Gulf Investments (Fiji) Ltd v Strategic Nominees Ltd [2009] FJHC 246; HBC153.2009L (30 October 2009)

IN THE HIGH COURT OF FIJI
AT LAUTOKA
CIVIL JURISDICTION

Civil Action No. HBC 153 of 2009L

BETWEEN:

GULF INVESTMENTS (FIJI) LIMITED
Plaintiff

AND:

STRATEGIC NOMINEES LIMITED
1st Defendant

AND:

OCEANIA INTERNATIONAL LIMITED (NEW ZEALAND)
2nd Defendant

AND:

OCEANIA INTERNATIONAL LIMITED (FIJI)
3rd Defendant

AND:

BAYLEYS REAL ESTATE (FIJI) LIMITED
4th Defendant

INTERLOCUTORY JUDGMENT

Of: Inoke J.

Counsel Appearing: Dr M S Sahu Khan for the Plaintiff
Mr N Barnes for the First Defendant

Solicitors: Sahu Khan & Sahu Khan for the Plaintiff
Munro Leys for the First Defendant

Date of Hearing: 26 October 2009
Date of Judgment: 30 October 2009

INTRODUCTION

[1] This is an application by the Plaintiff mortgagor ("Gulf") to restrain the First Defendant mortgagee ("Strategic") form proceeding with mortgagee sale. The application also sought to restrain the Fourth Defendant ("Bayleys") from accepting any tenders offered in response to the advertised mortgagee sale

THE BACKGROUND

[2] Gulf is the registered proprietor of two large pieces of land just south of Denarau Island in Nadi, Crown Lease Number 16928 (the "Crown Lease") and native land consisting of a Class 1 Special Tourism (Development) Lease (the "Native Lease") (collectively, the "Lands"). The Lands are suitable for tourism development.

[3] In 2006, representatives of the Third Defendant ("Oceania Fiji") approached Mohammed Aleem Khan ("Aleem Khan"), the Managing Director of Gulf, to develop Gulfs Lands for tourism purposes (the "Development"). Oceania Fiji intended to borrow the development funds from its offshore related company, the Second Defendant ("Oceania NZ").

[4] Oceania NZ obtained the funds from a New Zealand lender in 2006. Strategic was approached by a broker seeking to refinance the loan. Strategic did its usual risk assessment and agreed to refinance because the securities offered were valued at NZ$20m which was much higher than the risk. Strategic and Oceania NZ entered into a loan agreement on 2 May 2007 for NZ$5.1m. Gulf was to guarantee the loan and to mortgage its Lands as security. The mortgages are what is referred to as "third party mortgages". Other parties provided security as well but they are not relevant for the purposes of this application. Approval by the Reserve Bank of Fiji ("RBF"), subject to certain conditions, was obtained for these financial transactions.

[5] According to Strategic, a total of NZ$3.8m was advanced to Oceania NZ and out of that NZ$1.5m was remitted directly to Oceania Fiji in Fiji. The sum of NZ$1.3m remains undrawn. The loan was to be repaid by 27 April 2008. Oceania NZ failed to repay the loan on that date and Strategic instructed its Fiji solicitors to demand payment from Gulf and all the other guarantors. The amount demanded was about NZ$5.8m. Attempts to settle matter failed. Gulf complains that despite the large expenditure, the only work carried out was a survey of the Land.

[6] Strategic also exercised its rights to sell under the mortgages. The Lands were advertised by Bayleys for mortgagee sale, tenders were to close by 11 September 2009. Bayleys valued the land at US$46m as at 28 September 2007.

CASE HISTORY

[7] On 27 August 2009, Gulf filed the Writ of Summons and Statement of Claim in this action. On 28 August 2009 a motion supported by affidavit was filed for interim injunctions until further order, restraining Strategic and Bayleys from any tenders in respect of the advertised mortgagee sale. The application was first called on 1 September 2009 and I gave directions for the filing of affidavits and submissions. Counsel for Strategic advised the Court that Strategic had given an undertaking not to proceed further with the mortgagee sale until final determination of this application. Bayleys were served with the motion and other Court documents on 28 August 2009 but no one appeared on its behalf on 1 September 2009 so I granted the interim injunction sought in the motion against Bayleys. The application was set for hearing on 28 September 2009. The parties were not ready to proceed with the hearing on 28 September 2009 so it was further adjourned by consent for hearing on 26 October 2009.

THE APPLICATION

[8] The application was made pursuant to the High Court Rules and the inherent jurisdiction. No specific provision of the Rules has been referred to so I take it that it is pursuant to Order 29. It is supported by the affidavit of Aleem Khan filed on 27 August 2009 and a further affidavit by him filed on 20 October 2009. An affidavit in opposition was filed by Strategic on 15 September 2009. I am grateful for both Counsels very helpful written and oral submissions. I do not think it is necessary for the purposes of this application to set out in detail the various allegations and counter allegations in the affidavits and submissions so I will only refer to them in a summary and general way.

