Adelaide Bank Ltd v Property Builders Pty Ltd

[2010] NSWSC 830

CITATION:	Adelaide Bank Ltd v Property Builders Pty Ltd [2010] NSWSC 830
HEARING DATE(S):	17 March 2010; 18 March 2010
JUDGMENT DATE :	29 July 2010
JURISDICTION:	Common Law
JUDGMENT OF:	Simpson J
DECISION:	Adelaide Bank is entitled to an order for possession against Property Builders. Adelaide Bank is entitled to judgment in whatever amount is presently owing against Property Builders, and against Mr Phontos under his Guarantee. The parties to provide Short Minutes of Order to reflect the conclusions in this judgment.
CATCHWORDS:	REAL PROPERTY – loan agreement –mortgage and guarantee – variation of loan agreement – whether subsequent agreement was a variation of existing agreement or supplanted and replaced earlier agreement – transfer of mortgage – whether secured debt also assigned – notice of assignment of agreement – s 12 Conveyancing Act - GUARANTEE AND INDEMNITY – action against surety – whether guarantee assigned with principal debt – whether notice of assignment given to mortgagor, notices given under s 12 Conveyancing Act are sufficient evidence of assignment - MORTGAGES – mortgage contract – rights and liabilities of mortgagor and mortgagee – remedies of mortgagee
LEGISLATION CITED:	Conveyancing Act 1919 Real Property Act 1900
CATEGORY:	Principal judgment
CASES CITED:	Adelaide Bank Ltd v Property Builders Pty Ltd [2009] NSWSC 849 Consolidated Trust Co Ltd v Naylor [1936] HCA 33; 55 CLR 423 Nemeth v Reachford Pty Ltd [1998] NSWSC 271 Queensland Premier Mines Pty Ltd v French [2007] HCA 53; 235 CLR 81
PARTIES:	Adelaide Bank Ltd (First Plaintiff) Advance Investment Finance No 2 Pty Ltd (Second Plaintiff) Eurofinance Capital Ltd (Third Plaintiff) Property Builders Pty Ltd (First Defendant) Michael Phontos (Second Defendant)
FILE NUMBER(S):	SC 2008/286721
COUNSEL:	M J Cohen (Plaintiffs) R Freeman (Defendants)
SOLICITORS:	Gadens Lawyers (Plaintiffs) Phontos Legal (Defendants)

IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION

Simpson J

29 July 2010

2008/286721 Adelaide Bank Ltd v Property Builders Pty Ltd

JUDGMENT

1 HER HONOUR: These are proceedings for possession of property and money judgment. They arise out of a transaction, in 2006, in which the third plaintiff advanced money, secured by mortgage, to the first defendant (Property Builders Pty Ltd), repayment of which was guaranteed by the second defendant (Michael Phontos). The plaintiffs allege that the first defendant defaulted in its obligations to repay, and to pay interest, as a consequence of which they are entitled, against the first defendant, to possession of the property subject of the mortgage, and against both defendants to judgment in a money sum.

2 The defendants do not dispute the advance, the mortgage, or the guarantee. Nor do they contend that the first defendant has discharged the debt to the third plaintiff. They maintain, however, that, by reason of a further transaction between the third plaintiff and the first defendant, and further transactions between the plaintiffs, neither defendant is liable. That is, they assert that the first defendant is not liable under the mortgage, and the second defendant is not liable under the guarantee.

3 The proceedings were commenced by Statement of Claim filed on 27 August 2008. That Statement of Claim named Adelaide Bank Ltd (“Adelaide Bank”) as the sole plaintiff. It named Property Builders Pty Ltd (“Property Builders”) as first defendant and Michael Phontos as second defendant.

4 On 25 March 2009 an Amended Statement of Claim was filed naming Eurofinance Capital Ltd (“Eurofinance”) as third defendant.

5 On 7 September 2009 an application by Adelaide Bank for summary judgment was dismissed: Adelaide Bank Ltd v Property Builders Pty Ltd [2009] NSWSC 849, per Davies J.

6 On 19 November 2009, pursuant to leave granted by Hall J on 11 November, a Further Amended Statement of Claim was filed naming Advance Investment Finance No 2 Pty Ltd (“AIF”) as second plaintiff.

7 During the course of the hearing leave was given to the then plaintiffs, and to Eurofinance, to take the unusual course of amending the Further Amended Statement of Claim by removing Eurofinance as a defendant, and joining it as third plaintiff. A Second Further Amended Statement of Claim (“the 2FASOC”) was filed. That is the operative pleading.

8 The plaintiffs, either jointly or severally, claim possession of two properties (units in a residential development at North Ryde, NSW) together with judgment in a money sum.

9 The proceedings arise out of a transaction that took place on 12 October 2006.

Background

10 Eurofinance and AIF are both companies which are part of an umbrella group known as “The Eurofinance Group”. That group of companies operates as a funds manager, which advances funds on mortgage to borrowers. Its source of funds, relevantly, was Adelaide Bank. AIF, but not, apparently, Eurofinance, had a facility arrangement with Adelaide Bank. Mr Yianni Socratous was an officer of the Eurofinance Group.

11 Property Builders was a development company engaged, relevantly, in the construction of residential units. Mr Phontos was the director of Property Builders. He is also a solicitor of this Court, practising under the name “Phontos Legal”.

12 It is convenient at this point to outline a chronology of relevant events.

13 In late 2006 Property Builders sought a loan of funds from Eurofinance for the purpose of refinancing a residential project at 110-112 Twin Road, Ryde. The project consisted of five home units. By letter of offer dated 10 October 2006 Eurofinance approved the application. The amount of the loan was $2.4 million. The term of the loan was nine months. Interest was to be charged at an indicative rate of 15.20 percent per annum, reducing to 10.20 percent per annum if paid promptly. The letter noted Property Builders’ solicitors as Phontos Legal. The letter set out the terms and conditions of the offer of finance. The “Security” required was a registered first mortgage of the Twin Road property in favour of Eurofinance, together with joint and several guarantees by Michael Phontos and Peter Phontos (the latter since deceased, and not part of these proceedings). The letter provided for a “non-refundable settlement fee” of $33,000. One condition presently to be noted was:

“3. [Property Builders] acknowledgment that this proposed mortgage may be transferred to Advance Investment Finance No 2 Pty Ltd and onto Adelaide Bank Ltd.”

The offer was accepted by memorandum signed by Mr Phontos on 12 October 2006. In handwriting over his signature, the following appears:

“Executed by Property Builders P/L ACN … in accordance with section 127 of the Corporations Act 2001.”

14 In accordance with the terms of the letter of offer, on 31 October 2006 Eurofinance advanced to Property Builders the sum of $2.4 million. Also in accordance with the terms of the letter of offer, the term of the loan was nine months (expiring on 1 July 2009), and the loan was secured by mortgage, dated 31 October 2006. The mortgage was expressed to have been given:

“… in consideration of $2,400,000, the ‘ Principal Sum ’ lent or to be lent to the Mortgagor”.

The mortgagee was identified on the mortgage as Eurofinance.

15 Also in accordance with the terms of the letter of offer, by Deed of Guarantee Mr Phontos guaranteed the obligations of Property Builders. The Guarantee was expressed to be unconditional and irrevocable. By the Guarantee, Mr Phontos guaranteed the punctual payment of “the Debt” on the due date. “The Debt” was defined as:

“… all money owing at any time by [Property Builders] to [Eurofinance] on any account whatever, including money due in relation to the loan documents specified in the Schedule …”

The “loan documents specified in the Schedule” were the letter of offer of 10 October 2006 and a first registered mortgage over the Twin Road property by Property Builders in favour of Eurofinance.

16 The Deed of Guarantee contained the following important (for the purpose of these proceedings) provision:

“ 6.6 How [Eurofinance] can deal with this guarantee

[Eurofinance] may assign or otherwise deal with this guarantee in any way it wishes. You [Mr Phontos] must sign anything and do anything [Eurofinance] reasonably requires to enable any dealing with this guarantee. Of course, any dealing with this guarantee does not change Your obligations under this guarantee.”

17 The mortgage document incorporated provisions of a Memorandum filed with the Department of Lands, Land and Property Information Division. The Memorandum defined “Debt” as:

“… all money owing by [Property Builders] to [Eurofinance] now or in the future on any account … includ[ing] any money due or possibly due by [Property Builders] to [Eurofinance] as a result of any arrangements including any loans made to [Property Builders] or guarantees given by [Property Builders] to [Eurofinance] and includes any loss or damage suffered by [Eurofinance] as a result of those arrangements. It also includes interest, costs, fees, duties, taxes and any other amount [Property Builders] are obliged to reimburse or pay to [Eurofinance] at any time under the Mortgage or otherwise.”

18 It also contained the following relevant provision:

“ 6.04 How the Mortgagee Can Deal With the Mortgage

The Mortgagee may assign or otherwise deal with the Mortgage in any way it wishes. [Property Builders] must sign anything and do anything the Mortgagee reasonably requires to enable any dealing with the Mortgage. Of course, any dealing with the Mortgage does not change [Property Builders’] obligations under the Mortgage.”

19 On 26 October 2007 a Strata Plan relevant to the real estate was registered. Thereafter, the mortgage covered five separate titles on the same real estate. In November 2007 and January 2008, two of the units were sold and the proceeds applied in reduction of Property Builders’ debt to Eurofinance. At this time the term of the loan had expired. Three units remained unsold.

20 By letter dated 31 March 2008 Eurofinance agreed to give Property Builders an extension of time for repayment of the debt and the loan agreement was varied accordingly. How the arrangements then put into place are to be construed was a matter of considerable controversy. I will therefore set out some relevant extracts from the letter evidencing this transaction. It included:

“… we advise we are prepared to roll-over your existing loan facility for a further term on the following terms and conditions …”

21 The Mortgagee was identified as Eurofinance and the Borrower as Property Builders. Mr Phontos was named as Guarantor. (This last is of some importance.) The “Purpose” was stated to be:

“Roll-over existing facility”

The loan term was of three months, expiring on 1 July 2008. The “Security” was identified as the three unsold units, together with a fixed and floating charge over Property Builders. The letter provided for a “roll-over fee” which was, by a subsequent provision, waived. There was no provision for an “application fee” or “settlement fee”. The indicative interest rate was stated as 16.6 percent per annum, reducing to 11.6 percent per annum for prompt payment.

22 Property Builders and Mr Phontos accepted the offer. This was done by Mr Phontos signing the attached Memorandum of Acceptance. He did this in his own name. He did not purport to sign only on behalf of Property Builders.

23 In May 2008 Eurofinance undertook some internal restructuring or reorganisation. On 2 May 2008 consecutive meetings of Eurofinance and AIF were held. At the meeting of Eurofinance the following resolution was passed:

“In accordance with the company practice of freeing up funds in Eurofinance Capital Ltd and in accordance with the Letter of Offer to Property Builders Pty Ltd dated 10th October 2006, the following loan is to be transferred to Advance Investment Finance No 2 Pty Ltd under their facility with Adelaide Bank Ltd.

- Property Builders Pty Ltd.”

At the meeting of AIF a corresponding resolution, to accept the proposed transfer, was passed.

24 There was no evidence that either Eurofinance or AIF gave notice of this transfer either to Property Builders or to Mr Phontos. The overwhelming inference is that notice was not given.

25 On 9 May 2008 Eurofinance signed a transfer to Adelaide Bank of the Property Builders’ mortgage. On 23 May the transfer was registered.

