Bofinger and Anor v Kingsway Group Limited and Ors

[2009] HCATrans 206

[2009] HCATrans 206

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S161 of 2009

B e t w e e n -

RONALD JOHN BOFINGER

First Appellant

SANDRA ANNE BOFINGER

Second Appellant

and

KINGSWAY GROUP LIMITED FORMERLY WILLIS & BOWRING MORTGAGE INVESTMENTS LIMITED

First Respondent

REKLEY PTY LIMITED

Second Respondent

JOHN EDWARD SKEHAN

Third Respondent

DAVID JOSEPH LEVI AND JOHN MAXWELL MORGAN JOINT LIQUIDATORS OF B & B HOLDINGS PTY LIMITED (IN LIQUIDATION)

Fourth Respondents

RON TOSOLINI

Fifth Respondent

ADRIAN MATTIUSSI

Sixth Respondent

LOU POLITO

Seventh Respondent

PETER HATHEIER

Eighth Respondent

GUMMOW J
HAYNE J
HEYDON J
KIEFEL J
BELL J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 2 SEPTEMBER 2009, AT 10.23 AM

Copyright in the High Court of Australia

__________________

MR G.J. McVAY:   If it please your Honours, I appear with my learned friend, MS A. TSEKOURAS, for the appellants.  (instructed by Warren McKeon Dickson Solicitors)

MR D.R. SIBTAIN:   May it please the Court, I appear with MS C.K. AMATO for the first and eighth respondents.  (instructed by Watson Mangioni)

GUMMOW J:   The first respondent is the first mortgagee, is that right?

MR SIBTAIN:   Yes.

GUMMOW J:   What is the role of the eighth respondent?

MR SIBTAIN:   The eight respondent is an employee of the first mortgagee.

GUMMOW J:   An employee?

MR SIBTAIN:   Yes.

MR C.M. HARRIS, SC:   If the Court pleases, I appear with my learned friend, MR H.P.T. BEVAN, for the second respondent.  The third respondent has filed a submitting appearance.  (instructed by Bransgroves Lawyers)

GUMMOW J:   The second respondent is the second mortgagee, is that right?

MR HARRIS:   Yes, your Honour.

GUMMOW J:   The third respondent who submits is the third mortgagee?

MR HARRIS:   Yes.

MR R.J.H. DARKE, SC:   May it please the Court, I appear with my learned friend, MR G.K.J. RICH, for the fifth to seventh respondents.  (instructed by Middletons Lawyers)

GUMMOW J:   They are solicitors for which party?

MR DARKE:   It is alleged that they acted for each of the mortgagees at various times, although that is not part of the agreed facts before the Court.

GUMMOW J:   There is a submitting appearance from the liquidators who comprise the fourth respondent.  Yes, Mr McVay.

MR McVAY:   Some housekeeping first, if I may, your Honours.  In the appellant’s submissions and materials at tab ‑ ‑ ‑

GUMMOW J:   You have a proposed amended notice of appeal, do you?

MR McVAY:   Yes.  I understand there is no opposition, your Honours, and I seek leave to perhaps file these in the Registry later on today.

GUMMOW J:   Yes, you have that leave.  We have the draft here, so we will work off that.

MR McVAY:   Yes, thank you, your Honour.

GUMMOW J:   This is a proposed amended notice of appeal, presently undated.  Yes, go on.

MR McVAY:   Thank you, your Honour.  Just something about the parties before I go to any documents, your Honours.  The first respondent is the first mortgagee, the second respondent is the second mortgagee, the third respondent the third mortgagee, the fourth respondent was the liquidator of the borrower, the fifth ‑ ‑ ‑

GUMMOW J:   Your clients were directors or shareholders of the borrower?

MR McVAY:   Yes, but relevantly for this appeal they were guarantors of the loans made by the first, second and third respondents, being the first, second and third mortgagees.

GUMMOW J:   Yes.

KIEFEL J:   It was only the first appellant who was the director of the company?

MR McVAY:   Yes.

GUMMOW J:   Yes.

MR McVAY:   The fifth to seventh defendants are solicitors and as Acting Justice Handley recorded in his judgment in the court below, they were joined below as alleged accessories to a breach of trust by the first respondent pursuant to the second limb of Barnes v Addy, and similarly with the eighth respondent.

