Bentley v Finance Corporation of Australia Limited

[1991] HCATrans 372

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S74 of 1991

B e t w e e n -

HELEN BENTLEY

Applicant

and

FINANCE CORPORATION OF

AUSTRALIA LIMITED

Respondent

Application for special leave

to appeal

MASON CJ
DEANE J

GAUDRON J

Bentley 1 13/12/91

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 13 DECEMBER 1991. AT 10.04 AM

Copyright in the High Court of Australia

MR D.M.J. BENNETT, QC:  May it please the Court, I appear

with my learned friend, MR P.J. DOWDY, for the

applicant. (instructed by Lee Rigg & Co)

MR A.R. EMMETT, QC:  May it please Your Honours, I appear

with my friend, MR L.G. FOSTER, for the respondent.

(instructed by Hickson Lakeman & Holcombe)

MASON CJ:	Mr Bennett.
MR BENNETT:	Your Honours, I hand up an outline which has

attached to it an analysis of the figures and a

document which may be relevant to one minor aspect

of the case.

MASON CJ:	Thank you.
MR BENNETT:	Your Honours, when the Sydney Law Review was

first published in 1953 the first article on page 1

was an article by Lord Evershed entitled, "Is

equity past the age of child bearing?".

Your Honours, in a sense, this case may give
Your Honours an opportunity to answer that

question.

If I can just show Your Honours the analysis

of figures on the second-last page of the document

I have handed up, Your Honours will see the extent

of the injustice which occurred in this case.

There was a first mortgage in 1974 of $95,000 with an unsecured guarantee by the two directors. There

was a second mortgage in 1976 for $139,000 but only
$16,000 is advanced. There is a guarantee by the

same two people, supported by a collateral mortgage

over the property in which the applicant has an

interest.

The mortgagee than spends, as is perfectly

entitled to do, $86,000 on improvements pursuant to

its power as mortgagee in the second mortgage.

Now, the authorities say that when they do that -

and the test is whether the amount spent has

increased the value of the land by as much as the

amount spent. In other words, one adds to the

mortgage the lower of the amount the mortgagee

spends and the increase in the value of the land

and the increase was at least $86,000, so on that

principle the mortgagee was justified in doing

it.

But of course the effect of that in this case

was to completely twist the priorities. In 1978

the land sold for $179,000 - - -

DEANE J:  Mr Bennett, the authorities might say that when

there is a single mortgage, but is there any

authority which says that the mortgagee can do it

Bentley 13/12/91

for the purpose of increasing his interest under

another mortgage?

MR BENNETT:  The only authority in the common law world we

have found that decides that is this case, and this

case decides that he can; two judges said he cannot

and two judges said he can.

DEANE J: Justice Handley said that that is exactly what

this case did not decide, that the point was never

raised.

MR BENNETT:  It was not raised in that form, Your Honour,

but it is the same basic point because whether one

looks upon the point as a question of apportionment
as to which mortgage one applies the proceeds of
sale to or whether one regards it as whether one

can attach the $86,000 to the second mortgage when

the purpose is to benefit the first mortgage - - -

DEANE J:  Or whether one has to apportion them between the

two mortgages.

MR BENNETT: Yes, or that, is very much the same point.

There was a point raised as to the entitlement to

spend $86,000 being disproportionrnent to the

$16,000 and that point is sufficiently close to the

point Your Honour refers to, but I accept that the

precise point I am putting at the moment was not

put in the same way below.

DEANE J:  The concession you are making at the moment, to

lead on to the point you want to argue, does not

seem to me to be a self-evident concession though I

can see, if what Justice Handley says is correct,

why you are constrained to put the case that way.

MR BENNETT:	I am not making the concession, Your Honour. would wish to argue in this Court that the mortgagee is not entitled to spend the $86,000 on	I
the second mortgage when the effect of that would

be to benefit his first mortgage in the way that

was done here.

DEANE J:  Is that not what Justice Handley says at page 54

is not involved in the case?

MR BENNETT:  Your Honour, we say it is. We say it arises on

the facts, the facts are straightforward and

simple - - -

DEANE J:  You may be right. I was just directing you to a

problem I saw.

MR BENNETT:  Your Honours, we would submit that although

His Honour says it was not argued, it really is a

different way of putting the proposition that one

Bentley 3 13/12/91

was not entitled to spend $86,000 on the second

mortgage. It is a slightly different reason but it

is clearly, we would submit, within the Connecticut

Fire Insurance case. It is a classic case where

the facts would be no different, whether one put it

that way or the other way. We say that the test

should be not, "Is one increasing the land by that

amount?", which is the test in the normal case but

whether one is increasing the value of what is

mortgaged by that mortgage by the amount.

On the figures I have put here, as

Your Honours can see, what the mortgagee has done

is by spending this money has benefitted his first

mortgage and left a huge deficiency which would not
have otherwise existed on the second mortgage in

relation to which we were involved.

