ACN 077 991 890 Pty Limited v National Australia Bank Limited

[2007] NSWSC 358

CITATION:	ACN 077 991 890 Pty Limited & Ors v National Australia Bank Limited & Ors [2007] NSWSC 358
HEARING DATE(S):	8 February 2007
JUDGMENT DATE :	19 April 2007
JURISDICTION:	Equity Division
JUDGMENT OF:	Windeyer J at 1
DECISION:	Plaintiffs may marshal against rights of the first defendant under mortgages given by the second and third defendant to the first defendant.
CATCHWORDS:	EQUITY – MORTGAGES – Marshalling of securities – No common debtor – Exception to common debtor rule – Where company gave first ranked charge to defendant creditor as security for loan to company and to secure guarantee of debts of company directors – Where company directors gave mortgages to defendant creditor to secure loans to them – Where company gave second ranked charge to plaintiff creditors as security for loan to company – Where defendant creditor used company assets to repay company loan and directors’ debts – Where company had right of subrogation against directors – Whether plaintiff creditors could be marshalled to defendant creditors’ mortgages given by directors – Plaintiff creditors entitled to marshalling – Company directors could not rely on company’s rights of subrogation as defence to marshalling claim
LEGISLATION CITED:	Law Reform (Miscellaneous Provisions) Act 1965 Real Property Act 1900 Fisher and Lightwood Law of Mortgages Aust Ed, para 30.11 Meagher Gummow and Lehane, 4th Ed para 11-045
CASES CITED:	Bondi Securities Pty Limited v AGC (Advances) Limited (unreported 31 August 1990) Brown v Canadian Imperial Bank of Commerce (1985) 50 OR (2d) 420 Cadima Express Pty Ltd v Deputy Commissioner of Taxation (1999) 33 ACSR 527 Ex parte Kendall (1811) 17 Ves 514; 34 ER 199 Leichhardt Emporium Pty Ltd v AGC (Household Finance) Ltd [1979] 1 NSWLR 701 Neff v Miller (1848) 8 Barr 347 New Zealand Loan and Mercantile Agency Co Ltd v Loach (1912) 31 NZLR 292 Sarge Pty Limited v Cazihaven Homes Pty Ltd (1994) 34 NSWLR 658 South v Bloxham (1865) 2 Hem & M 457; 71 ER 541
PARTIES:	ACN 077 991 890 Pty Ltd (formerly Known as Apollo Financial Services Pty Limited) (First Plaintiff) Harold Roderick Chase (Second Plaintiff) Glenda Isabel Chase (Third Plaintiff) National Australia Bank Limited (First Defendant) Reginald Terence Norton (Second Defendant) Margaret Anne Norton (Third Defendant) Norton-Ram Pty Ltd (in liquidation) (Fourth Defendant)
FILE NUMBER(S):	SC 4795 of 2006
COUNSEL:	Mr J Stevenson SC with him Ms Nicolette Bearup (Plaintiffs) Submitting Appearance (First Defendant) Mr B Coles QC with him Mr N Carney (Second and Third Defendants) No appearance (in liquidation) (Fourth Defendant)
SOLICITORS:	King-Christopher Carpenter (Plaintiffs) Henry Davis York (First Defendant) Matthews Williams (Second and Third Defendants) No Appearance (in liquidation) (Fourth Defendant)

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IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WINDEYER J

THURSDAY 19 APRIL 2007

4795/06 ACN 077 991 890 Pty Limited (Formerly Known as Apollo Financial Services Pty Limited) and 2 ors v National Australia Bank Ltd and 3 ors

JUDGMENT

Outline

1 The question is whether the doctrine of marshalling of securities applies in this case where there is no common debtor.

Facts

2 Norton Ram Pty Limited (Norton Ram) gave two charges over its assets and undertakings. The first was in favour of National Australia Bank Limited (the Bank), as security for $380,000 lent by that Bank to Norton Ram and to secure a guarantee of Norton Ram to the Bank of the liability of Mr and Mrs Norton, the second and third defendants under loans by the Bank to them amounting to $620,000.

3 The second charge over the assets and undertakings of Norton Ram was in favour of the first plaintiff, a company now A C N 077 991 890 Pty Limited (formerly called Apollo Financial Services Pty Limited) (Apollo) and Mr and Mrs Chase, who are the second and third plaintiffs. This charge secured the sum of $682,500 which was the total of two amounts payable, one to Apollo and one to Mr Chase as the purchase price of certain businesses sold to Norton Ram by Apollo and Mr Chase. The whole of the purchase price was, in essence, lent back by the plaintiffs jointly to the purchaser company so that Mrs Chase became a lender. I will refer to these chargees as Apollo/Chase. That sum of $682,500 was secured, in addition to the charge over Norton Ram, by a mortgage over a property at Orange owned by Mr and Mrs Norton. This debt was also guaranteed by Mr and Mrs Norton.