26 On 21 August 2008 Bransgroves Lawyers, solicitors acting for Adelaide Bank, sent a series of letters to Phontos Legal and to Mr Phontos. Two of the letters (identical, except that one was sent by facsimile, and one by mail), addressed to “Phontos Legal for attention Michael Phontos”, referred to previous correspondence from Mr Phontos, which, Bransgroves said, implied that Phontos Legal acted for Property Builders and Mr Phontos. They invited confirmation that that was the case, advised that enclosed with each letter was a notice issued pursuant to s 12 of the Conveyancing Act 1919, and asked for confirmation whether Phontos Legal was instructed to accept service. The remaining four letters, which were substantially identical and which were all sent by mail, were in the following terms:

“This is a notice pursuant to s12 Conveyancing Act 1919.

We hereby notify you as guarantor under the Agreement, that the Agreement, in its entirety, has been assigned to Adelaide Bank Limited in accordance with the terms of the Letter of Offer. Your obligations pursuant to the Guarantee are therefore owed to Adelaide Bank Ltd.”

The letters went on to define “the Agreement” as:


“the agreement between Eurofinance, Property Builders, Michael Phontos and Peter Phontos consisting of the following documents:

● Mortgage dated 31 October 2006;

● Letter of offer dated 10 October 2006;

● Deed of Guarantee dated 31 October 2006;

● Memorandum 2367091.”

27 Whether these notices were received and whether they were effective is an issue in the proceedings. I digress from the chronology to note the affidavit evidence of Mr Phontos. In an affidavit sworn on 20 February 2009, he deposed:

“4. I have reviewed the files held by [Property Builders] and myself and have not been able to locate any notices or other mail correspondence from Bransgroves Lawyers dated 21 August 2008. I did receive a 2 page facsimile from Bransgroves Lawyers dated 21 August 2008 a copy of which is attached hereto and marked with the letter ‘A’; and a facsimile from Bransgroves Lawyers dated 29 August 2008 a copy of which is attached hereto and marked with the letter ‘B’.” (italics added)

28 Annexure A consists of two pages. The first is a covering letter dated 21 August 2008, addressed to Phontos Legal, for attention Michael Phontos, inviting confirmation that Phontos Legal acted for Property Builders and Michael Phontos, stating that a notice issued pursuant to s 12 of the Conveyancing Act was enclosed, and inviting Mr Phontos to advise whether he was instructed to accept service on behalf of Property Builders and himself. This is plainly the covering letter sent by Bransgroves and outlined above. The second document comprising Annexure A is a copy of one of the letters, sent by mail, to which I have already referred, pronouncing itself to be a notice under s 12 of the Conveyancing Act. There is no evidence of any reply to this correspondence.

29 Annexure B is a letter dated 29 August 2008 noting that Mr Phontos had not accepted service of the s 12 notice addressed to himself and advising that the s 12 notice would be mailed to the address for service provided in the loan documentation.

30 Mr Phontos also deposed that he received, by mail, four letters from Bransgroves dated 29 August 2008, the envelope of each of which was postmarked 5 September 2008 (Annexure D). Each is a replication of the second Annexure A document. The photocopying of these letters is very unclear, but three of the letters appear to have been addressed to Mr Phontos, one at each of the three then unsold units at Twin Road. The fourth is addressed to him at a different address, apparently that from which he conducts his legal practice.

31 Mr Phontos went on, in his affidavit, to depose:

“7. Between 5 May 2008 and 28 August 2008 neither I nor [Property Builders] conducted a search of the certificates of title of the premises and neither I or [Property Builders] received any other notice issued by the Plaintiff pursuant to s 12 of the Conveyancing Act 1919 detailing any assignment or transfer of any mortgage or other security documents prepared in relation to the premises.”

32 To return to the chronology: on 26 September 2008, a third unit was sold, and the proceeds applied in payment of interest and reduction of the debt. According to the affidavit of Mr Socratous, a sum of almost $600,000 was paid to Adelaide Bank. The evidence does not disclose whether that money was paid directly to Adelaide Bank, or to Eurofinance or AIF and sent on to Adelaide Bank. (Mr Phontos deposed that Property Builders had never made a payment to Adelaide Bank.)

33 As of the date of hearing two units remained unsold. Adelaide Bank claims that, from June 2008, Property Builders has been in default in its obligations to make interest payments, and that, from 1 July 2008, it has been in default of its obligation to repay the principal. Each of these allegations is denied by Property Builders and Mr Phontos.

34 On 27 August 2008 these proceedings were commenced.

The issues

35 In the circumstances outlined, one would think there could be no issue that Property Builders and Mr Phontos are indebted to Adelaide Bank, and that Property Builders’ indebtedness is secured upon the Twin Road properties, and guaranteed by Mr Phontos. That, however, is contested.

36 I found the responses put on behalf of the defendants particularly elusive and perplexing. I will, therefore, attempt to set out the manner in which those responses were made, beginning with the pleadings. The operative defence is a Fourth Further Amended Defence (“the 4FAD”), filed after the conclusion of the hearing, in response to the Second Further Amended Statement of Claim (“the 2FASOC”), which removed Eurofinance as a defendant and incorporated it as a plaintiff. The 4FAD significantly clarified the issues raised on behalf of the defendants, which until then had been, to say the least, opaque.

37 The 2FASOC has inherently some difficulty in that it refers, on occasions, to “the plaintiff” or “the plaintiffs” without identifying which of, initially two, and subsequently three, plaintiffs is intended to be the subject of reference. For example, in paragraph 12 it pleads that, in the event of default under the mortgage, “the plaintiffs” are entitled to take possession of and sell the units.

38 The 4FAD is characterised by what purport to be “admissions”, but which do not faithfully represent what has been pleaded on behalf of the plaintiffs. That is, under the guise of “admissions”, the 4FAD pleads matters inconsistent with the plaintiffs’ allegations.

39 For example, in paragraph 2 of the 2FASOC, the plaintiffs plead, in conventional and simple terms, that, on 31 October 2006, the defendants entered into an agreement with Eurofinance, the agreement “consisting” of four documents, being the Mortgage, the letter of offer of 10 October 2006, the Deed of Guarantee, and the Memorandum to the mortgage. (No doubt it was intended to assert that the Agreement is evidenced by, or contained in, those documents.) The defendants purport to “admit” something different: a “2006 loan agreement”, the Deed of Guarantee, the 31 October 2006 mortgage and the Memorandum. They also purport to “admit” that the mortgage was “collaterally” secured by the Deed of Guarantee, and “the 2006 Loan as supplemented or replaced” (although no such allegations are made in the 2FASOC); and they purport to “admit” (in response to paragraph 2, which makes no such allegation) “a loan agreement for $1,528,602 … dated 31 March 2008”. This was part of a strategy, the purpose of which slowly emerged. The strategy involved asserting a distinction between “the 2006 Loan” and “the 2008 Loan”. Demarcation of the 2008 arrangement as an entirely separate entity from the 2006 arrangement was an essential element of the defence.

40 With those limitations in mind, I set out the claims made on behalf of the plaintiffs, and the responses made on behalf of the defendants in the pleadings.

41 In paragraph 5 of the 2FASOC, the plaintiffs plead that Mr Phontos guaranteed the obligations of Property Builders under the agreement. In the 4FAD Mr Phontos pleads that he agreed to guarantee the indebtedness of Property Builders to Eurofinance pursuant to the terms of “the 2006 Loan”, with the further agreement of Mr Phontos:

“… for the obligations under the Guarantee to end upon entry into the 2008 Loan … in consideration of [Property Builders] agreeing to provide alternate security to the Guarantee being a charge over the assets of [Property Builders].”


Mr Phontos denies that he at any time provided a guarantee to Adelaide Bank or AIF. He asserts that the Guarantee has been discharged by reason of:

● the terms of “the 2008 Loan”;

● the assignment of the debt to which the Guarantee applied, without the benefit of the Guarantee;

● the assignment of the mortgage without the benefit of the Guarantee;

● the payment of the “guarantee debt”, on 9 May 2008, by AIF to Eurofinance in a direction to Adelaide Bank to pay Eurofinance;

● the absence of any notice to Property Builders by the plaintiffs of any assignment of the Guarantee Debt, the mortgage or the guarantee to any of the plaintiffs;

● the absence of any consent by Mr Phontos to the assignment of the “guarantee debt” by Eurofinance to AIF or the transfer of the mortgage by Eurofinance to Adelaide Bank on 9 May 2008.

42 In paragraph 6(a) and (b) of the 2FASOC, the plaintiffs plead that “the defendants” covenanted to repay the principal (of the loan) on or before 1 July 2007, and to pay interest as stipulated in the mortgage; in paragraph 6(c) they particularise interest as compounding. To this, the defendants jointly plead that Property Builders agreed under the terms of “the 2006 Loan” and the mortgage loan to a loan term of nine months, and to pay interest at the indicative rate:

“… but otherwise:


(a) deny the allegation [as to repayment of principal]; and

(b) do not admit the allegation [as to interest]; and

(c) do not admit that interest was compounding.”

43 In paragraph 7 of the 2FASOC the plaintiffs plead the “roll-over” of 31 March 2008 as a “variation” of the (2006) agreement, and the conditions of payment of the principal by 1 July 2008, and variation of the interest rate. To this, the defendants jointly plead:

“… on 31 March 2008 [Property Builders] as borrower entered into a new loan contract in the terms of the 2008 Loan and to rollover into that new loan the balance of the moneys then due and payable under the 2006 Loan … but only on the terms of the 2008 Loan, which included such terms:

(a) for a loan term of three (3) months expiring on 1 July 2008;

(b) [Mr Phontos] was not to be a party to the 2008 Loan and was not privy to such agreement;

(c) at the indicative interest rate; and

(d) secured by:


(i) the Mortgage over Lots 1, 3 and 5 of Strata Plan …

(ii) a fixed and floating charge over [Property Builders] instead of the Guarantee.”

44 In paragraph 8 of the 2FASOC, the plaintiffs plead that “the Agreement” was transferred to Adelaide Bank by registered transfer of mortgage. To this, Property Builders pleads, in paragraph 8 of the 4FAD, again as “admissions”, that:

(a) on 2 May 2008, “the 2008 Loan” was assigned by way of equitable assignment to AIF by transfer from Eurofinance; and

(b) on 9 May 2008, AIF borrowed from Adelaide Bank, through their pre-existing facility agreement, an amount sufficient to discharge the balance then due by Property Builders to Eurofinance by way of full and final discharge of Property Builders’ debt to Eurofinance in consideration of the transfer and assignment to it of the loan of Property Builders; that AIF directed Adelaide Bank to pay out the debt in the account of Eurofinance by way of discharge of the loan of Property Builders in the amount of $1,528,602; that Adelaide Bank, in accordance with that direction, delivered a bank cheque which was ultimately paid to Eurofinance; that the debt due to Eurofinance was repaid in full with no further moneys then being due and payable to Eurofinance under the loan with Property Builders pursuant to “the 2006 Loan”, “the 2008 Loan”, the Guarantee or “the Mortgage Loan”; that neither Eurofinance nor AIF assigned to Adelaide Bank “the 2006 Loan”, “the 2008 Loan” or the Guarantee; and that Eurofinance transferred to Adelaide Bank the mortgage by way of security for the advance made by Adelaide Bank to AIF pursuant to the Facility Agreement.