But, Your Honours, quite apart from that

point, there is the central analogy to marshalling
point which was fully argued below and which can

produce the same result in the present case. We

would submit that where the mortgagee does have a

choice as to how he applies proceeds, in our

respectful submission there is something analogous

to marshalling which says that where the proceeds

are caused by the injection of funds charged on the

second mortgage, it is simply contrary to any

principle of fairness that the mortgagee should be

entitled to act as he did.

In my respectful submission, whichever of the

two ways one attacks the problem, either by saying

the mortgagee cannot charge the whole $86,000 to

the second mortgage merely because he has increased

the value of the land by that amount, if the whole

benefit goes to a first mortgage in this way, or if

one says it by saying, when the land is sold there

is an obligation to apportion in a way which

recognizes the way the money was raised and what the mortgagee has done, one gets the same result

either way.

DEANE J:  Mr Bennett, the Chief Justice has pointed out to

me - and I had marked it - that Mr Justice Kirby

puts it even more strongly at page 38.	He says it
is agreed, from line 13.

MR BENNETT:  What His Honour is referring to there is not to

an acceptance of the point which I am putting but

simply to an acceptance that the second mortgage

does not secure the debt secured by the first

mortgage. The words "but only" are not part of the

proposition, they are simply a throw-away line

saying what is left after the agreement. In my

submission, that sentence is not intended to say

that it is accepted that the amounts advanced or

Bentley 4 13/12/91

expended were secured on the second mortgage

because that very point was argued. That was one

of the matters argued and determined on the basis
of those early cases about value of land being

increased by at least the amount of the property.

That point is discussed very fully by

Mr Justice Needham and His Honour decides it simply

on the basis of those cases, without

distinguishing the special case that was before

him.

GAUDRON J: Could I also take you to page 45, Mr Bennett, in

the judgment of Mr Justice Mahoney, and relevant to

your Connecticut Fire Insurance argument.

His Honour there seems to think that your first

point, if you like, does or might require further

investigation of the circumstances of the loan.

MR BENNETT:  Your Honour, it is hard to see, with respect,

why it would.

GAUDRON J: Unless I have misread it in some way, but that

does seem to be what His Honour is saying.

MR BENNETT:	The parties certainly argued the question of the fairness of the distribution and the general
justice and equity, if I can use those words in a
non-technical sense, of it at first instance and
they both called what evidence they regarded as
appropriate to it. The facts are fairly simply
and, in my respectful submission, the court would
simply assume there are no other relevant facts.
It is not as if the point I am raising really calls
for any additional facts. The relevant fact is the figures on the attached document. All the rest is
fairly unimportant and it is hard to see how it
could be important. It is really a matter of looking at those numbers and saying, "What does the
law require where that is the way a mortgagee acts and that is the way he seeks to apply the money?"

In my respectful submission, the point is

novel, the Court of Appeal has given a decision

which has rejected the existence of any doctrine of

the type which I have suggested. That is a matter

which will stand as a precedent.	It is a matter of
significance to the general law of mortgages.	It

is not something which arises every day, of course,

but mortgagees do from time to time spend

substantial moneys on improvements, particularly in

times of recession. In my respectful submission,

the point is of importance and special leave to

appeal should be granted.

I do not know if my friend makes any point

about the problem of parties. That was something

raised by the Court of Appeal. It was not - I say

Bentley 13/12/91

this subject to correction - but as I understand it

it was not raised by the respondent.	It was
something which the respondent simply -

MASON CJ:  You had better deal with the point, I think,

Mr Bennett, because it may be a problem.

MR BENNETT:  If Your Honour pleases. The answer is very

simply, Your Honour: if Your Honours go to the last

document I have handed up, that shows that

Mr Clime became bankrupt in 1980 and was discharged

in 1985. Whether or not the mortgage debt was

proved in the bankruptcy, as to which we have not

had the opportunity to ascertain, clearly it was

discharged by the bankruptcy. The appeal therefore

can be argued on the basis that if I am correct,

the burden falls on the respondent rather than on

Mr Climo. There is no way Mr Climo would be

affected, he having been made bankrupt and having

had the debt discharged.

GAUDRON J: But there is a further point when you say it

like that, is there not? The proceedings were

commenced in 1981. The bankruptcy was not

discharged until 1985. Is it not the case that by
not having joined Mr Climo in the proceedings the
finance company is now put in a position of
detriment in that it cannot recover what it might

otherwise have been able to claim for in some way

if Mr Climo had been a party from the beginning?

MR BENNETT:  As I understand it, it was never put that way.

It would have been open, of course, to the finance

company to raise the point in 1981 if it considered

itself prejudiced by an absence of parties. The

Supreme Court Act does have the old provision that an action is not defeated by the non-joinder of any

person and the circumstance that it might operate

to its disadvantage would have been equally known

to it as to us in 1981 and could easily have been

cured by either party.	The reality of the
situation, we would respectfully submit, is that it
would not affect it either way.	If there is a

technical problem it can be solved, of course, by

writing to the Official Receiver and asking if he

has any interest and getting the inevitable

response but it is not going to affect anyone

except the respondent and the respondent took that

risk when it did not take that point at the trial.