GUMMOW J:   That is why they have been joined in the litigation, but that question of Barnes v Addy is not litigated by the separate question, is it?

MR McVAY:   No.

GUMMOW J:   I see.

MR McVAY:   The reason why the separate question came about was if there was no trust, if there is no trust, then the fifth to the eighth respondents have no part in the litigation when it goes back to the Supreme Court, if it goes back to the Supreme Court because if there is no trust they cannot be accessories to a breach of it.  So that is why the special ‑ ‑ ‑

GUMMOW J:   If there was a charge?

MR McVAY:   If it is a charge, then they are probably still not accessories to a breach of trust, but that would be a result which the appellants would benefit from, because they could trace, probably, some of the proceeds.   But our primary position is a trust.

GUMMOW J:   Now, are there any infelicities or obscurities in the agreed facts that we should attend to?

MR McVAY:   Not on our part, your Honour, and I am not aware of any.  The separate question is at page 7 of the appeal books.

GUMMOW J:   There is one – you see at paragraph 8A.  It says:

The Plaintiffs by instruments of guarantee dated 14 March 2003 guaranteed to the Second Mortgagee repayment . . . 

8C. . . . guaranteed to the Third Mortgagee . . . 

8D.The guarantees of the Plaintiffs to the Third Mortgagee were secured –

It does not say that the guarantees to the second mortgagee were secured.

MR McVAY:   I beg your pardon, that is an omission, but at the Bar table, it is common ground that the guarantee to the second mortgagee was secured at one stage.

GUMMOW J:   That is the basis on which the Court of Appeal proceeded, I think?

MR McVAY:   We are all proceeding on that basis.

GUMMOW J:   All right.

KIEFEL J:   Am I correct in thinking that the guarantee was not connected to the mortgage, it spoke of a sum certain given as if the – I will come back to it.

MR McVAY:   I will take your Honour through the guarantees anyhow.

GUMMOW J:   Yes, I think in due course you better take us through the instruments.

KIEFEL J:   While you are there, paragraph 9B, the mortgages referred to, I take it are the mortgages in 8A and 8D?

MR McVAY:   Yes.

HAYNE J:   Also the mortgage that supported the guarantee given in respect of the second mortgage?

MR McVAY:   Yes.

BELL J:   Is there agreement about whether the payment described as being pursuant to the said guarantees in paragraph 9 was upon a call or not on the guarantee?

MR McVAY:   Not upon a call.  There is no suggestion ‑ ‑ ‑

BELL J:   And that is agreed?

MR McVAY:   Yes, that is correct.  The payment was made by the appellants as guarantors as sureties.  The reason why the separate question is as it is is, as I said, because of the presence of the solicitors and the claim under Barnes v Addy, but before the trust question arose – and neither of the four judges who have heard this matter before have decided the trust question because it has been held that the appellants did not get that far insofar as they failed to make out that they were entitled to be subrogated to the first respondent and therefore there was not need to decide whether there was a trust because we did not get ‑ ‑ ‑

GUMMOW J:   In respect of the excess proceeds?

MR McVAY:   The surplus, yes.  Justice Young dealt with it in this way.

GUMMOW J:   Page?

MR McVAY:   Page 249, line 10:

Whether a right of subrogation arose, and whether it “trumped” the rights of the unpaid second and third mortgages, is at the heart of the separate question because the “trust” referred to in the separate question depends on the Bofingers having a right of subrogation which gives them priority over pre‑existing secured creditors.

So, as we were not successful in relation to convincing their Honours that there was a right of subrogation, there was no need to answer the trust questions.

GUMMOW J:   There is also a point about this so‑called supplementary appeal book, is there not?

MR McVAY:   That is not my point, your Honour.  I certainly do not raise it.  I oppose it, but it is for my friends if they want to to raise it and when they do and if they do I will respond.

GUMMOW J:   But your point is that we are confined to the record of the Court of Appeal, namely, the record being the agreed statement.

MR McVAY:   Yes.  Amended notice of appeal.

GUMMOW J:   We do not let in fresh evidence when you get here.

MR McVAY:   That is how I understand it anyhow, your Honour.