45 Paragraph 8 is a complex, but important, part of the 4FAD. Far from constituting “admissions” (as it purports to do), it sets forth a large part of the case the defendants advance in defence and rebuttal of the plaintiffs’ claims. Translated, it asserts the following scenario in respect of the transaction of 9 May 2008 (the date of the transfer of the mortgage from Eurofinance to Adelaide Bank):

(i) AIF borrowed approximately $1.5 million from Adelaide Bank, representing a sum sufficient to make full and final discharge of Property Builders’ debt to Eurofinance, in consideration of the transfer and assignment to “it” (presumably, AIF) of Property Builders’ loan (I can only assume that, in simple terms, this is intended to plead that AIF paid out Property Builders’ debt to Eurofinance, in consideration of the transfer and assignment to AIF of the loan);

(ii) AIF directed Adelaide Bank to pay out approximately $1.5 million to Eurofinance by way of discharge of Property Builders’ debt to Eurofinance;

(iii) Adelaide Bank accordingly paid approximately $1.5 million to Eurofinance;

(iv) the debt due to Eurofinance by Property Builders was thus paid in full;

(v) neither Eurofinance nor AIF assigned either “the 2006 Loan” or “the 2008 Loan” or the Guarantee to Adelaide Bank;

(vi) the transfer of the Mortgage by Eurofinance to Adelaide Bank was by way of security for the advance made by Adelaide Bank to AIF.

46 In paragraph 9 of the 2FASOC, the plaintiffs plead default in the payment of interest as at 1 June 2008. In response both defendants deny the allegation, and assert that any “alleged default” in the payment of interest was remedied in September 2008 by the proceeds of the sale of the third unit.

47 In paragraph 10 of the 2FASOC, the plaintiffs plead default by the defendants on 1 July 2008 in the repayment of the principal. Both defendants deny this allegation, pleading:

● that upon the proper construction of “the 2008 Loan”, the parties intended on 31 March 2008 that the Mortgage Loan (being “the 2006 Loan”) had come to an end;

● alternatively, that the Mortgage Loan came to an end on 9 May 2008 by reason of what was earlier pleaded to be the equitable assignment of the loan on 2 May 2008 or what had been pleaded to be the discharge of Property Builders’ debt on 9 May 2008;

● that upon the registration of the transfer of the mortgage, the Mortgage Loan could not be assigned because it had come to an end.

48 In paragraph 11 of the 2FASOC the plaintiffs plead a series of defaults “since the original default”. Both defendants deny the allegations.

49 The defendants deny that, in accordance with provisions of the Memorandum, the plaintiffs are, on default by Property Builders, entitled to possession of the units, repayment of the principal or other money, or recovery of costs for enforcing the agreement.

50 In paragraph 18 of the 4FAD, both defendants plead that no notice pursuant to s 12 of the Conveyancing Act 1919 was served on either of them prior to the commencement of the proceedings, and that there was, on 27 August 2008 when the proceedings were commenced, thus no cause of action upon which to found a claim for repayment of a debt.

51 In paragraph 19 of the 4FAD, Mr Phontos pleads that the Guarantee was not then assigned either to Adelaide Bank or AIF, that the principal transaction to which it relates has not expressly been assigned to Adelaide Bank (and that s 51 and s 52 of the Real Property Act 1900 did not operate to assign it to Adelaide Bank on registration of the transfer of the mortgage) and that, accordingly, the plaintiffs were not entitled to sue upon it.

52 An elaborate response to the plaintiffs’ claims was thus constructed and presented. What was pleaded in the 4FAD was essentially what had been argued, in written and oral submissions, although those submissions did not reflect what had been pleaded in previous versions of the defence.

53 The case made on behalf of the plaintiffs may be stated simply in a series of propositions:

● that by agreement made on 10 October 2006 Property Builders became indebted to Eurofinance in the sum of $2.4 million;

● that Property Builders’ obligation to repay was secured by mortgage over the Twin Road property;

● that Mr Phontos guaranteed the obligation of Property Builders to repay;

● that in November 2007 and January 2008, reductions in the amount of the debt were made, by the payment of the proceeds of sale of two units;

● that in September 2008 a further reduction in the amount of the debt was made by the payment of the proceeds of sale of a third unit;

● that on 31 March 2008 the agreement between Property Builders and Eurofinance was varied by extension of the term of the loan;

● that on 9 May 2008 Eurofinance transferred the mortgage to Adelaide Bank;

● that the transfer of the mortgage carried with it the transfer of the debt owed by Property Builders to Eurofinance;

● that on registration of the transfer (23 May) Adelaide Bank acquired the same rights as Eurofinance had had under the mortgage;

● that Property Builders defaulted on its obligations to repay;

● that Adelaide Bank is therefore entitled, under the mortgage, to an order for possession of the property and to repayment of the amount of the debt outstanding.

54 For reasons I will come to, it is unclear precisely what case (if any) Adelaide Bank (or either of the other plaintiffs) seeks to make with respect to the guarantee. It seems to be implicit, though not pleaded or articulated, that the plaintiffs assert that the transfer of the mortgage carried with it the transfer of Mr Phontos’ guarantee, and that, on default of its obligations by Property Builders, Mr Phontos became liable to repay the debts of Property Builders to Adelaide Bank.

55 So far as the effect of the transfer of the mortgage is concerned, the relevant statutory provisions are s 51 and s 52(1) of the Real Property Act 1900. Those sections are relevantly in the following terms:

“ 51 Interest and rights of transferor pass to transferee

Upon the registration of any transfer, the estate or interest of the transferor as set forth in such instrument, with all rights, powers and privileges thereto belonging or appertaining, shall pass to the transferee, and such transferee shall thereupon become subject to and liable for all and every the same requirements and liabilities to which the transferee would have been subject and liable if named in such instrument originally as mortgagee, chargee or lessee of such land, estate, or interest.