And as I say, that was a point raised for the first

time by the Court of Appeal, as I understand it.

May it please the Court.

MASON CJ: Thank you, Mr Bennett. Yes, Mr Emmett.

Bentley 6 13/12/91

MR EMMETT:  Your Honours, we do not want to say anything

about the parties' point. It was a matter that was

raised by Mr Justice Mahoney, I think, in the Court

of Appeal and we were content to have the matter
decided on the basis of the parties then before the

court and we do not wish to say anything different

now.

Nevertheless, in our submission, this is not

an appropriate case for leave. With the greatest

respect, we do not quite follow the new way in

which my learned friend puts the argument. In so

far as it is set out in the application book, we

assume it is what is contained on page 65, that is

the specific questions of law and it seems to be:

the question of the scope and nature of the

equitable obligations of a mortgagee where -

in certain circumstances, leaving out three lines

the mortgagee pursuant to either its general

law right or a specific provision in the

mortgages incurs expenditure in improvements

to the land prior to realization and sale.

Now, Your Honours, that was something which

was agitated before Mr Justice Needham to some

extent, as appears from page 16:

The plaintiff submitted that FCA should

not be allowed to add to its debt the amount
spent on completion of the developmental works
because the expenditure was disproportionate

to the amount advanced under the 1976

mortgage ..... This submission takes no account

of the fact that FCA had the right to expend

moneys on development -

et cetera. Going down to line 20:

If it could be established that the

expenditure was wholly unreasonable in the
circumstances, in that it exceeded the
increase in value of the property by virtue of
the works, the plaintiff could well succeed in
denying the right of FCA to add the expense to
the principal sum, or so much thereof as

exceeded the increase in value, but there is

no evidence to that effect.

Now, the trial judge, in effect, was saying,

"There might have been some basis upon which this

sort of argument", as we understand what my learned

friend is now putting, "might have been advanced,

but that is just not the way in which it was put."

Bentley 7 13/12/91

DEANE J: Is not the real question here whether it is

reasonable to debit the whole amount of the money

spent as an advance under the second mortgage where

the benefit of the money spent is accruing to the

value of the first mortgage. That seems to me to

be a very large question and I do not quite see

what evidence could have been led, unless the

figures have something behind them that I do not

understand.

MR EMMETT:  Your Honour, one thing to bear in mind is that

this was a parcel of land which was going to be

developed. That was the purpose for the advances.

The intention was that the mortgagor would develop

the land. Had the money been advanced immediately

on completion of the second mortgage, the mortgagor

would have expended it in whatever way it chose to

do. Those matters simply were not investigated

because of the way in which the case was put below.

The circumstances of the advance was simply not the

subject of any evidence.

DEANE J:	But what evidence could there be in relation to a mortgagee spending $80,000 to improve the value of
the land which was subject to a second mortgage of less than $20,000 and then debiting the whole of
the $80,000 as an advance under the second mortgage
when the benefit of the expenditure would accrue to
the first mortgage?  I am not saying that there is
an obvious answer to the question.  I am just
asking what evidence would you have led.
MR EMMETT:	Your Honour, I do not know at the moment,

because the matter has never been investigated, but

the second mortgage was intended to secure an

advance of $139,000.

DEANE J: Yes, I am conscious of that.

MR EMMETT:	And if that money had been advanced on the granting of the mortgage, then this question simply
would not arise but because of default by the
mortgagor, the money that was intended to be
advanced was not advanced.  Now, the circumstances
surrounding the decision not to advance immediately
but to advance by means of expenditure was simply not a matter that was explored. It may well be
that there were circumstances surrounding those matters that could have thrown light on whether it
was inequitable or otherwise for the mortgagee to
debit the mortgage accounts in the way that it did.
GAUDRON J:	Mr Emmett, it seems that that was an issue at

first instance and you had your opportunity to call

evidence.

Bentley	13/12/91
MR EMMETT:	With respect, no, Your Honour, because the only question - and this appears from what is said by
Mr Justice Mahoney, for example, at the page to which Your Honour Justice Deane referred at
page 45:

Nor has there been any examination before

this Court of the circumstances in which the

moneys borrowed for development were borrowed:

it was not suggested that the circumstances in

which the borrowings were made would create or

evidence such an equitable right as would
warrant a process of marshalling or the

requirement that the second mortgage be

discharged first. The matter has been argued

upon the basis merely that it is because of the fact that the borrowing for development

purposes was secured on the second mortgage

that the right claimed by Mrs Bentley arises.