GUMMOW J:   All right. That is what the cases say. Yes, go on. It is a proposition rooted in section 73 of the Constitution. It is not some sort of caprice.

MR McVAY:   It is hard to overcome.  I should take your Honours to the agreed facts because I can elaborate a little bit on them as we go.  The borrower company was a developer of land and the first four agreed facts are quite uncontroversial and quite straightforward.  Agreed fact 5, to buy the land the borrower borrowed 8,278,000 from the first mortgagee – in the court below the first mortgagee was the second defendant, but we fixed that up in this Court and the first respondent now – the sum of 1.4 million from the second mortgagee and the sum of $350,000 from the third mortgagee. 

Each of those amounts were secured by mortgages over the company – over the borrower’s land and they were further secured by instruments of guarantee in respect to the first respondent dated 31 January 2003 from the appellants, a mortgage from the appellants to support that guarantee of their home at Willarong Road and an investment property at Bulwarra Street.  The second respondent’s advance was also secured by an instrument of guarantee dated 14 March 2003 and it was also secured by a second mortgage over the appellant’s home and investment property and, similarly, the third respondent took a guarantee from the appellants and it was secured by a third mortgage over their home and the investment property.

What appears so far, your Honour, is that the advances were made on different days – different amounts and different lenders.  They were in no way interdependent, totally independent loans.  Obviously the borrower ran out of money from the first respondent, needed some more ‑ ‑ ‑

GUMMOW J:   The first mortgage is January, the second mortgage March, and the third mortgage was April.

MR McVAY:   Yes, 2005, two years later.

KIEFEL J:   The second mortgage was not expressed to be security for the guarantee, was it?

MR McVAY:   No, it was not.  That has been cleared up and everyone accepts now that the second mortgage, even though it did not expressly state it was security for the second guarantee, it is accepted that it is.

KIEFEL J:   Is that following the ruling in the Court of Appeal that it was collateral to the company’s obligations?

MR McVAY:   Following the judgment of Justice Young, actually, yes.

KIEFEL J:   I am sorry, what is it that is agreed between the parties – that the mortgage was intended to be security for the guarantee?

MR McVAY:   Yes.  Not so much agreed; Justice Young found that way and we do not take any point about it.  Agreed fact 9, your Honours, the appellants sold their home and their investment property and the proceeds totalled $1,519,234.40.  That was paid to the first mortgagee in reduction of the amount owing to the first mortgagee by the borrower.  That sum was made up as set out in paragraph 10.

GUMMOW J:   So some $8 million had been borrowed.

MR McVAY:   Yes.

GUMMOW J:   I see.

MR McVAY:   Of course, the borrower was making payments along the way as it sold its land, but come towards the end of 2005 the appellants also, pursuant to the guarantee, made some payments.  Agreed fact 11 – and your Honours can see that they are all July and October 2005:

The First Mortgagee knew of the sales in paragraph 9 hereof and the payments totalling $1,519,234.40 in reduction of the Company’s debt to the First Mortgagee.

GUMMOW J:   The supporting mortgages over Willarong Road and Bullwarra Street were all discharged?

MR McVAY:   Yes, I think that is so.  I have still to come to that fact, I think.

KIEFEL J:   What is the relevance of paragraph 11?

MR McVAY:   When a surplus arose, the first mortgagee was aware that there was a payment by a surety off its loan to the borrower.  I will be submitting in due course that it is a trustee of the surplus, that the first mortgagee knew that the appellants had rights of subrogation and that it should not have dealt with the surplus the way it did without reference to the appellants.  Agreed fact 12:

Pursuant to its mortgage, and between about November 2005 and February 2005 –

so after the surety’s payment –

the First Mortgagee exercised its power of sale over certain properties on the Land, including Lot 13 and Lot 5, and applied the proceeds of sale of those properties (save for Lot 5) in reduction of the amount then owing to the First Mortgagee by the Company.

12A.    On or about 2 February 2006, the sale of Lot 13 . . . was completed –

and with the completion of that sale, your Honours, the first mortgagee was paid out in full, and the secured mortgage by the first mortgagee was therefore discharged.

GUMMOW J:   This is over the company’s assets.

MR McVAY:   Over the company’s assets.

GUMMOW J:   Over the borrower’s assets.

