pty Ltd v Permanent Trustee of Aust Ltd (1990) 5 BPR 97,341 that:

21. [49]

    It seems to me that there are more fundamental difficulties with ALI’s reliance on the principle expressed in Project Research Pty Ltd v Permanent Trustee of Aust Ltd above. The findings made in the referee’s report as to CCF’s claims in the reference to a 10% share of the sales proceeds of the land and to over $995,000 in fees claimed by associated entities, which are not contested by ALI, would support a provisional view that CCF had not acted “reasonably in stating the figure” for which it contended in the reference and had not determined that figure “bona fide and on reasonable grounds” and that its conduct of the reference amounted to “misconduct”, in the sense noted by Hodgson J in Project Research Pty Ltd v Permanent Trustee of Aust Ltd above, and that would be sufficient to deprive CCF (and ALI as its assignee) of any contractual or wider right to the costs of the reference. Although ALI has already had an opportunity to lead such evidence and make such submissions as it wished in respect of this hearing, I will nonetheless allow it a brief further opportunity to make further submissions limited to that issue if it seeks to establish the contrary.

22. [50]

    For these reasons, and subject to the leave to make submissions limited to the matter noted in paragraph 49 above, orders for costs should be made in accordance with the provisional view as to costs expressed by the referee.

Orders

1. [51]

   Accordingly, and again subject to the leave to make submissions limited to the matter noted in paragraph 49 above, the Court will adopt the referee’s report and make orders in accordance with his provisional view as to costs, and ALI should pay the Plaintiffs’ costs of and incidental to this application.

2. [52]

   I make the following orders: