Bendigo & Adelaide Bank Ltd v Dean - [2019] SADC 13

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil: Application)
BENDIGO & ADELAIDE BANK LTD v DEAN & ANOR
[2019] SADC 13
Judgment of His Honour Judge Cuthbertson
18 February 2019
REAL PROPERTY - TORRENS TITLE - MORTGAGES, CHARGES AND ENCUMBRANCES
EQUITY - GENERAL PRINCIPLES - PRIORITY AND NOTICE - PRIORITY - POSTPONEMENT OF PRIOR EQUITY
The applicant CEG seeks a declaration that its equitable interest in land has priority over any equitable interest in the land held by the plaintiff Bendigo Bank and any interest the Bank holds, as chargor of a judgment debt. CEG made various advances to the registered proprietor (Dean) of the land. Dean granted a second mortgage over the land to CEG as security. CEG lodged a caveat claiming an equitable interest as mortgagee over the land.
Bendigo Bank obtained a judgment against Dean in the District Court in an unrelated matter and registered the judgment as a Charge against the land pursuant to the Enforcement of Judgments Act.
CEG had paid out the first mortgage on the land assuming it would retain subrogation rights of the prior first mortgagee pursuant to its equitable mortgage.
Whether the CEG mortgage secures all the loans/advances of CEG to Dean. Whether CEG is secured for the funds it paid to Dean to discharge the earlier first mortgage on the land by subrogation. Whether the registered Charge gives priority to Bendigo Bank for its judgment debt against any prior equitable mortgage.
Held:
1. CEG has the priority of a first mortgagee for the funds it used to pay out the original first mortgage.
2. The CEG unregistered mortgage secures the first and second advancements made to Dean by CEG.
3. The CEG unregistered mortgage does not secure the third advancement by CEG to Dean of $35,000.
4. The registered Charge creates no legal interest in the land and is subject to the CEG unregistered mortgage in respect of advancements made before its creation.
Enforcement of Judgments Act 1991 s 7, s 8, s 16; District Court Civil Rules 2006 r 356, referred to.
Chase Corp (Aust) Ltd v North Sydney Brick & Tile Co Ltd (1994) 35 NSWLR 1; Commonwealth Bank of Australia v Psevdos [2015] SASC 66; Hopkinson v Rolt (1861) 9 HLC, 514; 11 ER 829; Butler v Rice [1910] 2 Ch 277; Ghana Commercial Bank v Chandiram [1960] All ER 865, considered.

BENDIGO & ADELAIDE BANK LTD v DEAN & ANOR
[2019] SADC 13
Introduction

At all relevant times, Dean was the registered proprietor of a block of land at 350 Gilles Street, Adelaide (the property).
CEG Direct Securities Pty Ltd (CEG) was granted leave to intervene in this action on 10 April 2018. CEG seeks orders to give effect to a loan agreement and mortgage between it and Dean so that upon the property being sold priority as to the proceeds of sale will go to CEG.
On 2 February 2015, Perpetual Trustee Co. Ltd (Perpetual) registered a first mortgage over the property.
On 5 March 2015, Dean obtained a loan from CEG of $100,000. The loan was pursuant to an agreement dated 6 March 2015 granting CEG security over the property.[1]
[1] Exhibit A1, p 7.
On 19 July 2016, Bendigo and Adelaide Bank Ltd (Bendigo), an unsecured judgment creditor of Dean, registered its judgment on the Certificate of Title of the property pursuant to s 8 of the Enforcement of Judgments Act 1991.
On 5 September 2017, Bendigo issued a warrant of sale pursuant to s 7 of the Enforcement of Judgments Act directing the Sheriff to sell the property.
On 19 September 2017, CEG issued a Notice of Claim to Properties Subject to Execution pursuant to s 16(2) of the Enforcement of Judgments Act, particularising its interest as that of an equitable mortgagee protected by caveat.
In these proceedings CEG claims a first entitlement to the proceeds of the sale of the property, whereas Bendigo says its debt should be paid from the proceeds of sale of the property first, pursuant to the registered charge it holds over the property.
CEG’s Equitable Mortgage
An agreement between CEG and Dean dated 5 March 2015 establishes a line of credit of a maximum of $100,000.[2]
[2] Exhibit A1, p 7, cl 1.