MR McVAY:   Yes.  I missed out 9B and that is why I am puzzled:

The mortgages over the –

appellants’ personal home and investment property –

referred to in paragraphs 8 and 8C above –

and also the second mortgagee –

were discharged consequent upon the sales in paragraph 9 above.

So to allow the sales of the personal properties to take place the three mortgagees discharged their mortgage.

HAYNE J:   We know nothing in the agreed facts about what, if any, arrangement led to that result?

MR McVAY:   Precisely, nothing.

GUMMOW J:   So it may be that if there was to be any special treatment of the ordinary rules because of particular circumstances, giving rise to some equities which displaced the ordinary consequences, that would be where you would find it maybe, but we do not know about it.

MR McVAY:   Yes.

GUMMOW J:   We do not know if it exists.

MR McVAY:   We do not know, no.  What is clear is that, for reasons that I will come to, perhaps reasons that I will allude to, the three mortgagees saw fit, they are all commercial people, for their own benefit to discharge their mortgages.  The appellants’ complaint is that the second mortgagee treated itself as though it was still secured to the appellants’ moneys, but I will come to that.

GUMMOW J:   The discharge of the second and third mortgages over the personal properties, if I can call them that, of the appellants had what consequence for the continued subsistence of guarantees?

MR McVAY:   None, except that the promises that were made by the guarantors were unsecured, and it had the effect for the second and third respondents that whilst they still had the benefit of the guarantees they were not secured.  So if the appellants became bankrupt or insolvent in some way, they were ordinary unsecured creditors as opposed to being secured creditors, which they gave up.

HAYNE J:   So far as the agreed facts tell us there is nothing to suggest any agreement or arrangement disordering consequences that would otherwise follow.  It was made at or about the time of the discharge of mortgages two and three over the personal property.

MR McVAY:   Nothing at all.

HAYNE J:   There is nothing in the agreed facts that discloses whether these events had any consequence in respect of the guarantees, the debts, calls on them or anything?

MR McVAY:   No priority agreement that one might have thought might be better entered into saying that, notwithstanding we are going to allow you to sell your properties and we will discharge your mortgages to allow you to do it; we want to retain those priorities – nothing at all to that effect.  One would have thought that would have happened, but it did not, and there may be a clue as to why it did not happen later on.

So by 2 February 2006, your Honours, the first mortgagee was fully paid out from a combination of sales by the borrower and by the 1.5 million sales by the guarantors.  It started off as an issue in this proceeding that a part payment by the guarantors of the borrower’s debt was not sufficient to found the equity under either the section of the Act or under equity.  It seems to have faded a little bit, but it is still there.  But I just flag at this stage, your Honours, that the first mortgagee was paid out from two sources; one, the borrower and only as to part by the guarantors.

GUMMOW J:   I see.  This is the last sentence of 12A.

MR McVAY:   Yes.

GUMMOW J:   And there was a surplus?

MR McVAY:   There was a surplus.  I am coming to that.

GUMMOW J:   And that is 12B, is it?

MR McVAY:   Yes, “the First Mortgagee paid to the Second Mortgagee’s solicitors”.

GUMMOW J:   Now, are those second mortgagees’ solicitors the fifth, sixth and seventh respondents?

MR McVAY:   They are.

GUMMOW J:   Yes, right.  Anyhow, that is agreed.

MR McVAY:   I will come to that more fully in due course when I take you to the documents:

13.On or about 8 February 2006, the First Mortgagee provided to the Second Mortgagee the certificates of title for 2 townhouses on the Land –

still unsold.  This was a development of townhouses.  The borrower sold most of them.  The first mortgagee as mortgagee in possession sold enough to recoup its money and the titles of the two townhouses left were given to the second mortgagee.  The appellants say because of their right of subrogation, because of their payment off part of the first mortgage, those titles were held in trust for them:

14.The discharge of the First Mortgage over the said folio identifiers in paragraph 13 was registered on or about 8 February 2006.

15.As at 8 February 2006, loans made by the Second Mortgagee and Third Mortgagee to the Company were outstanding in sums of $1,935,671.23 and $464,267.12.