52(1) Transfer of mortgage or lease transferee’s right to sue

By virtue of every such transfer (a reference to s 51), the right to sue upon any mortgage … and to recover any debt, sum of money … thereunder … and all interest in any such debt, sum of money … shall be transferred so as to vest the same at law as well as in equity in the transferee thereof.” (italics added)

56 What is transferred includes:

“… any rights which are so intimately connected with the estate transferred that they cannot be severed”

Nemeth v Reachford Pty Ltd [1998] NSWSC 271, per Young J (as he then was).

57 On the face of the documents (especially the mortgage) what was transferred was the mortgage with the specified debt.

58 The case for the defendants is, in essence, that the debt had become detached from the mortgage, and that, on transfer, and registration of the transfer, the mortgage no longer secured any debt.

59 Two separate bases were advanced in support of this proposition. The first was that the debt secured by the mortgage was that which resulted from the loan in October 2006, but that this loan came to an end on 31 March 2008 when Property Builders and Eurofinance entered into a new and different loan agreement. That new and different loan was not secured by the mortgage, or any other mortgage.

60 The second basis is that, prior to the transfer of the mortgage, Eurofinance assigned the loan (but not the mortgage) to AIF, and that, when the mortgage was transferred, it secured nothing.

61 The defendants’ case, it seems to me, depends upon two, or possibly three, propositions. These propositions are:

(i) the 2008 “roll-over” of the loan supplanted and entirely replaced “the 2006 Loan”. This emerges from an analysis of the 2006 letter of offer, and the “roll-over” letter of offer. It has certain important consequences;

(ii) that the resolutions of Eurofinance and AIF at the meetings of 2 May 2008 amounted to an equitable assignment of “the 2008 Loan”;

(iii) that no notice under s 12 of the Conveyancing Act 1919 has been given by any plaintiff to either defendant, prior to the commencement of proceedings, of any assignment, whether of the Guarantee or the guarantee debt (ie the loan), and that, therefore, by reason of s 12 of the Conveyancing Act , any such assignment is ineffective.

62 I will deal with each of these in turn.

(i) Was “the 2006 Loan” supplanted and replaced by “the 2008 Loan”?

63 Separation of what they chose to call, and persisted in calling, “the 2006 Loan” and “the 2008 Loan” was critical to the defendants’ case. That was because they relied upon the decision of the High Court in Queensland Premier Mines Pty Ltd v French [2007] HCA 53; 235 CLR 81. That case was concerned with s 62 of the Land Title Act 1994 (Qld), which is the counterpart (although not in identical terms) of s 52 of the Real Property Act. As encapsulated in the headnote, the Court held:

“… that the right to recover moneys owed under a loan agreement, separate from but secured by a mortgage, was not assigned by operation of s 62 of the Land Title Act on registration of the instrument of transfer of the mortgage. Section 62 effected an assignment of both the mortgagee’s interest in the land and the mortgagee’s right of action with respect to moneys which become due under the mortgage but it did not extend to obligations arising otherwise than under the terms of the mortgage .” (italics added)

Kiefel J, with whom all other members of the Court agreed (Kirby J adding additional comments), said:


“55 … The words of the section provide no warrant for a construction which extends it to the right to recovery of a debt merely collaterally secured by the mortgage.

56 … Neither the historical reason for the provision nor its purpose, of effectuating a transfer of both the security interest and the right to moneys arising from the mortgage transaction, supports a construction which extends the section to obligations arising otherwise than under the terms of the mortgage …

57 The circumstances of this case are not usual. More commonly, when a mortgage is transferred, the debt arising from a separate loan agreement will be transferred with it …”

64 The facts of French were complex. The mortgagee made two loans, one to a company (“QPM”), and one to QPM jointly with two individuals. The loans were collaterally secured by mortgages, in favour of the lending company, over property of which QPM was the registered proprietor. The individuals were not parties to the mortgages. On the transfer of the mortgages, the transferee sought to assert, in respect of the loans to the individuals, the rights conferred by s 62. The High Court held that s 62 did not effect a transfer of those obligations, as they were “freestanding”, and arose otherwise than “under” the mortgage.

65 The decision can assist the present defendants only if it is the case that the 2008 arrangements gave rise to a new and “freestanding” loan. The mortgage itself acknowledges the 2006 debt of $2.4 million which cannot, therefore, be said to be a “collateral” obligation.

66 It seems to me to be implicitly accepted in the defendants’ case that, if the debt secured by the mortgage was that incurred by the 2006 arrangement (however it may have been varied), it was not “separate from” the mortgage, it was not a debt merely “collaterally secured by the mortgage”, it was not an obligation “arising otherwise than under the terms of the mortgage”; it was not a “freestanding” loan.

67 That is why it is so important to the defendants’ case that they establish that the 2008 arrangement represented, in effect, a revocation of the 2006 arrangement, and its replacement by a new arrangement. The debt involved in that arrangement was not expressly secured by the mortgage (as was the 2006 debt) and could be said to be no more than collaterally secured by the mortgage. On the authority of French, Adelaide Bank, therefore, as transferee of the mortgage, was deprived of the benefit of s 52.

68 I turn now to the basis upon which the defendants submitted that the two arrangements created independent loans, “freestanding” from one another.

69 As I have indicated above, the argument put on behalf of the defendants depends upon an analysis of the original (10 October 2006) letter of offer, and the (31 March 2008) letter from Eurofinance by which that loan was “rolled-over”.

70 Variations identified in submissions are:

● in the amounts of the loans (in 2006, $2.4 million; in 2008, $1.5 million);

● the terms (in 2006, nine months; in 2008, three months);

● the security required (in 2006, registered first mortgage and guarantees by Michael Phontos and Peter Phontos; in 2008, registered first mortgage and fixed and floating charge over Property Builders).