It is clear from the contract, firstly, that it extends only to a maximum loan of $100,000 and, secondly, it is equally clear that a Charge has been given over the security ‘to secure the payment of the Balance’, namely $100,000, and the performance of other obligations ‘under this Loan Contract’.[3]
[3] Exhibit A1, p 7, cl 20.
It is also agreed in clause 21 that if the security includes any real property, (which it does) ‘if requested by the Lender [the borrower] will execute the Mortgage in registrable form pursuant to the provisions of the Real Property Act’. In other words, even before the lodging of the caveat the mortgage is already created before any document of it is in existence and before the mortgage is registered.
Clause 21(d) provides that until the mortgage is registered, CEG shall be entitled to lodge a caveat pursuant to the provisions of the Real Property Act to notify CEG’s interest in the property.
The Caveat
A caveat was lodged by CEG on 6 March 2015[4]. Bendigo asserts that it does not protect the unregistered mortgage of CEG as the mortgage was not executed until 24 March 2015[5] and therefore did not exist until that date.
[4] See App. p 19
[5] Memorandum of Mortgage, Exhibit A1, p 54.
It is my view that clauses 20 and 21 of the contract[6] dictate that the mortgage came into existence upon the signing of the contract. It did not come into existence, as asserted by the applicant, on 24 March 2015 when the memorandum of mortgage was signed. Thus, when the caveat[7] was lodged on 6 March 2015, it properly protected an unregistered interest in the property already in existence, albeit that a written memorandum of mortgage had not then been drawn up.
[6] Exhibit A1, p 11.
[7] Exhibit A1, p. 19.
The caveat states that the caveator is claiming an equitable interest in the land at 350 Gilles Street Adelaide ‘by virtue of a certain Loan Contract dated and executed on the 6^th day of March 2015’ as security for repayment of all ‘moneys lent pursuant to the said loan contract’[8].
[8] Exhibit A1, p11
A further objection is made to the form of the caveat. It is said to be different to the unregistered mortgage[9] in that it extends to the property as well as ‘any other property’ owned by Dean.
[9] Memorandum of Mortgage, Exhibit A1, p 54.
In my view, this does not matter for the reason that I have mentioned, namely, that the mortgage, both unregistered and not reduced to writing, was in existence at the time the caveat was lodged and that was the mortgage the caveat protected.
In my view, the caveat complies with the minimum requirements for it to be a valid caveat. It identifies the land which is the subject of the caveat and it identifies the interest as arising ‘by virtue of a certain Loan Contract dated and executed on the 6^th day of March 2015 … as security for repayment of all moneys lent pursuant to the said loan contract’.
Even if the caveat were invalid, it would not matter because there are no other equitable interests competing for priority, at least if the Charge registered by Bendigo does not create a priority over pre-existing equitable mortgages, which in my view it does not do.
The loan amount of $100,000 is described in the agreement as a ‘Line of Credit’ with a maximum limit of $100,000’. Pursuant to the agreement, it would have been open to the borrower under the agreement to make certain repayments and further withdrawals provided at all times that the sum borrowed remained under the amount of $100,000.
In my view, this initial loan of $100,000 is protected by an equitable mortgage which itself is protected by the caveat.
The First Additional Loan
A further loan of $75,000 was made by CEG to Dean on 24 March 2015. The written agreement in respect of the 24 March 2015 loan is dated 10 June 2015.[10]
[10] Exhibit A1, p. 23.
In order for this loan of $75,000 to have any security protection, it would need to be established that it is somehow secured by an interest in 350 Gilles Street.
The variation agreement states that the ‘Lender has agreed to advance further funds … of $75,000.00 at the standard rate of 7.00% per month’.[11]
[11] Exhibit A1, p 23, cl 3.1.
Clause 4.1 provides as follows:
The Security shall remain fully effective and binding and shall continue to secure all amounts owing in respect of the Loan Agreement, as varied, to the Lender.
The combined effect of these clauses is that the advance can be referenced to the original loan agreement and the original security on the property secures this loan.
Priority is to be determined not at the time of creation of the original mortgage, but at the time of creation of this loan, however it does not matter, as I have held that there is no other candidate for priority.