You can see just from that, your Honour, that this was a terrible deal for everybody to go into because after the first mortgagee had been paid out and the second mortgagee had received surplus moneys plus the securities, it was still owed 1.9 million and the third mortgagee $464,000.  This all, of course, coincided with the big fall in the real estate market in about 2005‑2006:

16.      On or about 21 February 2006, the First Mortgagee paid to the Second Mortgagee’s solicitors an amount of $432,712.53 representing the whole proceeds of sale of Lot 5.

So the second mortgagee got from the first ‑ ‑ ‑

GUMMOW J:   Why would the second mortgagee’s solicitors just hold the moneys as directed by their client?

MR McVAY:   There is some documentation about that, which I will – the second mortgagee’s solicitors?

GUMMOW J:   Yes.

MR McVAY:   Yes.  We allege that the first mortgagee held the surplus on trust for us and we say the second mortgagee received trust moneys.  So combining 12B and 16, the second mortgagee received 268,000 plus 432,000 in money, being surplus.

GUMMOW J:   That is paragraphs 12B and 16?

MR McVAY:   Paragraphs 12B and 16.  And the appellants say those amounts were surplus and held in trust for us, and not only did they receive those moneys, they received under agreed fact 13 the certificate of title and discharge of the first mortgage to the two remaining townhouses.  Now, they have long since been sold and so they do not exist any more, the townhouses.  They exist but not the title to them.

KIEFEL J:   Who holds the proceeds - the solicitors?

MR McVAY:   Who knows where they are.  They were sold by the second mortgagee and it is done with the proceeds whatever it has done with them.

GUMMOW J:   Your question talks about the securities.  Your question talks not only about the two sums of money in 12B and 16, the separate question talks about the securities over lots 1 and 14.

MR McVAY:   At the time the first mortgagee was paid out, the appellants say that all property including money and securities were held on trust for the appellants.

GUMMOW J:   Where do we see a separate treatment of lots 1 and 14 in the agreed facts?

MR McVAY:   At agreed fact 13.

GUMMOW J:   They are the two townhouses, are they not?

MR McVAY:   They are the two townhouses that were unsold.

GUMMOW J:   They are lots 1 and 14, are they?

MR McVAY:   Yes, they are.  So after the first mortgagee was paid out it still had two unsold lots and all this cash which it gave to the second.

KIEFEL J:   Do the appellants in the proceedings claim an account of those moneys from the second mortgagee to it?

MR McVAY:   No, they say they are subrogated to the first mortgagee and that as a result of that equitable right of subrogation the first mortgagee held those certificates of title and the cash and the money on trust for the appellants.

KIEFEL J:   What are we concerned with?  Is there a tracing exercise involved, or an account?

MR McVAY:   Not yet.  We have to get over the hurdles of, first of all, there was subrogation, and then over the hurdle of a trust or a charge before we can trace.

KIEFEL J:   So far as concerns the agreed statement of facts, the certificates of title were given and that is as far as you need to go.  Is that what you say?  Was it apparent in the courts below when the appellants asserted their right to subrogation?

MR McVAY:   No.  There was not.

KIEFEL J:   When were the proceedings commenced?

MR McVAY:   On 21 April 2006, so very shortly after.  The payments were made in February 2006 and the first proceedings were commenced in April 2006.

GUMMOW J:   What date in April?

MR McVAY:   On 21 April.

GUMMOW J:   Anyhow, it appears at 247 that the question was framed on 16 November 2006.

MR McVAY:   That is when it came on before the associate justice for the first time.

KIEFEL J:   How did the question come to be framed?  Did one of the parties suggest that this was an efficient course?

MR McVAY:   It was considered an efficient course because of the presence of the fifth, sixth, seventh and eight respondents who are alleged to be accessories to a breach of trust.  If there is no trust, and there is only, say a charge, then those ‑ ‑ ‑

KIEFEL J:   You alluded to that earlier, yes.

GUMMOW J:   They disappear from the action.

MR McVAY:   Yes.

GUMMOW J:   So it was seen as a quick way of letting them know whether they were on or off the hook.

MR McVAY:   Exactly.

GUMMOW J:   It has not worked out that way.

MR McVAY:   No, it has not, and preventing us from having to prove whole lots of things against them if it is not right.