..... it is proper to refer to these

matters because, if it had been argued that

from the terms of the second mortgage or from

the circumstances of the borrowing such an

equitable right had arisen, it would have been

necessary to examine in detail the

circumstances in which the second debt was

created and/or increased and to determine

whether there were reasons in those

circumstances, or in what was known at the
time of the creation of the second mortgage or
the debt secured by it, which would warrant

the creation of such equitable rights. It

would also have been necessary to examine
whether, if the fact of the borrowing for

development purposes would alone have created

the right claimed, the circumstances of the
transactions would negative or qualify that

right.

GAUDRON J:  Now, it is the last point that I am interested in. If you just assume for the moment that the

mere debiting of the development moneys to the

second mortgage is sufficient to create an equity,

then it would be for your client to raise

circumstances which would negative or qualify that

right, in the words of Justice Mahoney at page 45,

and if you go to page 16, in terms of what

Justice Needham said, it looks as though that was

the case that was there. His Honour did not accept

it but it looks as though you had the right, but

did not seek to call evidence as to the

circumstances of the transaction so as to negative

any right that Mr Bennett's client asserted arose

directly from the debiting.

Bentley 13/12/91

MR EMMETT: But, Your Honour, that question was simply not

an issue before Mr Justice Needham.	One needs to
look at page 11 to see what the issues were.	The

parties agreed in some detail on some issues and

one does not find, with respect, in those issues

the contention which is now being advanced.

GAUDRON J: But is page 16 not in the judgment of

Mr Justice Needham?

MR EMMETT:  Yes, but one has to consider that in the light

of the issues that were before His Honour. There

were no -

GAUDRON J:  I must say I do not understand it.

The plaintiff -

that is Mr Bennett's client -

submitted that FCA should be allowed to add to

its debt ..... because the expenditure was

disproportionate to the amount advanced under

the 1976 mortgage -

which is the second mortgage, namely $16,000.	Now,
was that not an issue?

MR EMMETT:  It was a contention, but the issues which

His Honour was asked to decide are at page 11 and

that is the basis upon which evidence was called

and cases were closed, not on the basis of some

submission that was made after the event. If

Your Honour looks at page 11 of the application book, page 6 of the judgment - starting perhaps at

the bottom of page 10 of the application book:

The parties agreed on.the issues to be

determined in these proceedings.	They are as
follows:-

Now, one does not find there any reference to the

notion that there was some inequity because the

expenditure was disproportionate to the amount

actually advanced.	The expenditure was, in effect,
by way of advance.	It was expenditure of the money

that was intended by an express covenant in the

mortgage to be advanced and expended in that way.

DEANE J: What, it was not expenditure by a mortgagee in

possession?

MR EMMETT:  It was expenditure in effect making good a

covenant contained in the mortgage, not just

expenditure made by a mortgagee in possession for

whatever benefit. There was an express covenant in

the mortgage that the money would be spent in

Bentley 10 13/12/91

development. There had been a similar covenant in

the first mortgage but there had been a default in

the performance of that covenant - - -

DEANE J:  I had misunderstood. Is what you are saying that

the expenditure was made in fulfillment of a

covenant that was accepted as being still on foot

and binding?

MR EMMETT:  Yes. That is how the matter was clearly put to

the Court of Appeal. Unfortunately the mortgages

are not in evidence in the application book here

but - - -

GAUDRON J:  I was just thinking that that did not

necessarily emerge from issue 6 at page 12 of the

application book.

MR EMMETT:  It may not, but it is quite clear that that was

the evidence before Mr Justice Needham, that the

money that was expended was in making good a

covenant contained in the mortgage itself.	I am
indebted to my learned friend. It is page 7
line 25:

The mortgagor was to complete the subdivisional works by 30 December 1976, in

default of which FCA was to be entitled to

enter the land and complete the works.

So this was not just a mortgagee entering into

possession and deciding to spend money because he

thought it was a good idea, and doing it at the

expense of the second mortgage, but the mortgagee

entered into possession to perform the express

covenant which the mortgagor had given in the

mortgage and that, of course, was something known

to the mortgagor, Mr Bentley, through whom the

present applicant claims. So it is a circumstance

or a case where the third party mortgagor, if I

could use that expression, gave the mortgage to

secure, amongst other things, an obligation to

spend this money in improving the land.

DEANE J: Where does that express covenant appear?

MR EMMETT: It is not in the application books. It appears

in the evidence.

DEANE J: Should we not have a look at it?

MR EMMETT:  I think, in the way the case is now being put by

my learned friend, yes, Your Honours.	I do not
know that we have the appeal books here.	Does the

High Court receive the supreme court appeal books

as part of the record? I am told my learned friend

Bentley 11 13/12/91

tried to put them in and the Registry said that

they should not be in.

MASON CJ: Mr Emmett, perhaps we should stand the matter

down in the list to give the parties the
opportunity to put the appropriate document before

us, or a copy of it.

MR EMMETT:  That may be an appropriate course, Your Honour.

MASON CJ: What do you say as to that, Mr Bennett?

MR BENNETT:  I have no objection to that course.