4 Mr and Mrs Norton owned two properties at Parkes. One was No 20 Panarama Street and the other was 91-93 Carinda Street. These are known as the Parkes land and the Parkes office respectively. Mr Norton owned a property 117 Andrews Road, Valentine. These three properties were mortgaged to the Bank to secure the $620,000 lent to Mr and Mrs Norton by the Bank. That was the same sum as that guaranteed by Norton Ram to the Bank under its secured guarantee. The Nortons also guaranteed to the Bank the debt due to the Bank by Norton Ram, secured by these three properties.

5 The loan to Mr and Mrs Norton from the Bank was in default in February 2005. The loan from Apollo/Chase to Norton Ram was in default at least in July 2005 and on 14 July Apollo/Chase, as chargee under the second charge, appointed receivers to Norton Ram. Six days later the Bank appointed receivers to that company pursuant to its charge. Whether this was by reason of the earlier receivership being an event of default or because default by Mr and Mrs Norton under their mortgage triggered default under the first charge, does not matter.

6 The receivers and managers appointed by the Bank to the assets of Norton Ram sold the whole of its undertaking. The proceeds of sale were applied: (a) towards discharge of the balance of $380,000 lent by the Bank to that company, namely $342,825; (b) in payment of all moneys due by Mr and Mrs Norton to the Bank, namely $629,044; (c) $134,436.08 for legal fees incurred by the Bank and the receivers; (d) $199,084 for receivers’ fees; and; (e) the balance of $106,138.21 was paid to the receivers and managers appointed by Apollo/Chase, which appears to have been applied to meet their fees and legal costs. Under the sale agreement for the assets of Norton Ram there is a sum of $150,000 unpaid, and there is at least some doubt as to whether it will be received. If it is received, it will go to Apollo/Chase.

7 The Orange property owned by Mr and Mrs Norton was sold in May 2006, the plaintiffs receiving $278,680.20 from the proceeds of sale. As a result of all these transactions the amount outstanding to Apollo/Chase by Norton Ram as at 5 February 2007 was $574,564.

Issue

8 The issue in these proceedings can now be stated as follows: are the plaintiffs entitled to marshal against the rights of the Bank under the three mortgages held by the Bank over the properties at Parkes and Valentine? The claim is to marshal only in respect of the amount of the Bank recoveries from the sale of the Norton Ram assets pursuant to the guarantee and applied to discharge the Nortons’ debt to the Bank or the amount owing by Norton Ram to the plaintiff if that is a lesser amount. The plaintiffs also claim, in addition, that a proportion of the Bank’s receiver’s fees should be available to them, which I will consider separately. There are subsidiary orders sought to which I will return.

Marshalling

9 The equitable doctrine of marshalling arises in situations where creditor A and creditor B both have claims against a debtor, and where creditor A has the benefit of two securities, X “the singly charged security” and Y “the doubly charged security”, to secure his claim, while creditor B has a second ranked security over Y only. If creditor A satisfies his claim from Y, the doubly charged security, creditor B will lose the benefit of that security and will be forced to join the ranks of general creditors, whereas if creditor A satisfies his claim from X, the singly charged security, creditor B can maintain his secured position over Y. Thus, by choosing to enforce his claim against the doubly charged security instead of the singly charged security, creditor A can prejudice the position of creditor B. Equity remedies this situation through the doctrine of marshalling. While equity recognises that creditor A should be permitted to choose which security to enforce, and thus will not force A to go against the singly charged fund (X), it allows creditor B to take the benefit of the singly charged security, X, by subrogating creditor B to the rights of A in relation to that security.

10 In the present case, the Bank is in the position of creditor A, having the benefit of both the first ranked charge over Norton Ram’s assets (the doubly charged security) and the mortgages over the Nortons’ properties (the singly charged security). Apollo/Chase is in the position of creditor B, possessing only the benefit of a second ranked charge over Norton Ram’s assets. The Bank, which had the option of enforcing either the doubly or the singly charged security, prejudiced the position of Apollo/Chase by choosing to go against the doubly charged security, instead of against the Nortons’ properties against which Apollo held no security.