BELL J:   Mr McVay, it is paragraph 11 of the agreed facts - in answer to the question that was asked of you a few moments ago about when an entitlement to subrogation was raised, your case is that Kingsway was on notice by reason of what is set out in paragraph 11.  You depend on that?

MR McVAY:   Yes.  While we are on that topic, your Honour, I will just take you to appeal book page 238.  Now, this is a letter from the solicitors, Willis & Bowring, on their letterhead to what is clearly a mortgage – they obviously ran a mortgage practice – to Willis & Bowring Mortgage Investments Limited, dated 7 February 2006.  The solicitors have said:

We advise that we act for the Second Mortgagee Rekley Pty Limited.  This letter is to formally request possession of the 2 remaining unsold lots being lots 1 and 14 . . . 

Please pay the balance proceeds of sale in relation to lot 13 and the total proceeds of sale in relation to lot 5 to Willis & Bowring Trust Account.

GUMMOW J:   Willis & Bowring was the former name of the first mortgagee.

MR McVAY:   First mortgagee.  So the solicitor for the second mortgagee has said, please pay the surplus to us.  At 240 the first mortgagee complied on 8 February by a letter to the solicitors:

We acknowledge receipt of your letter dated 7^th February.

We consent to your client Rekley Pty Limited taking possession –

So the second mortgagee is now in possession –

We now enclose the following:-

1.        Keys

2.        Deeds and Discharges of Mortgage in relation to lots 1 and 14

We confirm that the balance proceeds of sale of lot 13 (after discharge of mortgage) and the proceeds of sale of lot 5 are to be paid to your trust account for the purpose of being disbursed to your client.

So that is how the second mortgagee came to get the surplus.  Back to the agreed facts now, your Honour, page 11.

GUMMOW J:   Now, if you were ultimately successful there could be a large amount of interest attached, could there not?

MR McVAY:   A huge part, yes.

GUMMOW J:   Which could depend upon the state of investment of these moneys.  The actual state of investment, or what should have been the state of investment?

MR McVAY:   What should have been, yes.

GUMMOW J:   As Justice Hayne said, on a wilful default basis.

MR McVAY:   Yes, your Honour.  The trustee rate ‑ ‑ ‑

GUMMOW J:   This comes back to the question Justice Kiefel was asking about what the account would be.  You have not got that far.

MR McVAY:   We have not got that far.

GUMMOW J:   All right.

MR McVAY:   We are still arguing whether we have subrogation.

GUMMOW J:   Yes.

HAYNE J:   Can I just understand what the status of these agreed facts is?  Are they agreed for all purposes in the litigation?  Are they agreed for some purposes in the litigation?  What is their status?

MR McVAY:   Well, for all purposes relating to the separate question, that is, whether there was a trust.  We have not got any further than that yet.  If we are successful on that we will go back to the Supreme Court and no doubt no one will disagree with them.

GUMMOW J:   Does the decision upon the separate question in respect of any of these facts give rise to some form of res judicata which then cannot be controverted in the further hearing of the action?

MR McVAY:   That is probably so, your Honour.  We are all aware that by agreeing these facts that in whatever proceedings we find ourselves those are the facts.

HAYNE J:   The only facts relevant to the issue thus determined.

MR McVAY:   Or to be determined; that is the separate question, yes.

HAYNE J:   Can I be quite blunt about it?  What alarms me is if someone later in this litigation wants to amplify what appears in paragraph 9 of these agreed facts, that is, the circumstances that led to the discharge of the subsequent encumbrances over the private property.

MR McVAY:   All I can say to that, your Honour, we all had input into these agreed facts.  One would have thought that if there was something that should have gone in to favour one or other of us, it would have gone in.

GUMMOW J:   It is a Coulton v Holcombe question really; you have made your bed, you may all have to lie in it.

MR McVAY:   Exactly.  That is the agreed facts, your Honours.  I should take your Honours now to familiarise your Honours with some of the important documents.

GUMMOW J:   Yes.  Now, there is a point about construction, is there not ‑ ‑ ‑

MR McVAY:   There is.

GUMMOW J:   - - - which is alive here, but which was not passed upon by the Court of Appeal?  Was it passed upon by the primary judge?

MR McVAY:   No.

GUMMOW J:   But it has been a live question at all stages, has it not?