There was also variation in the interest rate.

71 Considerable weight was placed upon what was said to be an absence, in 2008, of a requirement that Mr Phontos provide a personal guarantee and the requirement instead (as it was argued) of a fixed and floating charge over Property Builders.

72 It is true that, in the 2006 letter, under the heading “Security”, an explicit requirement for “joint and several guarantees” by Michael Phontos and Peter Phontos was made; there was no corresponding requirement under the “Security” clause in the 2008 letter, which identified, besides first mortgages over the three remaining units, a fixed and floating charge over Property Builders. But Mr Phontos was identified, on the first page, as “Guarantor”.

73 By his signature to the Memorandum of Acceptance to the 2008 letter, Mr Phontos signified his acceptance of this circumstance. It is of some interest that he did not, in signing the Memorandum of Acceptance, limit the acceptance to that of Property Builders, by signing in his capacity of director. He signed in his personal capacity and his acceptance is of all conditions, including his guarantee. The only sensible construction to place upon this letter is that it represents an extension or variation of the original loan.

74 It was submitted that, in the 2008 letter, the personal guarantee was specifically excluded. This is disingenuous. Although it is true that the requirement of a guarantee does not appear under the heading “Security”, Mr Phontos is noted as “Guarantor” on the first page of the letter. Far from suggesting that, in 2008, an entirely fresh loan arrangement was made, this is indicative that the 2006 arrangement was to continue, but with some variations as to the due date for repayment, and as to the interest rate.

75 The requirement of a fixed and floating charge over Property Builders was obviously an additional security requirement, having regard to the history of the dealings between the parties; the registered first mortgage was noted, not only for completeness, but because, by reason of the registration of the Strata Plan, the nature of the title had changed.

76 It was unnecessary to note, again, the requirement of the guarantee by way of security, because the guarantee was in place.

77 It is not to be forgotten that the “Debt” secured by the Mortgage (and therefore the subject of the Guarantee) was defined in the memorandum as including money owing by Property Builders at the time of signing or “in the future on any account”.

78 The language of the letter is consistent only with the arrangement being that of an extension of the existing loan arrangement. The term “roll-over” appears four times in the 2006 letter. That is a term that is well understood by those engaged in borrowing and lending in the finance industry. The letter includes specification of a “roll-over fee” (as distinct from “application” and “settlement” fees required by the 2006 letter) which was, by a subsequent provision, waived.

79 The only cause for puzzlement lies in the term (periods) of the facility. The 2006 arrangement began on 31 October 2006 and was due to end on 1 July 2007; the 2008 arrangement began on 1 April 2008 and ended on 1 July 2008. The evidence does not disclose what arrangements were made between the parties between 1 July 2007 and 1 April 2008.

80 However, it is quite clear on the evidence (and I do not understand it to be other than common ground) that, although the $2.4 million originally owing was reduced, it was never fully repaid by 31 March 2006, and as at that date an amount of approximately $1.5 million remained unpaid.

81 I am quite satisfied that the transaction of 2008 was precisely what it purported to be, and what Mr Socratous was adamant (under cross-examination) that it was: an extension of an existing facility, of the kind commonly known as a “roll-over”. Indeed, this was the effect of evidence given by Mr Phontos. The following cross-examination is instructive:

“Q. … Can I put it to you you never had any belief at any time that the document of 31 March 2008 was anything other than a mere extension of time, did you?
A. It was a roll-over of the facility.

Q. It wasn't a new facility of any substance. It was simply extended time for 3 months?
A. It was an offer to roll-over the facility.

HER HONOUR

Q. What do you mean by that?
A. The document was expressed as an offer and they were rolling over what was the balance then of the loan for a further term of 3 months.

[COUNSEL FOR THE PLAINTIFFS]

Q. But you must have been giving instructions to [counsel for the defendants] to put to Mr Socratous that it was an entirely new facility, must you not?
A. I wouldn't know whether I gave any particular instructions.

Q. You must have done, surely [he] wouldn't just invent it otherwise?
A. I think there's an argument on the documents that really is a matter for construction for her Honour actually.

Q. Can I put it to you that there really is no difference between the facility as at October 2006 and March 2008 save and except for a reduction in outstanding amount and extension of time of 3 months, that's right?
A. There is one other big difference which is in my mind which is that the first facility was very much in default because it was for a term of 9 months and that period had well expired by then and I can't recall now but I believe that I would have been or Property Builders would have been charged penalty interest rate so this was an opportunity to put the loan - the amount that was then outstanding back in order.”

82 There is more than a hint of prevarication or even evasiveness in these answers; it seems to me that Mr Phontos was not prepared to say, on oath, that he had at any time believed that the 2008 arrangement supplanted and replaced the 2006 arrangement. That is because it simply was not so.

83 The first proposition upon which the defendants’ argument rests is not sustained.

(ii) Equitable assignment of the loan by Eurofinance to AIF

84 Section 12 of the Conveyancing Act 1919 relevantly provides as follows:

“Any absolute assignment by writing under the hand of the assignor … of any debt … of which express notice in writing has been given to the debtor … shall be, and be deemed to have been effectual in law … to pass and transfer the legal right to such debt … from the date of such notice, and all legal and other remedies for the same, and the power to give a good discharge for the same without the concurrence of the assignor …”

85 It was never suggested that either Eurofinance or AIF had given Property Builders notice of any assignment of its (Property Builders’) debt to Eurofinance to AIF. Accordingly, there was, under s 12, no effective assignment in law. The defendants submitted, nevertheless, that there was an equitable assignment.