The Right to Tack Further Advances onto an Existing Mortgage
If the mortgagee has knowledge of a subsequent equitable mortgage, he is not permitted to tack or gain priority under an existing mortgage for any additional loan amount made after he gains knowledge of the subsequent mortgage.
By analogy, this principle, in my view, should apply in relation to a registered charge in relation to a judgment debt of which the mortgagee is aware. Surprisingly, no one has been able to draw my attention to an authority directly on the point.
The April 2016 Loan of $90,000
On 15 April 2016, a further advance of $90,000 was made by CEG to Dean.[12]
[12] Exhibit A1, p. 27.
Recital F speaks of the loan agreement being varied to increase the principal sum owing by increasing the principal pursuant to the loan agreement dated 6 March 2015 by $90,000.
This agreement is referenced back to the original loan agreement by clause 4.1, which records that the same security ‘shall remain fully effective and binding and shall continue to secure all amounts owing in respect of the Loan Agreement, as varied, to the Lender’.
It is protected by the caveat as the caveat refers to the original loan agreement and this agreement is referenced back to that original loan agreement.
Even if it were not protected by the caveat, that is not necessarily of any great consequence. There is no entity claiming priority over the equitable mortgage of CEG (except Bendigo by virtue of the registered Charge) and a caveat does not affect the priorities as they already exist (Parker J in Commonwealth Bank of Australia v Psevdos[13]).
[13] [2015] SASC 66.
The December 2016 Loan of $35,000
On 21 December 2016, CEG made a further loan to Dean of $35,000 at a time when there was a judgment debt as a registered Charge over the property.
On 22 March 2016, Bendigo had filed a Statement of Claim in the District Court claiming $110,000 from Dean on the basis that Dean had guaranteed a loan by Bendigo to a third party which had not been repaid.
On 24 June 2016, it had obtained a default judgment in the District Court against Dean as guarantor of the loan for $113,000.
On 14 July 2016, the District Court made a Charging Order in respect of the default judgment of Bendigo. Significantly, this order was registered before the last draw down of $35,000.
On 21 July 2016, the Charging Order was registered in the Lands Titles Office on the title of Dean in respect of the premises at 350 Gilles Street.
Bendigo claims that the Charging Order, when registered, takes priority over any prior unregistered mortgage of CEG.
In addition, it claims that when the loan of $35,000 was made, CEG had constructive notice that there was a Charge on the property for a judgment debt.
In my view, the Charging Order does not create a priority over prior equitable interests, but rather the order remains subject to any prior equitable interests and in particular subject to the prior equitable interest of CEG.
Tacking after Knowledge of the Existence of a Charging Order
The right to tack is lost for further advances made after knowledge is acquired of a later mortgage (the rule in Hopkinson v Rolt[14]). The situation does not arise in relation to the first two advances made by CEG because there are no other mortgages competing.
[14] (1861) 9 HLC, 514; 11 ER 829.
The question arises, however, as to whether a loan secured by an equitable mortgage has priority over a judgment debt after the Charging Order of Bendigo is registered on 21 July 2016. Analogously with the principle that tacking is prevented from giving priority for the amount tacked if it occurs after the creditor becomes aware of another mortgage, even though it be later in priority, I hold that tacking should not be permitted to diminish the equity available to a chargor of a judgment debt after the creditor has knowledge of or constructive knowledge of the Charge.
The purpose of allowing a judgment creditor to register a Charge on a title and to prevent further dealings in that land is to preserve the equity in the land so that the chargor may have some way of preserving the judgement debtor’s equity in the land so as to permit the chargor to execute on it.
The principle is justified on the basis that equity does not protect an equitable interest that relies on an unconscionable act to knowingly deprive a judgment creditor of his judgment by dissipating his potential equity by circumventing the prohibition effected by the Charging Order on further dealings in the land.
To tack to an existing mortgage is to ‘deal’ in the land which is prohibited by the order of the District Court.
The court order of the District Court is:
4. The said Judgment Debtor is prevented from dealing with the land hereby charged whilst this Charge remains in force.[15]
[15] Exhibit A1, p 41.