GULFS ARGUMENT

[9] Dr Sahu Khan, Counsel for the Gulf, submitted that the essence of his case is: (i) the mortgages themselves were unlawful, null and void for being issued contrary to the Exchange Control Act; and (ii) the moneys now claimed were not used for the Development and therefore not recoverable under the mortgages.

[10] In respect of (i) he referred to a letter (the "Approval letter") from the RBF to Strategic’s solicitors dated 25 May 2007 in which the RBF gave permission under the Exchange Control Act for Oceania Fiji and Gulf to issue various securities to Strategic as outlined in the loan agreement to secure the NZ$5.1m lent to Oceania NZ. Permission was granted subject to certain conditions. Dr Sahu Khan argued that these conditions had not been met so the RBF approval automatically became null and void and consequently the mortgages too became null and void and unenforceable.

[11] In its Statement of Claim, Gulf alleged that it was made to execute the mortgages by the fraud and deceit of Strategic, Oceania NZ and Oceania Fiji. The alleged fraudulent misrepresentation was that all consents and approvals had been obtained, which was not the case in fact when it signed the mortgages.

[12] In respect of his second main argument, Dr Sahu Khan submitted that his client gave the mortgages on the clear understanding that the moneys that were being borrowed and secured were to be used exclusively for the Development. He referred to various examples in the affidavits which he said clearly demonstrated that a substantial part of the drawdowns were used for purposes unconnected with the Development. Aleem Khan’s affidavits also referred to correspondence in which Gulfs representative had seriously questioned and sought information on how and to whom payments were made from the loan drawdowns.

[13] He also submitted that Strategic, Oceania NZ and Oceania Fiji owed a duty to Gulf to ensure that the drawdowns were used for the purposes for which the money was lent. He also submitted that Strategic had also breached the terms of the loan agreement by not ensuring the loan was used for the agreed purpose.

[14] Counsel also suggested in his written submissions that I make certain orders which involve a third party. These are matters which the parties can pursue in settlement talks so I will ignore them in this application.

STRATEGIC’S ARGUMENT

[15] Mr Barnes, Counsel for Strategic, essentially submitted that this is just another normal commercial transaction entered into by business men with eyes open. There is nothing unusual about these transactions. The normal rules apply.

[16] He submitted that approval of the RBF was not required because the definition of "securities" in the Exchange Control Act makes no mention of "mortgage". He argued that as a matter of law, no RBF approval was required. It was only as a matter of practice that such approval is sought. I have to disagree with him and agree with Dr Sahu Khan that the definition is not an exhaustive one. It uses the word "includes" to cover other forms which would not normally be regarded as "securities. Mention the word "securities" and I think "mortgages" and "debentures" are the first to come to mind.

[17] He also submitted that in any event, all the conditions set out in the Approval letter have been met and, even if not met, approval could be given retrospectively. He referred to s 20(2) of the Act as authority for this proposition. I note that such approval is at the discretion of the Minister and is therefore not automatic.

[18] As to the use of the loan drawdowns, he argued that it made no difference whether the money was used for the Development or whether the lender failed to ensure that they were properly used. He based his argument on the basis that the parties’ rights were restricted to the documents, which were the Deed of Guarantee and the Mortgages.

[19] I think, the loan agreement must also be included in these documents. I do not think that each document should be looked at in isolation. They were executed by the parties for the purpose of funding the Development. That is clear in my view, at least from Gulfs perspective.

[20] In the course of argument Mr Barnes submitted that his client had power of sale pursuant to the Deed of Guarantee to pursue Gulf without first exhausting its remedies against the principal debtor, Oceania NZ, and I asked him to direct me to the provisions which gave that power. He could not do so but argued that the Deed was linked to the Mortgages by the definition of "security documents" in the Deed and clauses 2.1, 2.2 and 2.3. He argued that the Deed gave his client the right to sell as mortgagee because the Deed referred to the Mortgages.

[21] Examination of these clauses in the Deed show that they do no more than simply state the usual obligation of a guarantor that he will pay the debt when the debtor does not pay the debt when due. They do not give Strategic the right to sell as mortgagee. That right must be found in the mortgages. The mere reference to the Mortgage in the Deed, with respect, does not transfer the rights of a mortgagee to the Deed.

[22] He submitted that there were no serious issues to be tried because none of the allegations made by Gulf amount to a cause of action against Strategic.

[23] Finally, he submitted that I should order Gulf to pay into Court the full amount of the security rather than the indebtedness but conceded that a "substantial" amount should be paid, after I asked him whether he was seriously suggesting that I order US$46m to be paid into Court,.