MASON CJ: In the circumstances, we will stand the matter

down until 2.15 unless the parties are in a

position at some appropriate time during the course

of the morning to present the document to us and to
continue with the argument in the case.

MR BENNETT:  May it please Your Honours.

MR EMMETT: If Your Honours please.

AT 10.33 AM THE MATTER WAS ADJOURNED

UNTIL LATER THE SAME DAY

UPON RESUMING AT 2.24 PM:

MASON CJ: Yes, Mr Emmett.

MR EMMETT:  Might I hand to Your Honours copies of the

mortgages which were under consideration in the

courts below.	Your Honours, can I go back a bit
further.	It may be necessary, in the way in which
my learned friend has put the contention, to go

through the chronology as we would see it, rather

than the chronology as is outlined in my learned

friend's paper this morning.

MASON CJ: Yes.

MR EMMETT:  One starts with the proposition that the land in

respect of which the applicant claims an equitable

interest was held as to the legal estate by her

husband, Sandor Bentley. That appears from page 6

of the application book. Your Honours may recall

that in the first judgment His Honour

Mr Justice Needham gave consideration to the

question of whether or not the applicant had

standing to bring the proceedings, bearing in mind

Bentley 12 13/12/91

that she was no more than an equitable holder of an

interest in the property. He concluded that she

did - he first of all concluded that she was

entitled to an equitable interest either as a joint

tenant or as tenant in common; then declared that

she had standing to bring the proceedings.

But it is significant that when the mortgage

in question was given, the present respondent had

no knowledge of the interest of the present

applicant in the land. So it starts with that,

that from 1974 onwards the applicant's husband was
the registered proprietor of the legal state in fee

simple. On 31 July 1974, what is referred to as

the first Ruru mortgage or the first Doonside

mortgage was granted by Ruru Pty Limited to the respondent. That appears from one of the three

documents which I have just handed to Your Honours.

It is the document which was originally at page 63

of the appeal book. The pages that I have just

handed to Your Honours are copies of the appeal

book before the Court of Appeal. The pages are at

the bottom right-hand corner; I hope they are

legible.

It was a mortgage by Ruru to the respondent to

secure an advance of $95,000. If Your Honours go

to page 65 - 63 is where the mortgage begins - 65

contains the eighteenth covenant which was a

covenant by Ruru that:

not later than the Thirty First day of July

One Thousand nine Hundred and Seventy Five -

it would cause a "linen plan of subdivision" to be

prepared, and would:

(b) Complete any road works, drainage works

and water reticulation work •.... to be

completed to the satisfaction of the

relevant Local Government Authority ..... Should

the Mortgagor fail to comply with these

covenants then at the Mortgagee's election;

( i) .....

(ii) The Mortgagee by itself ..... may enter

upon the said land and complete any such works
in any manner the Mortgagee may see fit and
any money so expended by the Mortgagee shall

be deemed to be principal moneys covered by

this security and shall carry interest at the

rate aforesaid.

Now, the obligations of that company, that is

Ruru, were guaranteed by Mr Bentley, the registered

proprietor of the Northbridge land. That appears

from page 66 of the appeal book which I have just

Bentley 13 13/12/91

handed to Your Honours. Guarantee given by

Mr Bentley and Mr Climo. Mr Bentley was a director

of the mortgagor company. That appears from page 6
of the application book in the judgment of

Mr Justice Needham. The works that were

contemplated by that covenant were not completed by

31 July 1975. That appears from page 7 of the

application book at line 11:

It appears that Ruru Pty Ltd failed to

meet this deadline as, on 31 June 1976 - I think that is probably meant to be 30 June -

further moneys were agreed to be advanced by

FCA for the purpose of completing the subdivisional works.

It was at that point that the two further mortgages

were entered into which are at pages 45 and 55 in

the bundle which I have just handed to

Your Honours. The document at page 45 is the

mortgage by Ruru Pty Limited, which is the second
mortgage of the Doonside land. It was expressed to

secure - I am not sure whether the copies are

legible - I think they are just legible enough to

see the - I am afraid the appeal book was much the

same - we do in fact have the exhibits in Court if

Your Honours want to have a look at them.

MASON CJ:	I think we can follow them.
MR EMMETT:	I think they are sufficiently legible to see

them. It is a mortgage by Ruru Pty Limited

expressed to secure $139,000. At page 49 - and I
fear that the page might have been cut off because

it was cut off in the original appeal book - but

Your Honours will be able to find it by reference

to the pages on either side, I think - - -

MASON CJ: It has been renumbered in writing.