These matters raise the question of the $35,000 advance, which was made subsequent to the registration of the Charging Order. The position that the holder of an equitable mortgage securing future loans should not be allowed to tack and gain priority against a chargor of the land can be justified by the equitable principle that he who comes to equity must come with clean hands. To get around the Charge by tacking further loans onto an existing equitable mortgage is not to come with clean hands and such a loan would not receive the protection of a prior equitable mortgage that equity normally gives. It is to “deal” in the land by changing the extent of the encumbrances on the land.
Charging Order
The Charging Order is made pursuant to s 8 of the Enforcement of Judgments Act.
Section 8 reads as follows:
8—Charging orders
(1) A court may, on application by a judgment creditor, charge property of a judgment debtor with a judgment debt or part of a judgment debt.
(2) Where the court makes an order under subsection (1), it may make ancillary or consequential orders—
(a) requiring registration of the charge; or
(b) prohibiting or restricting dealings with the property subject to the charge; or
(c) providing for the sale of the property and the application of the proceeds of sale; or
(d)relating to any other incidental or consequential matters.
In particular, it is noted that s 8(2)(c) provides for the sale of the property ‘and the application of the proceeds of sale’. It does not say that the proceeds of the sale are necessarily to go to the chargor.
The important section is s 16 of the Act, which reads as follows:
16—Rights of purchaser of property sold in execution
(1) The purchaser of property sold by authority of a court acquires a good title to the property subject only to registered interests and interests of which public notice has been given pursuant to statute.
(2)If, before the date of sale of property, a person claims to have an unregistered interest in the property, and gives notice of the claim in accordance with the rules of the relevant court, the sheriff must, if the claim is not disputed or the court orders the sheriff to recognise the validity of the claim—
(a) pay the claimant out of the proceeds of the sale of the property, a sum sufficient to satisfy the claim; or
(b) where appropriate to do so, withdraw the property from sale and give possession of it to that person.
Section 16(1) means that a purchaser is protected against all but registered interests and interests of which public notice has been given. But s 16(2) recognises that unregistered interests in a property subject to a Charge may exist and may have priority over the chargor.
The section provides that persons claiming to have an unregistered interest in a property the subject of a Charge (and this would include CEG) may give notice of the claim in accordance with the relevant court rules and, if the claim is not disputed, the claimant is to be paid out of the proceeds of the sale of the property and if the claim is disputed, the court may order the sheriff to ‘recognise the validity of the claim’.
This is exactly the position of CEG. It seeks recognition of the validity of its claim.
Rule 356 of the District Court Civil Rules 2006 determines how a court faced with a similar application should proceed.
The first question is whether the prior equitable interest of CEG includes the initial loan of $100,000 made on 5 March 2015, the $75,000 further advance made on 24 March 2015 and the $90,000 advance of 15 April 2016, and whether it includes the further $35,000 advance made on 21 December 2016, which was made after the Charging Order was registered in the LTO.
In my view, the equitable interest of CEG which must take priority includes the $100,000 initial loan, the $75,000 advance and the $90,000 advance, but not the $35,000 advance made after the registration of the Charging Order.
It follows that in my view, while the Charging Order does not affect existing equitable interests at the time of its filing, an existing creditor, secured by an equitable mortgage, cannot be permitted to extend the debt by the mortgagor, thus prejudicing the claim of the chargor when the existing creditor had knowledge of the Charge.
The law of equity does not protect the holder of the equitable interest who is tacking on further loans which prejudice a subsequent holder of an equitable interest or holder of a Charge because, if the creditor making the further advance has knowledge or constructive notice of the existence of either, he is acting unconscionably in prejudicing the chargor’s opportunity for obtaining satisfaction for his judgment debt.
In so far as s16(v) of the Enforcement of Judgment Act creates a discretion to “recognise the validity of the claim”, I would recognise the validity of all the claims of CEG save the claim for the advance of $35,000 for the reasons I have discussed.
Prohibition on Dealing with the Land
The Charge prevents any subsequent dealing with the land.
In my view, to deal in the land must include performing a transaction which affects any security on the land.
As to the $35,000 loan or advance made after the registering of the Charge, it is a dealing in the land because it encumbers the land by an equitable mortgage to the extent of $35,000, or to the further extent of $35,000.