THE LAW

[24] The leading case of Inglis v Commonwealth Trading Bank of Australia [1972] HCA 74; (1972) 126 CLR 161 (28 April 1972) has been accepted in Fiji as setting out the proper rule in applications such as this. The rule as noted in the headnote is: "As a general rule an injunction will not be granted restraining a mortgagee from exercising powers conferred by a mortgage and, in particular, a power of sale unless the mortgage debt, if there is no dispute, is paid or unless, if the amount is disputed, the amount claimed by the mortgagee is paid into court; and this rule will not be departed from merely because the mortgagor claims to be entitled to set off the amount of damages claimed against the mortgagee."

[25] The decision of the High Court of Australia in Inglis was delivered in 1972 before the House of Lords decision in American Cyanamid [1975] UKHL 1; [1975] AC 396 and I wonder if Inglis would have been decided differently had American Cyanamid been decided before it. In Naigulevu v National Bank of Fiji [2008] FJHC 141; Civil Action 598.2007 (15 February 2008), a case cited by Mr Barnes, Scutt J applied the Cyanamid principles despite referring to Inglis. The facts in that case fell within the second limb of the Inglis rule. The amount of the debt was disputed so Scutt J granted an injunction restraining advertisement of the mortgagee sale on the condition that the amount of the debt is paid into Court. The same result as if the general rule in Inglis was applied.

[26] In Kim v Bank of Baroda [1999] FJHC 39; Hbc0244d.99s (2 June 1999), Shameem J considered both the Inglis and Cyanamid principles. In that case, the debt was not disputed. The plaintiff was seeking an injunction as temporary relief from forfeiture so that he could find a purchaser. The injunction was refused.

[27] The Court of Appeal in Ali’s Engineering Ltd v Valebasoga Tropicboards Ltd [2003] FJCA; Civ App ABU 6 of 2003S (15 September 2004) (Sheppard, Penlington and Scott JJA) applied the Cyanamid principles despite referring to Inglis. The appeal in that case was against the High Court Judge’s refusal to grant an interlocutory injunction restraining exercise of power of sale under a mortgage debenture. The Court of Appeal clearly approved the approach taken by the learned trial Judge of considering the threshold question of whether there were serious issues to be tried and then the balance of convenience. It seems to me therefore that the harshness of the general rule in Inglis, which can arise especially when the debt is significantly less than the value of the mortgaged property, has been tempered in this jurisdiction by Cyanamid.

SERIOUS ISSUES TO BE TRIED

[28] I will therefore consider the threshold question: Are there serious issues to be tried? I am convinced that there are serious issues to be tried. The validity and enforceability of the Mortgages and the other security documents, as far as they concern Gulf, and the amount of the indebtedness are issues that have been fairly raised by the affidavits.

BALANCE OF CONVENIENCE

[29] As for the balance of convenience, I think it lies in favour of Gulf. The amount of the alleged debt is significantly less than the value of the Lands. Strategic and Oceanic NZ are overseas companies and have no presence or assets in Fiji other than the securities in this action. If Gulf succeeds in its action it may not be able to execute its judgment in Fiji. On the other hand, if Strategic wins, the Lands are still available to satisfy its judgment. The Lands are valued well in excess of the alleged debt.

DAMAGES AN ADEQUATE REMEDY?

[30] This is a case involving land so prima facie damages is not an adequate remedy. I think the nature of the properties involved make damages inadequate.

UNDERTAKING AS TO DAMAGES

[31] As for the undertaking as to damages, I think the Defendants are adequately protected because of the substantial value of the Lands.

FINAL OUTCOME

[32] The final outcome is that the First and Fourth Defendants are restrained from proceeding with mortgagee sale of the Lands.

COSTS

[33] The First and Fourth Defendants have lost and should pay the Plaintiffs costs of this application. The Fourth Defendant was only acting on the First Defendant’s instructions so the First Defendant should pay the costs. Substantive affidavits and submissions have been filed. The hearing took nearly 3 hours. I think costs of $2,000 is justified.

EARLY HEARING

[34] At the end of the hearing I asked Counsel if they wanted this action heard before the end of this year and to advise me on suitable dates when I deliver judgment on 30 October 2009. The reason I am giving priority to this case is that I think development of the lands in question can have a significant impact on the economy of this country and should not be stifled because of lack of access to this Court. I urge the lawyers and their clients to have this action ready for hearing before the end of the year or at the latest early next year.

ORDERS

[35] I therefore make the following Orders:

1. Until further Order of the Court the First and Fourth Defendants and their servants and agents be restrained from accepting any tender in respect of the Advertised Mortgagee Sale or otherwise exercising power of sale in respect of Crown Lease No: 16928 and the Native Lease comprised in Special Tourism (Development) Lease executed on 28th day of February, 2005 and registered with the Registrar of Deeds.

2. The First Defendant shall pay the Plaintiffs costs of $2,000 within 14 days.

Sosefo Inoke
Judge