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Interlocutory injunctions to prevent property sales - What is 'reasonable'?

17 Jul 2012

Depending on who you listen to, the property market is either in recovery mode or on life support. When companies (and individuals) suffer financial difficulties and mortgagees or receivers move in, often a major asset that is sought to be preserved, is that of some landholdings. Understandably, mortgagees and receivers want to sell properties as soon as practical to recover funds, while the debtors / those associated with them may disagree with the course of conduct or the sale process.

A recent matter before the Federal Court of Australia dealt with the legal principles involved with an interlocutory injunction to prevent the sale of property by receivers and confirmed that receivers have a large degree of autonomy in conducting their duties. Furthermore, that the Court will not readily intervene in preventing the exercise of the receivers' powers.

The Court in Saward v J & A Saward Developments Pty Ltd [2012] FCA 404 (Saward) applied a number of principles in determining whether or not the receivers were acting reasonably and if the properties could be sold in the manner suggested.

The matter involved the proposed sale of 23 properties, which were controlled by Receivers appointed by the National Australia Bank (NAB). The Receivers had determined that it was necessary to sell all the properties to satisfy the debt owed to NAB by auctioning the properties consecutively.

The Plaintiffs sought an injunction to prevent the sale of:

  • the properties; or alternatively
  • three farm properties (the Farm Properties) and in particular the property known as Three Mile Line (the Three Mile Line Property).

The Plaintiffs argued that the Receivers' conduct was unreasonable for two reasons, being:

  • the ‘fire sale’ manner in which it was suggested the properties be sold; and
  • the Receivers' insistence on selling the Farm Properties and, in particular, the Three Mile Line Property in circumstances where funds from the other sales would likely be sufficient to meet the outstanding debts.

Court's determination

In relation to the allegation that it was a fire sale, the Plaintiffs argued that that manner was unreasonable because the properties would fetch higher returns if the sales were staggered. The Receivers countered that the properties appealed to different purchasers and that by selling the properties together, it would attract more buyers to the one place and create better competition at the auctions. Each party called evidence including real estate experts. The experts disagreed with each other.

Bromberg J determined that it was not the Court's role to determine the best method of sale. Simply, the Plaintiffs must sufficiently show that the Receivers' decision was unreasonable. Because the real estate field involves a high level of speculation, and neither expert was preferred to the other, the Plaintiffs did not satisfy the Court that the Receivers' approach was unreasonable.

The Plaintiffs then argued that the Receivers did not need to sell the Farm Properties, and in particular the Three Mile Line Property, because the sale proceeds of the other properties would be sufficient to cover the debt owed to NAB. The Plaintiffs argued that, based on previous valuations, the remaining 20 properties would cover the outstanding debt.

Again, the Court was not satisfied that the Plaintiffs had proven the Receivers' actions to be unreasonable.

Because the Court was not satisfied, that the conduct was unreasonable, the Court declined to grant the injunction and the Receivers were able to proceed with selling all properties individually.

Compare this case to that of Australian Barter Currency Exchange Pty Ltd v Uniting Church (NSW) Trust Association Ltd [2009] NSWSC 607 (Cassiniti). In contrast to Saward, this matter resulted in an injunction being granted to prevent the sale of property.

In Cassiniti there were 29 secured properties. The secured creditors sold five thereby reducing the indebtedness, then notified the Plaintiff that they intended to sell several of the remaining properties at public auction to satisfy the remainder of the debt.

The Plaintiff sought an interlocutory injunction to prevent the secured creditors from selling three of the properties (the Three Properties) because the total value of all remaining properties (the Total Properties) was significantly higher than the outstanding value of the loan.

Court's determination

Significant evidence was produced to the Court by the debtor to prove that the value of the Total Properties considerably exceeded the outstanding value of the loan. The debtor also put forward offers of refinance to prove to the Court that debtor companies could remain operational and satisfy its obligations even while keeping the Three Properties.

The Court determined that the financial position of the secured creditor was fully protected because of the substantial value of the Total Properties which significantly exceeding the outstanding value of the loan. The Court determined that even if a refinancing did not occur, there would be no financial loss suffered by the Secured Creditor.

Due to the lack of detriment to be suffered by the Secured Creditor, the Secured Creditor was restrained from selling the Three Properties until further order of the Court.

How these cases affect you

Seeking an interlocutory injunction is a very useful temporary remedy to maintain status quo and allow a matter to run its course through the Court. As can be seen from the above cases, injunctions can be sought against receivers and mortgagees, but can also be sought in many differing circumstances.

Saward outlines the prospective litigation involved in administering an estate in receivership and the hurdles that may be faced. Whilst interlocutory injunctions are inconvenient to deal with, as can be seen from this decision, they are not always granted. Conversely, Cassaniti showed that injunctions can be granted in circumstances where sales are unnecessary and the other party will not suffer detriment.

How can we help?

Whether you are a company in receivership, a company seeking an injunction, or a liquidator or receiver, we can assist. The Hynes Legal's litigation team is experienced in all aspects of insolvency litigation and has extensive experience acting for liquidators and receivers, and, conversely, acting in applications against liquidators and receivers.