MR EMMETT:  Thank you. The twenty-second covenant is a

covenant by the mortgagee that it:

may in its absolute discretion make further

advances from time to time on the security of

this mortgage up to a total not exceeding

$137,125.50. Such further advances shall form

part of the principal sum of ONE HUNDRED AND

THIRTY-NINE THOUSAND DOLLARS ($139,000) hereby

secured -

The twenty-fourth covenant is in much the same

terms as the covenant in the first mortgage:

Bentley 14 13/12/91

In respect of the land comprised in

Certificate of Title Volume 7857 Folio 175 the

Mortgagor shall not later than the 30th day of

December One thousand nine hundred and

seventy-six:-

A. Cause a linen plan -

to be prepared:

B. Complete any road works, drainage

works ..... such work to be completed to the

satisfaction of the relevant Local Government

Authority ..... Should the Mortgagor fail to comply with these covenants then at the

Mortgagee's election:

(ii)      The Mortgagee by itself its servants or

agents may enter upon the said land and

complete any such works in any manner the
Mortgagee may see fit and any money so
expended by the Mortgagee shall be deemed to

be principal moneys covered by this security -

So in the second mortgage of the Doonside land

there is an express covenant to complete the

subdivisional works and an express reservation of

the right on the part of the mortgagee to complete

those works and to threat the moneys expended as an

advance under the mortgage.

And that is the context in which the mortgage

of the Northbridge land was given. That mortgage

appears at page 55 in the supreme court appeal book

and Your Honours will see that it is a mortgage by

Sandor Bentley to the respondent to secure

$139,000. At page 58 is the covenant which, as

they say, collateralizes the securities.	The
twenty-first covenant is:

That the sum of $1872.50 shall be advanced to

the Mortgagor upon the execution hereof and

the Mortgagor hereby acknowledges receipt of

this amount.

Twenty-secondly - The Mortgagee may in its

absolute discretion make further advances from

time to time on the security of this mortgage

up to a total not exceeding $137,125.50 -

which is the same figure as appeared in the second
mortgage of the Doonside property -

Such further advances shall form part of the principal sum -

Bentley 15 13/12/91

And then twenty-fourth covenant:

This mortgage is collateral to mortgages of even date herewith firstly -

by Climo -

and secondly ..... between RURU PTY LIMITED and

the Mortgagee hereto and the principal sum of

ONE HUNDRED AND THIRTY-NINE DOLLARS

($139,000) -

is the same sum as is referred to in the second

mortgage by Ruru of the Doonside land. So one has,

Your Honours, this situation that on 30 June 1976

there was a further covenant entered into by Ruru

in favour of the respondent to complete the

subdivision, an acknowledgement that $139,000 would
be advanced for that purpose, and an express

acknowledgement that if the subdivisional work was

not carried out, then the respondent would be

entitled to carry out the work itself and treat the

money as being advanced under the mortgage and

secured by the mortgage, and that is the obligation

which was secured by the mortgage - the second or

third mortgage of the Northbridge property given by

Mr Bentley in circumstances where FCA had no

knowledge at all, of course, of the interest of the

present applicant in the proceedings. It was a

mortgage given by a guarantor of the whole of the

obligation to secure an obligation expressly

contemplating the completion of the work by

the - - -

GAUDRON J:  The right of the mortgagee to secure the

advances - to secure the money it expended in

completion of the subdivision was the same under

either mortgage. When it actually expended the

money it had the right under both existing
mortgages, did it not?

MR EMMETT:  No .

GAUDRON J: Did not clause 18 in the first Ruru mortgage

also give them the right - - -

MR EMMETT: Indeed, yes.

GAUDRON J: Yes, and the clause in the second Ruru mortgage

gave them the same right.

MR EMMETT:  Yes.

GAUDRON J: And there was no express reference to that in

the collateral mortgage?

Bentley 16 13/12/91

MR EMMETT:  The collateral mortgage said that it was

intended to secure the same money intendedly

advanced under the second mortgage. So that the

collateral mortgage made perfectly clear that it

was intended to secure an amount which the both

parties intended would be advanced under the second

mortgage and not under the first mortgage.

GAUDRON J: But at the time when the mortgagee expended the

moneys, it could at its election have treated the

moneys secured as advanced under one or other or

could have apportioned.

ME EMMETT: It could have said, "We will abandon the

additional security we got for this further

advance, but we choose not to". If these matters

had been the subject of investigation and evidence

at the time, one might have concluded that the

reason why this was done was to give an advantage,

one possible explanation, to the mortgagor to save

them some stamp duty. One reason why this would

have been done is that the respondent was saying,

"We will lend you the further money to complete the

subdivision but we want some further security. If

we simply take security over the Northbridge

property to secure all of the advances, then there

will be more stamp duty payable in respect of the

total advances. Instead of doing that, we will do

it this second" - - -

GAUDRON J:  Does not something intrude into the picture,

when your right is to treat it as an advance under

either mortgage and what you are eventually taking

your money from is a mere guarantee?