Accordingly, in my view, it is a prohibited dealing and hence cannot affect other interests in the land or the equity available to the chargor in order for him to satisfy his judgment debt.
The $517,266 payment to Perpetual and the Discharge of the Perpetual Mortgage
On 20 July 2017, CEG paid out Perpetual the sum of $517,266, thus paying out the first mortgage. It then lodged a Discharge of Mortgage of that mortgage of 2 February 2015 in the belief that its own unregistered mortgage could then be registered and would have priority in securing the $517,266.

When it went to lodge its mortgage on 1 September 2017, CEG found that the LTO would not register it because of the Charge preventing further dealings in the land.
If CEG had caused the legal mortgage held by Perpetual to be transferred to it that would have been sufficient to protect the $517,266 it had paid off, ranking first in priority due to the registered first mortgage.
Instead, however, of taking over the first mortgage, it discharged that mortgage, intending to rely on its own unregistered equitable mortgage, it being an ‘all monies’ mortgage, by getting that registered. Not surprisingly, the LTO declined to register the equitable mortgage of CEG on the basis that the Charge prohibited further dealing in the land.
The land was always subject to Perpetual’s first mortgage in the amount of $517,266, and the only change has been that the mortgage has been discharged.
Subrogation
The issue is whether the discharge of the Perpetual mortgage gives an equitable interest by subrogation to CEG as security to it for the $517,266 it has loaned to Dean by repaying Perpetual.
On 20 July 2017 (a year after the Charging Order was registered in the LTO) CEG paid Perpetual the sum of $517,266, which was the amount owed by Dean to Perpetual, which loan was protected by a registered first mortgage.
Upon paying out Perpetual, CEG lodged a Discharge of Mortgage in relation to the registered first mortgage on the property.
On 1 September 2017, CEG sought to lodge its unregistered mortgage over the property.[16]
[16] Exhibit A1, p 54.
CEG expected that upon the discharge of the first mortgage in the name of Perpetual,[17] CEG would be subrogated to the rights of Perpetual and thus have protection in relation to the $517,266 advanced to pay out the Perpetual mortgage. It thought it would do this by being able to register its own equitable mortgage originally created on 24 March 2015.
[17] Exhibit A1, p 76, letter from Elliott & Co. to Mellor Olsson.
There can be no doubt that when a third party pays off a mortgage, it is presumed, ‘unless the contrary appears, to intend that the mortgage shall be kept alive for [its] own benefit’.[18] This is so even if the original mortgage is discharged and no longer in effect.
[18] See Butler v Rice [1910] 2 Ch 277 at 282, 283 (footnote 3 of Ghana Commercial Bank v Chandiram [1960] 2 All ER 866 at 871).
It is asserted by Bendigo, however, that by discharging the first mortgage, CEG got what it bargained for, namely, an equitable mortgage over the property at 350 Gilles Street, without a legal mortgage for the $517,266 and thus with the priority only of the equitable mortgage that it held.
The argument goes that as CEG got what it bargained for, it is not subrogated to the rights of Perpetual in respect of 350 Gilles Street in respect of the first mortgage. Rather, its rights of priority are to be determined by the second unregistered mortgage, not the first mortgage which it discharged, and that the former is relegated in priority behind the registered Charge.
Bendigo now argues that its Charge gives it priority over that $517,266 debt to CEG which is no longer protected by a registered first mortgage. If that were the case, Bendigo would receive the benefit of a $517,266 contribution to the equity in the premises at 350 Gilles Street by CEG for nil consideration. Further, it seeks to claim a priority for itself by the lodging of the Charge in relation to the obtaining of a default judgment in an unrelated matter.
The right of subrogation must relate to the mortgage that is paid out and not to some other mortgage which CEG wrongly thought attracted the rights of subrogation. Accordingly, if the right of subrogation exists, it exists in relation to the first registered mortgage paid out by CEG. This would have priority over any equitable mortgage, including the equitable mortgage of CEG, and any Charge, even in the event that the Charge creates a priority in relation to the judgment debt at the time of registration over prior unregistered interests.
In my view, the right of subrogation applies in respect of the $517,266 and CEG has priority in relation to that amount over all competing unregistered interests and later registered interests.