11 Generally speaking, marshalling requires a common debtor: Ex parte Kendall (1811) 17 Ves 514; 34 ER 199. There has however been recognised an exception to this requirement that arises where the owner of the singly charged security can be compelled at law or in equity to pay the debt owing to a creditor of the owner of the doubly charged security. That circumstance arises, inter alia, where the doubly charged security is charged by its owner as surety in favour of a creditor of the owner of the singly charged security as principal or primary debtor. This is explained in Meagher Gummow and Lehane’s Equity Doctrines and Remedies, 4th Ed para 11-045 as follows:

[11-045] This rule [the sole debtor rule] is subject to the qualification, implicit in the words of Lord Eldon LC in Ex parte Kendall (1811) 17 Ves 514; 34 ER 199; [1803-13] All ER Rep 295, that, even if funds belong to different parties, where there is an obligation recognised in equity upon the owner of the fund charged once to the owner of the fund charged twice, to bear the burden of all charges as between themselves, equity will enforce that duty at the instance of the second chargee of the doubly charged fund; it will do this by permitting marshalling against the single fund charged to the double chargee even though the chargor is another person to the chargor of the doubly charged fund: Carter v Tanners' Leather Co 81 NE 903 (1907); Savings & Loan Corp v Bear 154 SE 587 (1930) at 596; Ernst Bros Co v Canada Permanent Mortgage Corp (1920) 48 OLR 407; 57 DLR 500. Thus if one creditor has a claim against X and Y and another creditor has a claim against Y only, the latter cannot require the former to resort to X in the first instance, unless Y could throw the primary liability on X, as where X and Y are principal and surety: Brown v Canadian Imperial Bank of Commerce (1985) 50 OR (2d) 420. This paragraph was approved and applied by Young J in Sarge Pty Ltd v Cazihaven Homes Pty Ltd (1994) 34 NSWLR 658 at 661-3; BC9405356. In that case, there being no obligation upon the owners of the doubly charged fund to pay the debts of the other, there was no right to marshall.

12 The words of Lord Eldon referred to are as follows:

We have gone this length: if A. has a right to go upon two funds, and B. upon one, having both the same debtor, A. shall take payment from that fund, to which he can resort exclusively; that by those means of distribution both may be paid. That course takes place, where both are creditors of the same person; and have demands against funds, the property of the same person. Here, it is true, there may be creditors, who have demands against the four, and others who have demands against the one: but it was never said, that, if I have a demand against A. and B., a creditor of A. shall compel me to go against A.; without more; as, if B. himself could insist, that A. ought to pay in the first instance; as in the ordinary case of drawer and acceptor, or principal and surety; to the intent, that all the obligations, arising out of these complicated relations, may be satisfied: but, if I have a demand against both, the creditors of B. have no right to compel me to seek payment from A.; if not founded on some equity, giving B. the right for his own sake to compel me to seek payment from A. (17 Ves Jun 520)

This passage is quoted in Story: Equity Jurisprudence 7th Ed Vol 1 s 643 with reference to American authorities including Neff v Miller (1848) 8 Barr 347, where the following passages appear in the judgment of Bell J:

But the peculiarity of the question before us is, that one creditor, having a joint and several encumbrance against the estates of two distinct debtors, claimed and received the amount of that encumbrance from the separate estate of one of the debtors, and thus defeated the claim of a lien creditor of the latter. It is then the case of two funds belonging to different debtors, and not an instance of a double fund belonging to a common debtor. Under such circumstances, a court of equity will not, in general, compel the joint creditor to resort to one of his debtors for payment, so as to leave the estate of the other debtor for the payment of his separate and several debt, for, as between the two debtors, this might be inequitable; and the equity subsisting between them ought not to be sacrificed merely to promote the interest of the separate creditor. Nor will chancery, for the same reason, substitute the several to the place of the joint creditor, who has compelled payment from the estate of the debtor of the former. But where the joint debt ought to be paid by one of the debtors, a court of equity will so marshal the securities as to compel the joint creditors to have recourse to that debtor, so as to leave the estate of the other open to the claims of his individual creditors; or, if the joint creditor has already appropriated the latter fund, it will permit the several creditor to come in pro tanto, by way of subrogation upon the fund which ought to have paid the joint debt: 1 Story Eq. sec. 642-3; Per Ld. Eldon, Ex parte Kendall, 17 Ves. 520; Sterling v. Brightbill, 5 W. 229.

…

The principles that have been brought to view are of easy application in this instance, and, indeed, the illustration which has been offered exactly embraces the case. Here is a surety, whose money has been applied in payment of the debt of his principal, to the exclusion of his own proper creditors. That he would be entitled to come in, by way of substitution, upon the estate of the principal, is every-day equity; and I think it equally clear, that his creditor, who has suffered by the appropriation of a fund which otherwise would have been available for the discharge of his claim, may well ask to stand upon this equity, to the extent of the deprivation to which he has been subjected.

