Receivers win first stoush in Raine Square Saga

The recent decision of Saraceni v Mentha [2011] WASC 94 concerned two matters:

• Mr Saraceni’s application to strike out various paragraphs of the receivers’ defence and counterclaim; and
  
  
• the receivers’ application for leave to proceed with their counterclaim against the administrator.

Background

In November 2004, St George Bank Limited (as it was then known) (St George) provided Westgem Investments Pty Ltd (receivers and managers appointed) (administrators appointed) (Westgem) with a loan.  Westgem granted St George a fixed and floating charge over all of its assets and undertakings in order to secure its obligations under that loan (the St George Charge). 

In April 2008, BOS International (Australia) Limited and the Bank of Western Australia Limited (together the Financiers) agreed to provide Westgem with financial accommodation in connection with a project to develop land located in the Perth CBD known as ‘Raine Square’ (the Raine Square Development).  Contemporaneously with the execution of the facility agreement, Westgem entered into a deed entitled ‘Fixed and floating charge (all assets)’ with BOSI Security Limited (BOSI)¹ (the BOSI Charge).  Westgem also granted BOSI a mortgage over the Raine Square Development and St George assigned the St George Charge to BOSI.  Subsequently:

• on 11 November 2008, Westgem granted a further mortgage to BOSI;
  
  
• the facility agreement between Westgem and the Financiers was amended and restated by an agreement dated 22 September 2010 (the Restated Facility Agreement);
  
  
• Westgem granted a third mortgage to BOSI;
  
  
• on 11 January 2011, BOSI appointed Mark Mentha and Cliff Rocke as joint and several receivers and managers of Westgem pursuant to the Charge (the Receivers);
  
  
• on the same day, Mr Luke Saraceni (the sole director of Westgem) (Saraceni) appointed Mr Bryan Hughes as the voluntary administrator of Westgem pursuant to section 436 of the Corporations Act 2001 (CA) (the Administrator);
  
  
• on 21 January 2011, BOSI appointed the Receivers as joint and several receivers and managers of the Raine Square Development pursuant to the mortgages; and
  
  
• the Receivers commenced proceedings against Saraceni and Saracen Project Management Pty Ltd (Saracen)² seeking orders that Saracen pay approximately $1.2M to an account nominated by the Receivers.  The $1.2M comprised fees paid by Westgem to Saracen immediately prior to the Receivers’ appointment (the Receivers Proceedings).

Issues in the proceedings

Saraceni and Saracen (together the Saraceni Parties) contend that the BOSI Charge was ineffective to charge any of the assets of Westgem and accordingly, that the appointment of the Receivers was invalid.  The Saraceni Parties’ argument was that as there was no definition of ‘Secured Property’ in the BOSI Charge, the operative charging clause of the BOSI Charge did not charge any of Westgem’s property, and accordingly, the appointment of the Receivers was invalid.

In response to the Saraceni Parties’ claims, the Receivers filed a defence and counterclaim (the Defence and Counterclaim).  Pursuant to the Defence and Counterclaim, the Receivers asserted that the BOSI Charge was effective to charge all of the property of Westgem.  The Receivers also sought additional/alternative relief, including:

• an order that the St George Charge was effective to charge all of the assets of Westgem (as security for all amounts owed by Westgem to BOSI), and that BOSI did not intend to discharge and would not have discharged the St George Charge if the BOSI Charge was, or is held to be invalid (the Subrogation Issue); and
  
  
• an order for rectification such that if the BOSI Charge was not effective to charge all of Westgem’s property, it was the common intention of the parties that the BOSI Charge was an ‘all assets’ fixed and floating charge and the definition of ‘Secured Property’ in the BOSI Charge should be rectified accordingly (the Rectification Issue).

In order to proceed with a claim for rectification, it is necessary to have all of the parties present to the original document represented in the proceedings, which meant that Westgem was required to be a party to the Receivers Proceedings.  As Westgem was a company in administration, the Receivers required leave to proceed against Westgem pursuant to section 440D of the CA (the Leave Issue).

The Saraceni Parties filed an application to strike out various parts of the Defence and Counterclaim, including the parts relating to the Rectification Issue and the Subrogation Issue.

The Subrogation Issue

The Saraceni Parties alleged that the Subrogation Issue as pleaded in the defence should be struck out as it was:

• embarrassing, in that BOSI cannot be subrogated to rights under a charge that BOSI itself discharged; and
  
  
• the St George Charge did not fall within the definition of ‘Secured Property’ as defined in the Restated Facility Agreement as it was not created or entered into as security for any ‘Secured Money’ as defined by the Restated Facility Agreement.

Justice Corboy dismissed the Saraceni Parties’ application to strike out the Receivers’ subrogation plea as he was satisfied that the Receivers’ subrogation plea disclosed a reasonable defence or cause of action, and considered that it was arguable as a matter of law, and accordingly, should be determined at a full hearing, not summarily.

The Rectification Issue

The Saraceni Parties alleged that the rectification counterclaim should be struck out as:

• it was not adequately particularised; and
  
  
• the argument cannot be advanced in light of the decision in JJ Leonard Properties Pty Ltd v Leonard (WA) Pty Ltd (No 2) (1987) 13 ACLR 37 (JJ Leonard).

Justice Corboy dismissed the Saraceni Parties’ application to strike out the Receivers’ rectification claim as he was satisfied:

• that the claim was adequately particularised; and
  
  
• it was at least arguable that the JJ Leonard³ decision was distinguishable, in that:
  
  
  • JJ Leonard concerned a company in liquidation, in this case, Westgem was in administration; and
    
    
  • in the JJ Leonard case, the Court denied the secured creditor relief on discretionary grounds (in that it was unfairly prejudicial to unsecured creditors), whereas in this case it was arguable that the Court should use its discretion to rectify the BOSI Charge.

The Leave Issue

The Administrator neither consented nor opposed the Receivers’ application for leave to proceed.  However, the Administrator raised a number of issues for the Court’s consideration:

• whether unsecured creditors would be unfairly prejudiced if the BOSI Charge was rectified;
  
  
• that as he had exhausted all of his funding, and was not in a position to participate in the proceedings there would be no-one to challenge the Receivers’ claims on behalf of Westgem; and
  
  
• that the question of rectification could be considered after the Court had made a decision on the proper construction of the BOSI Charge.

Justice Corboy considered the following factors relevant in granting the Receivers leave to proceed:

• that the Saraceni Parties were in a position to (having regard to the fact that Saraceni was the sole director) and would raise issues that Westgem would raise in its defence of the Receivers’ claims; and
  
  
• that the interests of all creditors required the question of the validity of the Receivers’ appointment to be determined as soon as possible.

Lavan Legal Comment

This is the first decision in what is likely to be a protracted series of litigation, and while it does not ultimately dispose of the issues between the parties, it is useful to remind:

• practitioners about the reluctance of Courts to entertain interlocutory strike out applications;
  
  
• secured creditors about the importance of ensuring that the appointment of receivers and managers are made pursuant to all of their (valid) securities.  In this case, if BOSI had appointed the Receivers pursuant to the mortgages in the first instance, it is likely that these proceedings would never have been commenced; and
  
  
• practitioners about the importance of ensuring that when using ‘Transaction Documents’ as a definition there are common definitions in each of the transaction documents.

For more information please contact Alison Robertson, Partner on (08) 9288 6872 / alison.robertson@lavanlegal.com.au or Joseph Abberton, Senior Associate on (08) 9288 6765 / joseph.abberton@lavanlegal.com.au.