It is argued that the principles of equity would not intervene to resurrect the discharged mortgage for the benefit of CEG in the circumstances of this case. Firstly, it is suggested that the equity does not arise because Dean has not been affected by the transaction. He has not been unjustly enriched by having the benefit of the payment out of the $517,266 increasing his equity in the property at no expense to himself. It is said that this is the case because his equity in the property is so low that he would not receive anything upon a sale of the property.
This is only so in the context of this case because of the debt to equity ratio. One can envisage a situation where there is a surplus upon sale of the property, in which case Dean would have obtained the benefit of the payment by CEG at no cost to himself.
The real loser would be CEG, which, having paid off the $517,266, would see nothing, or little, for its payment if its position in the competing priorities is lost. Bendigo would, however, be unjustly enriched. It seeks to take advantage of the payment of $517,266 by CEG as increasing the equity in the land and hence its ability to share in that equity.
In my view, the payment to Perpetual by CEG has done nothing to affect the competing equities. Whoever has the equity next in priority, must take subject to the right of CEG to first take $517,266 from the proceeds of the sale.
In my view, CEG is entitled to $517,266 before any entitlement in relation to the $100,000 loan and any further advances, and before Bendigo takes the proceeds of its judgment debt even if the judgment debt gained priority at the date of registering the Charge over any prior unregistered interests.
Notwithstanding that CEG wrongly thought it could secure the $517,266 by registering its own second mortgage, it has the same priority as the Perpetual first mortgage in securing its debt, at least in relation to those with notice.
The case of Ghana Commercial Bank v Chandiram[19] is directly on point:
It is not open to doubt that, where a third party pays off a mortgage, he is presumed, unless the contrary appears, to intend that the mortgage shall be kept alive for his own benefit: see Butler v Rice.
In the present case, it has been contended that the execution of the abortive legal mortgage sufficed to negative any such intention. Their Lordships cannot agree. While not disputing that the Ghana Bank’s intention was to substitute the legal mortgage for the equitable charge, they find it impossible to accept the view that the Ghana Bank intended the equitable charge to be extinguished in the event of the legal mortgage proving for any reason to be invalid or ineffective. In other words, their Lordships take the intention of the Ghana Bank to have been to replace the equitable charge by a valid and effective legal mortgage, but to keep it alive for their own benefit save in so far as it was so replaced.
[19] [1960] 2 All ER 865, Lord Jenkins at 871.
Is the Substitution of the First Mortgage a Dealing in the Land?
The only other question is whether the submission by Bendigo is correct that by encouraging Perpetual to undertake the transaction, it has knowingly breached the Charge by encouraging a ‘dealing’ in the land contrary to the Charging Order.
The question is whether a discharge of a mortgage on land is a ‘dealing’ in the land in the present circumstances. In my view it is not. By paying the $517,266, CEG has merely substituted one first mortgagee for another.
This does not affect the competing equities of any of the parties. It does not affect Dean’s interest, nor does it affect the interests of subsequent equitable mortgagees.
It is therefore not in breach of the Charge and hence the LTO correctly permitted the discharge of the mortgage to be registered, notwithstanding the existence of the Charging Order.
The principle that he that comes to equity must come with clean hands is a discretionary remedy to be applied against those seeking equitable relief in certain circumstances. In my view, it is not appropriate to apply the principle here because no one has been disadvantaged by the paying out of the Perpetual mortgage by CEG. It cannot be said that by encouraging the ‘dealing’ whereby the amount owing by Dean to Perpetual was paid out by CEG, that the hands of CEG are sullied.
Accordingly, in my view, the first priority is in relation to the payment from the proceeds of the sale of the property of $517,266 to CEG based on the principle that CEG is subrogated to the rights of Perpetual, which rights were a first mortgage on the property securing the loan.
Conclusion
It follows that in my view, CEG holds priority on the sale of the property for:
(1)the $517,266, which it had used to pay out Perpetual;
(2)then the $100,000 advanced on 5 March 2015;
(3) then the $75,000 advanced on 24 March 2015;
(4)then the $90,000 advanced on 5 April 2015;
(5)but not the $35,000 further advance that was made after the registration of the Charging Order.
I will hear the parties as to the form and content of any orders I should make.