86 The argument advanced on behalf of the defendants was that, on 2 May 2008, Eurofinance assigned the loan (the debt by Property Builders) to AIF. That was evidenced by the twin resolutions of the companies, Eurofinance resolving to transfer to AIF, and AIF resolving to accept the transfer of, the loan. That was sufficient to constitute assignment in equity. AIF then drew on its facility with Adelaide Bank to pay out Eurofinance. Accordingly, when Eurofinance transferred the mortgage to Adelaide Bank, no money was owing to Eurofinance. There was no debt associated with or secured by the mortgage, and the mortgage was “empty”. If Property Builders owed money to anybody, it was to AIF. (However, that was questionable – indeed, denied – because no notice had been given of the assignment.)

87 The defendants’ proposition is this: Eurofinance divested itself of the debt by transferring it to AIF. Eurofinance thereafter had no property in the debt, and no entitlement to receive payment of it from Property Builders. The property in the debt was, in equity, that of AIF. But because notice had not been given to Property Builders, s 12 rendered the debt unenforceable against it at the hands of AIF.

88 The notion is unattractive, because Property Builders has never suggested that it has repaid the debt. But it is also, in my opinion, wrong.

89 As I understand it, an equitable assignment operates to confer an equity upon the equitable assignee. I do not understand it to confer rights upon third parties, including the debtor. It may or may not be the case that, on 2 May 2008, Eurofinance conferred upon AIF, and AIF received, an equitable assignment, enforceable (if the circumstances arose and it sought to do so) by AIF against Eurofinance. What the resolutions did not do was confer on Property Builders any equitable rights, and it certainly did not give Property Builders any absolution from its obligations to repay the debt to Eurofinance.

90 The second proposition upon which the defendants’ argument rests is not sustained.

(iii) Notice

91 The defendants’ final proposition rested upon the evidence concerning the service, under s 12 of the Conveyancing Act, of notices of the assignment of the “Agreement”. The contention was that no such notice was served prior to the commencement of proceedings on 27 August 2008, and Adelaide Bank therefore lacked the foundation for its cause of action.

92 The evidence is that notices were sent to Mr Phontos by Bransgroves on 21 August 2008. Mr Phontos’ evidence (in his affidavit) was that he was unable to locate, in the files of Property Builders and himself, any notices or mail correspondence from Bransgroves of that date. But in the very next sentence, he deposed to having received from Bransgroves a two page facsimile dated 21 August 2008, one page of which identified itself as a “s 12 notice”.

93 It is true that that notice is addressed to Mr Phontos, apparently in his private capacity, and notified him, as guarantor, of the assignment of “the agreement”. In cross-examination Mr Phontos agreed that he was “the alter ego” of Property Builders.

94 I am satisfied that both Property Builders and Mr Phontos were given notice of the assignment of the loan prior to the commencement of the proceedings.

* * *

95 The fundamental difference in the positions of the parties is this: the plaintiffs maintain that there was one agreement, the terms of which are contained in four documents – the 2006 letter of offer, the Mortgage, the Mortgage Memorandum, and the Deed of Guarantee. By reason of provisions contained in these documents, the terms of the agreement could be varied from time to time, including by the extension of the loan amount and/or the loan term, and, in 2008, they were varied. Essentially, however, on the plaintiffs’ case, there was a single transaction or agreement, giving rise to the obligations of Property Builders to repay the debt, and to Mr Phontos on his Guarantee in the event of default by Property Builders.

96 The defendants insist that this does not correctly recognise what happened. Their case is that there were two quite separate loan agreements: the first on 31 October 2006; the second on 31 March 2008. “The 2008 Loan” stood alone and separate from “the 2006 Loan”. It lacked certain important incidents of “the 2006 Loan”, most particularly, the Guarantee by Mr Phontos.

97 For reasons I have given above, I reject the defendants’ contention. The agreement was a single agreement made in 2006 and varied in 2008.

The Guarantee

98 The defendants presented an argument, based on Consolidated Trust Co Ltd v Naylor [1936] HCA 33; 55 CLR 423 to the effect that the transfer of the mortgage did not carry with it the transfer of Mr Phontos’ guarantee. That is, indeed, the effect of that decision: a transfer of a mortgage does not operate, under s 52 of the Real Property Act, to give the transferee the right to sue a guarantor on a guarantee contained in the instrument of mortgage.

99 Apart from the s 12 notices, there is no evidence that the guarantee, as distinct from the mortgage and the debt, was assigned.

100 Recourse to the 2FASOC shows that no claim under the Guarantee was explicitly made. The Deed of Guarantee is mentioned in the 2FASOC, as one of the documents evidencing the terms of the Agreement. In paragraph 5, it is asserted that Mr Phontos guaranteed the obligations of Property Builders. What is absent from the 2FASOC is any separate claim for relief based upon Mr Phontos’ obligation under the Guarantee. However, the proceedings were conducted on the common understanding that Adelaide Bank sought relief against Mr Phontos in reliance on his guarantee.

101 Clause 6.6 of the Deed of Guarantee entitled Eurofinance to:

“assign or otherwise deal with this guarantee in any way it wishes”

and obliged Mr Phontos to:

“… sign anything and do anything [Eurofinance] reasonably requires to enable any dealing with this guarantee.”

There is no evidence (other than the s 12 notices) that Eurofinance sought to exercise its rights under this clause. The question which therefore arises is whether the s 12 notices are sufficient evidence that such an assignment was made. I have concluded that the notices ought to be taken at face value. While they may not, of themselves, effect an assignment, they are sufficient evidence that such an assignment has been made.

102 The conclusion I have come to is that Adelaide Bank is entitled to an order for possession against Property Builders. It is also entitled to judgment in whatever amount is presently owing against Property Builders, and against Mr Phontos under his Guarantee.

103 It is not possible for me to calculate the amount in which Adelaide Bank is entitled to judgment. It will be necessary for that information to be brought up to date. I direct the parties to bring in short minutes of order to reflect these conclusions.

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