MR EMMETT:  Your Honour says a mere guarantee, but that was

one of the preconditions for the respondent

agreeing to make the further advances, that it had

the additional security. What it is saying is, "We

weren't prepared to do anything further. We would

not have advance any more money at all" - I am

probably entering into the merits of the appeal but

it is perhaps necessary in order to see that what

my friend is putting is really a new way of putting

the matter, but in effect, what the respondent says

it would have been open to call evidence about is,

"We were asked to advance these further moneys. We

weren't prepared to advance these further moneys to

complete the subdivision on the basis of the

existing security. We required some further

security." And the further security was given on

the clear understanding that it was for the further

advances that now were going to be made, either at

the request of Ruru, so that it could spend the

money itself, or if it would not do it, then the

mortgagee itself would expend the money in

Bentley 17 13/12/91

performing the obligation which Ruru had covenanted

to perform but which it failed to perform.

Now, the reason why one needs to look at all

of that material is to put in context the
observations of Mr Justice Mahoney and, indeed, the

observations of Mr Justice Needham -

Mr Justice Mahoney at page 45 of the application

book - and perhaps I can take Your Honours back to

that page, starting at line 12:

As I have said, it is proper to refer to these matters because, if it had been argued

that from the terms of the second mortgage or

from the circumstances of the borrowing such

an equitable right had arisen -

that is such an equitable right as is now contended

for -

it would have been necessary to examine in

detail the circumstances in which the second

debt was created and/or increased and to

determine whether there were reasons in those

circumstances, or in what was known at the
time of the creation of the second mortgage or
the debt secured by it, which would warrant

the creation of such equitable rights.

Now, that was a matter which

Mr Justice Needham had adverted to and said, after

this submission was made when the evidence closed,

"Look, counsel for the plaintiff, there is simply

no evidence of these matters." Those matters were

therefore never examined or investigated. If they

were, then of course the respondent may well have

called evidence in relation to the last sentence

which Your Honour Justice Gaudron drew my attention

to before lunch.

It would also have been necessary to examine

whether, if the fact of the borrowing for

development purposes would alone have created

the right claimed, the circumstances of the
transactions would negative or qualify that

right.

Well, of course, the present respondent did not call any evidence about that question, the
reason being that it would only have been in answer

to evidence that might have been called in relation

to what is dealt with in the previous sentence.

That question was simply never raised below and

therefore the question of calling evidence about

circumstances which might negative or qualify some

equitable rights simply did not arise. And it is,

therefore, in our submission, simply not open to

Bentley 18 13/12/91

the present applicant to argue, as we understand

my learned friend to have argued, for a principle

that says that there was something that was

inequitable in the circumstances of the respondent

expending the money which it did. And that, as we

understand it, is the contention which is contained

in the affidavit.

For those reasons, in our submission,

Your Honours, this is simply not an appropriate

case to test the principle which we understand is

being put forward. It is simply not appropriate

because of the lack of evidentiary investigation at

the trial level. So the application, in our

submission, should be dismissed with costs.

MASON CJ: Thank you, Mr Emmett. Mr Bennett.

MR BENNETT:  We make six point in reply. First, we submit

the issue which I put as being one of the main

issues, and my friend puts as being a new issue, is

squarely raised at page 16. It is a question of

how one answers it, rather than what the question

is. At line 10 on page 16 His Honour Mr Justice

Needham records that:

The plaintiff submitted that FCA should

not be allowed to add to its debt the amount

spent on completion of the developmental works because the expenditure was disproportionate -

Just stopping there, the submission we make is

almost that, but not quite the same. What

His Honour said was, well, it was not

disproportionate because I apply the usual test,

where there is only one mortgage. That test is,

has the expenditure increased the value of the land

by more than the amount of the expenditure. But

where there are two mortgages to the one mortgagee,

that test may not be the appropriate test. The test then, we submit, should be: has the amount

available under this mortgage been increased

proportionately by the amount expended. Because

otherwise one is permitted to do what this

mortgagee has done, which is tack all the

expenditure on to the second mortgage and thereby

fill a deficiency in relation to the first

mortgage. So we submit the issue was raised; it is

a question of how it is answered and it was

answered with wrong test.

The second matter is my learned friend

submitted that that was something that was not

raised because it is not included in, what he

described as, the agreed list commencing on

page 11. At the bottom of page 10 the words are,

that my friend relies on:

Bentley 19 13/12/91

The parties agreed on the issues to be

determined in these proceedings. They are as

follows:-

We submit that is not the sort of agreement which

is some sort of binding agreement between parties

that they are bound by because His Honour then goes

on to say, "The plaintiff submitted that" at

page 16 and refers to an additional point.

Your Honours, if it was to be suggested that that was a point not open to be decided, that was a

matter that should have been raised before

His Honour on short minutes because His Honour, on page 17, says he:

will publish these reasons and

direct ..... short minutes -

so there was time for that objection to be taken,

if it was a point not argued. But that was not

done.