13 I set out the passage from Neff v Miller because it is often referred to. The most recent of the North American cases listed in Meagher Gummow and Lehane, Brown v Canadian Imperial Bank of Commerce (1985) 50 OR (2d) 420, relied upon the second paragraph. The facts in Brown are complicated but the exception was upheld. In that case marshalling was allowed to a third mortgagee who had in fact sold the mortgaged land under judicial sale, the result of which was that he was compelled to pay out the first and second mortgages on the triply secured property given to secure guarantees. If my decision in Bondi Securities Pty Limited v AGC (Advances) Limited (unreported 31 August 1990) is correct then the actual decision in Brown may not be correct, but that does not affect the principle: See Meagher Gummow and Lehane ante paragraph 11-180. The exception has also been discussed at some length and accepted by Young J in Sarge Pty Limited v Cazihaven Homes Pty Ltd (1994) 34 NSWLR 658, who emphasised that the right to marshal in these circumstances arises not out of abstract justice but only when there is a duty of one debtor to pay the debts of the other. Although there does not appear to be any other case on the common debtor exception in Australia, there is no doubt I should follow Sarge particularly as the exception is accepted as existing in Meagher Gummow and Lehane and in Fisher and Lightwood’s Law of Mortgages Aust Ed, para 30.11.

14 It is now necessary to consider the argument against the application of marshalling that was pressed most strongly by Mr Coles QC for the Norton defendants. Before doing so, however, it is necessary to point out two relevant facts in this case, (1) the Bank has filed a submitting appearance; and (2) Norton Ram Pty Limited (in liquidation) is a defendant but has taken no part in the proceedings. Both facts are important for this consideration. An order was made giving leave to proceed against the company in liquidation.

15 The argument of Mr Coles QC for Mr and Mrs Norton is that marshalling should not be allowed because the company has a superior right as a guarantor that has paid the debt of the principal debtors, Mr and Mrs Norton, and is thus entitled, both in equity and pursuant to s3(1) of the Law Reform (Miscellaneous Provisions) Act 1965 to be subrogated to the rights of the Bank against the Nortons. That argument, if it were valid would have been an answer in Neff v Miller and in the North American cases in which the exception was held to exist, at least so far as the equitable claim to subrogation was concerned, although not necessarily an answer to the statutory right existing in this State.

16 An interest in property coming into the possession of a company after the company’s liquidation falls under a charge existing over that company’s assets: Leichhardt Emporium Pty Ltd v AGC (Household Finance) Ltd [1979] 1 NSWLR 701 at 704. Thus, the position is that, if marshalling were not ordered, Norton Ram could take action as a paying guarantor subrogated to the creditors’ rights against the debtor and if the liquidator refused to do so Apollo/Chase could probably require him to do so or obtain an order entitling them to do so in the name of Norton Ram or for the appointment of a receiver for that purpose: Cadima Express Pty Ltd v Deputy Commissioner of Taxation (1999) 33 ACSR 527 paras 41 to 58. The Norton securities would then be sold and Norton Ram would be entitled to retain the proceeds of sale up to the amount paid under its guarantee of the Nortons’ debt to the Bank. This would fall under Apollo’s charge, and the funds would be applied first in satisfaction of the Apollo/Chase debt. In addition the right of action in Norton Ram would be property subject to the charge. Thus the result would eventually be the same, except that Apollo/Chase would be inconvenienced by being forced to bring further proceedings, and the Nortons would be in a worse position after Apollo/Chase, as permitted under their charge, applied the funds from the sale of the lands to their debt, interest and costs. In any event the position here is there is no competition. The company through its liquidator, though being a party to the action, is not asserting any claim to subrogation. The Norton defendants cannot rely on the unasserted rights of another to defeat the plaintiffs’ claim. This is entirely different from the position in the cases of New Zealand Loan and Mercantile Agency Co Ltd v Loach (1912) 31 NZLR 292 and South v Bloxham (1865) 2 Hem & M 457; 71 ER 541, whichever be correct.

17 There is a further twist in this case as Norton Ram was a direct debtor to the Bank as well as a guarantor of the Norton’s debt to the Bank and thus it could not be argued that it was inappropriate for the Bank to move first against Norton Ram to recover the debt owing by that company to the Bank. The assets of Norton Ram were such that it was obviously sensible that they should be sold together. In such circumstances it could hardly be said that it was unfair for the Bank to use the surplus proceeds of sale, after payment of the direct debt, to satisfy the Nortons’ debt guaranteed by Norton Ram. In other words, no one would suggest that the Bank ought to have paid to Apollo/Chase, as second chargee, the surplus funds after discharge of the debt due to the Bank by Norton Ram. The question is whether this bears on the exception. I think not and no contrary argument was advanced. The principle in Neff v Miller still applies and as a matter of equity it is proper that it should. As stated in Sarge at 663 the equity arises “where there is a duty on the part of one debtor to pay the debts of another”.

