Case | Binding Financial Agreements: The Independent Legal Advice Requirement and its Limits
Key Takeaways:
A serious question is not enough: an arguable legal claim does not automatically justify an injunction. The Court will consider the strength of that claim together with the practical consequences of granting or refusing relief.
Commercial consequences require evidence: where an injunction could interrupt a development or financing transaction, evidence of financing deadlines, comparative interest rates, delay costs and alternative funding options may be decisive.
Applicants must identify concrete prejudice: general concerns about being excluded from management or losing control may carry limited weight without evidence explaining how the proposed transaction will cause actual harm.
An undertaking as to damages must have real value: the Court will examine whether the party giving the undertaking has the financial capacity to compensate those affected if the injunction is later found to have been wrongly granted.
Loan and project documents must work together: where funding, ownership and management rights are interconnected, the loan agreement, trust deed, shareholders agreement and security arrangements should clearly specify the consequences of default and the steps required to enforce those rights.
Parties should act promptly: delay in challenging a demand, transfer or exercise of contractual rights may weigh against the grant of urgent equitable relief.
DATE: 30 May 2021
Case Overview
This case concerned an urgent application for interlocutory relief arising from a breakdown between joint venture partners in a residential property development in Lindfield, New South Wales. The New South Wales Supreme Court refused the relief sought after finding that the balance of convenience favoured allowing the project’s proposed refinancing and development activities to proceed. Another key factor in the decision was the Court’s finding that the undertaking as to damages offered by the cross-claimants lacked substance and did not provide adequate protection to the opposing party.
Two investors jointly held a property development through a unit trust structure. The plaintiff, our client, was the primary funder of the project having advanced a $3,000,000 loan to the cross-claimant to enable its participation. When the loan was not repaid after two years, the plaintiff exercised powers under the Commercial Loan Agreement to transfer the cross-claimant’s units and shares in the project to itself and related companies. The cross-claimant disputed the validity of those transfers and sought urgent interlocutory relief to restrain the plaintiff from proceeding with a commercially advantageous refinancing of the project.
The Court’s Decision
The Court was satisfied that serious questions to be tried existed on several grounds, including whether the transfer clauses were void for uncertainty, constituted an unenforceable penalty, or required formal rescission before operating. However, it found the cross-claimants’ case to be overall not strong. The Court also found no prima facie case that a new trustee had been validly appointed, as the cross-claimant was unable to resile from recitals in a Deed of Variation it had signed recording that the required special resolution had been passed.
The interlocutory relief was refused on two principal grounds. First, the balance of convenience favoured the plaintiff. Granting the injunctions would have jeopardised a commercially advantageous refinancing, with a potential loss to the project of $5.4 to $6.3 million over three years. Second, the Court was not satisfied that the cross-claimant’s undertaking as to damages was adequate. Despite a late attempt to shore up the undertaking by relying on the assets of a related company, the Court found the evidence insufficient. The most recent audited financial statements showed the company operating at a loss, no tax returns had been filed since 2018, and several of the assets relied upon were subject to registered mortgages and caveats. The cross-claimant’s own history of failing to repay the $3,000,000 loan further undermined confidence in its financial position. Costs were awarded against the cross-claimants.
When seeking urgent interlocutory relief, parties often focus their attention on establishing a prima facie case and demonstrating the balance of convenience. This case is a reminder that the undertaking as to damages is equally important, and that a weak or poorly evidenced undertaking can be the decisive factor in a court refusing relief, regardless of the merits of the underlying claim. Parties should ensure their financial position is thoroughly documented and verifiable before making any application for interlocutory relief.
Disclaimer:
This article does not give legal advice. It is intended to provide general information in summary form on legal topics, current at the time of first publication, for general information purposes only. The contents do not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such. Formal legal advice should be sought in particular matters.