Thirdly, my learned friend referred to the

terms of the mortgages. Your Honours, it makes no

difference whatsoever whether these are mortgages

in which there is a covenant by the mortgagor to

develop and a breach justifying the mortgagee in

doing it, or a case where the mortgagee has a

general power to improve the security. In either

situation, it is being done for the same purpose;

for the purpose of improving the value of the land

for resale; in a sense the common interest of

mortgagor and mortgagee, in another sense for the

interests of the mortgagee. But we submit those

clauses make no difference.

Fourthly, my learned friend referred to the

possibility of other facts being relevant. We

would submit there are no other facts relevant and,

in any event, there was an opportunity to raise

them. We put this as a very simple point.	Those
are the numbers, those are the provisions of the

mortgages, that is what occurred, what is the
mortgagee entitled to do, and the second question,

how must he apply it? Between the two, or in one

or other, we seek to find an equitable principle

which says, this is unjust, for the reasons I have

given.

Fifthly, may we respectfully adopt what

Your Honour Justice Gaudron put to my learned

friend, and that is the significance of the fact

that this could have been done under the power in

the first mortgage. That was where the primary

benefit was to go, but the mortgagee chose to say,

well, I will do it under this mortgage but apply

the benefit to that mortgage.

Bentley 20 13/12/91

GAUDRON J: There may have been evidence called on that as

to why one course and not another was followed.	It
may really depend upon the circumstances of the
giving of the second mortgage, may it not?

MR BENNETT:  I would submit not, Your Honour. The

circumstances are unlikely to affect the

construction of the mortgage or the duties, unless

there was some suggestion that there was some

express agreement about something as to where

things would lie.

GAUDRON J: It does seem, if you look back to page 16, that

in this area what was being said when you sought to raise the issue was that you really could not raise

this by way of submissions. It was a point which,

if you wanted to take, should have been the subject

of evidence. And the same would seem to flow

through to the notion that it should have been

debited to one mortgage rather than the other.

MR BENNETT:  But that is because the principle which was no

doubt being substantially referred to by counsel,

and the principle which His Honour referred to, was

the simple principle which says you cannot expend

disproportionate amounts where you are going to

increase the value of the land by less than what

you are spending. That was the principle which was

applied. But we are talking about an extension of

that principle. What we would wish to submit is

that there is an equity which would say, where

there are two mortgages and, in effect, an outside

guarantee of one or different parties ultimately

liable on one, one may not - one does not apply

that test to expenditure, one rather says, is the

expenditure increasing the value of the security

available for this mortgage?

And may I give this example, Your Honours? Suppose there was a huge deficiency in the first

mortgage. A first mortgage with $1 million owing
under it and a piece of land worth $100,000.	Would
a second mortgagee, who happens to have a

guarantee, be entitled to spend $100,000 on the
land, thereby increasing the value by $100,000, but

still not creating the slightest possibility of any

money flowing to the second mortgage. One would

have to say, in that situation, that it would be

unreasonable to spend it, and that the test applied

by His Honour is the wrong test. One does not

simply say if you increase the value of the land;

one would have to say if you increase the value of

the security or the value of the equity. What

His Honour should have valued is not the increase

in value of the land but the increase in the value

of the equity available to the second mortgagee,

treating that as a separate entity.

Bentley 21 13/12/91

It is that simple error of law which we

identify and as to which we say facts would have

been basically irrelevant.

The final matter is that the remark on

page 45, in His Honour Mr Justice Mahoney's

judgment, about the necessity for evidence

presupposes that the applicant was relying upon

special circumstances. We are not relying on

special circumstances; we are relying on the short

simple facts in the documents and the figures as

giving rise to the equity we claim, in the same way

as the doctrine of marshalling, on which we rely by

way of analogy, operates on bare facts rather than

on background factors which make it more or less

desirable in particular circumstances.

May it please the Court.

MASON CJ: Thank you, Mr Bennett.

MASON CJ:  We are not persuaded that this case is a suitable

vehicle for the determination of the questions
which the applicant seeks to argue. In considering
whether or not an equitable right of the kind

contended for by the applicant arose, we are not

persuaded that it would not be relevant to have

regard to the circumstances in which the money

borrowed for development was borrowed.

In the Court of Appeal, Mahoney JA said:

if it had been argued that from the terms of

the second mortgage or from the circumstances

of the borrowing such an equitable right had

arisen, it would have been necessary to

examine in detail the circumstances in which

the second debt was created and/or increased

and to determine whether there were reasons in

those circumstances, or in what was known at

the time of the creation of the second

mortgage or the debt secured by it, which

would warrant the creation of such equitable

rights. It would also have been necessary to

examine whether, if the fact of the borrowing

for development purpose would alone have

created the ~ight claimed, the circumstances

of the transactions would negative or qualify

that right.

These matters were not explored before the primary judge. In the result, the application for special leave to appeal is refused.

You do not oppose costs, Mr Bennett.

Bentley 22 13/12/91

MR BENNETT:	No, Your Honour.
MASON CJ:	The application is refused with costs.

AT 2.52 PM THE MATTER WAS ADJOURNED SINE DIE

Bentley 23 13/12/91