18 It follows that the plaintiffs are entitled to marshal against the Norton securities and obtain payment from those securities of the amount applied by the Bank in discharging the Nortons’ debts up to the amount due to the plaintiffs under their charge. The amount applied was $629,044.44. It was argued that, in addition, part of the Bank’s receiver’s fees and the legal costs incurred in enforcement of the charge should be considered as referable to enforcement of the guarantee and thus added to the sum of $629,044.44. It was submitted that the amount should be calculated as the proportion of those fees and expenses which the amount of the Bank loans to the Nortons represents to the total amount paid to the Bank in respect of its loans to both the Nortons and Norton Ram. That calculation would have brought about 65% of the total fees and expenses of the receivers being added to the sum of $629,044.44, bringing about a total of $845,833.24. I do not consider this to be correct. While it is correct that the Bank appointed receivers to the assets of the company and to the Norton mortgages, it is clear nearly all costs were incurred in acting as receiver of the assets of Norton Ram and in the sale of those assets, which assets were charged, not only to secure the guarantee, but to secure the debt owing by Norton Ram as principal debtor to the Bank. The apportionment proposed would not bring about a fair result and as no other submission was put and no authority was cited to justify any apportionment, marshalling should not be allowed for any amount over the sum of $629,044.44.

19 The evidence establishes that the Bank, as mortgagee, was entitled to possession of the Norton properties and to exercise power of sale as the required notices under s57(2)(b) of the Real Property Act 1900 have been given. Apollo/Chase is entitled to be subrogated to these rights and either to have the Bank securities transferred to them or to take proceedings in the name of the Bank to enforce the mortgages. In such circumstances new proceedings for possession should not be required as a claim for possession is made in this action.

20 Finally, I point out that the Nortons, as guarantors are liable to the plaintiffs for the debt owing to the plaintiffs by Norton Ram. It is only the question of security with which this judgment is concerned.

1. Declare that the sum recovered by the first defendant pursuant to its fixed and floating charge over the assets of the fourth defendant and applied in satisfaction of the amounts owing to the first defendant by the second and third defendants is $629,044.44 (NAB Recoveries).

2. Declare that the plaintiffs are entitled to marshal against and be subrogated to the rights of the first defendant with respect to:

(a) registered mortgage 9958320K (Parkes Land Mortgage) over the land in folio identifier 41/715503 and known as 20 Panarama Street, Parkes, New South Wales (Parkes Land);
(b) registered mortgage 9958319T (Parkes Office Mortgage) over the land in folio identifier 14/17/758827 and known as 91-93 Clarinda Street, Parkes, New South Wales (Parkes Office);
(c) registered mortgage 415428T (Valentine Mortgage) over the land in folio identifier 345/207426 and known as 117 Andrew Road, Valentine, NSW (Valentine Land)
to an amount equal to the NAB Recoveries or the amount owing by the fourth defendant to the plaintiffs whichever is the lesser.


3. Declare that the plaintiffs are entitled to exercise the rights of the first defendant in respect of the Parkes Land Mortgage, the Parkes Office Mortgage, and the Valentine Mortgage to an amount equal to the NAB Recoveries or the amount owing by the fourth defendant to the plaintiffs whichever is the lesser.

4. Order that the first defendant do all such things and execute all such documents as are necessary to give effect to the declarations set out in paragraphs 1, 2 and 3 above.

5. Judgment that the second and third defendants give the plaintiffs possession of the Parkes Land and Parkes Office.

6. Judgment that the second defendant gives the plaintiffs possession of the Valentine Land.

7. Order that the plaintiffs have leave to issue writs of possession after 28 days to enforce the judgments for possession of the Parkes Land, Parkes Office and Valentine Land.

8. Order that the second and third defendants pay the costs of the plaintiffs.

9. Note the agreement between the plaintiffs and the first defendant that:

(a) the plaintiffs will indemnify the first defendant in respect of any costs orders made against it in these proceedings and any reasonable costs that the first defendant incurs in complying with order 4 above; and
(b) the plaintiffs will pay to the first defendant all amounts which the first defendant is entitled to in respect of its costs pursuant to the mortgages referred to in paragraph 2 above from the proceeds of any sale of the Parkes Land, Parkes Office and Valentine Land before applying those proceeds to the amount owing by the fourth defendant to the plaintiffs.

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