MR McVAY:   Right from the start.  The construction issue is, as with all rights, they can be given away, bargained away.  My opponents say that if we did have a right of subrogation, we have bargained it away, on a true construction of a couple of the clauses and we say that is not right.

BELL J:   I thought the primary judge at paragraph 43 on appeal book 258 did decide that question adversely to you.

MR McVAY:   I think it is fair to say he mentioned it but he did not really decide it.  I think he just said, “Even if I am wrong ‑ ‑ ‑

BELL J:   He said he considered the clauses that he had set out above, which were clauses 6.4 and 7, clearly showed the sureties were not able to claim their rights of subrogation.

MR McVAY:   To that extent, he gave no reasons for that.  To that extent, yes, I accept what your Honour says.

BELL J:   Yes, all right.

MR McVAY:   But apart from those few words, nothing has ever been said about this.  We do not know how he arrived at that conclusion or on what basis.

GUMMOW J:   Was this a reserved judgment?

MR McVAY:   It was, yes, but not for very long.

HEYDON J:   A month.

GUMMOW J:   You were going to take us to the instruments.

MR McVAY:   I am.  Your Honours, the first guarantee is at page 15 of the appeal books.  The first guarantee is the one given by the appellants to the first mortgagee.  This, of course, no longer has any effect because the first mortgagee has been discharged.

GUMMOW J:   This is over their house and other properties?

MR McVAY:   Yes, their house and investment property, yes.  The promises in it were secured over their house and investment property up until when they were discharged.

GUMMOW J:   Yes.

MR McVAY:   The three guarantees are essentially, although not precisely, in the same terms.  So what I say about the first guarantee will apply to the other two guarantees.  If your Honours would go to page 16, there is a definition of “Guaranteed Money”:

means the money, interest, costs and damages the subject of the guarantee and indemnity contained in clauses 3 and 5. 

I will just pause there.  Your Honours will see the reference to “guarantee and indemnity”.  My opponents say, or one of them does, the solicitors say that what the appellants did under this guarantee was to indemnify them.  They say, well, how can it be unconscionable for the second respondent, the second mortgagee, to keep the surplus when the appellants indemnified the second mortgagees?  But it is not a contract of indemnity at all.  It is a contract of guarantee and I will demonstrate that.

GUMMOW J:   There is an indemnity clause in there, is there?

MR McVAY:   There is.

GUMMOW J:   It is a fallback.

MR McVAY:   It is a fallback clause, and it only applies if the guarantee is otherwise ineffective.

GUMMOW J:   Clause 11, is it?

MR McVAY:   That is 5.1:

If the Borrower is not bound by some of all of the Borrower’s obligations under the Agreement, if for any other reason the guarantee is not effective, the Guarantors agree, by way of indemnity -

That is the only indemnity, the rest is the usual guarantee that ‑ ‑ ‑

GUMMOW J:   Clause 5 is a pretty usual clause.

MR McVAY:   It is, but it has no work to do here at all, because no one suggests that the guarantee is not effective.  So the actual guarantee then, is included in paragraph ‑ ‑ ‑

GUMMOW J:   Clause 5 deals with a situation where, for example, by a dealing, there is effected a release of the guarantee.

MR McVAY:   That is right, or for some reason ‑ ‑ ‑

GUMMOW J:   Which is a trip-up situation, as it were?

MR McVAY:   Yes, so an indemnity arises in those situations, but otherwise, the guarantee is in clauses 3.1 and 3.2 and it is of the nature that if the borrower defaults in its obligations, then the appellants will be liable:

(1)the performance of all the obligations of the Borrower under the Agreement; and

(2)the payment of all damages suffered by the Lender (including interest costs and expenses) arising from any breach or termination of the Agreement.

3.2If the Borrower does not, on the date provided in the Agreement, pay any amount payable to the Lender, the Guarantors must immediately pay that amount to the Lender.

So your Honours can see that if the borrower defaults, then the guarantors are liable, and that is not an indemnity, as my friend submits.  It is purely a guarantee.  I can say at this stage, your Honours, that – and you have seen in the agreed facts - there is no suggestion that there is any judgment by the second and third respondents against the guarantors.  They have no judgment under this guarantee.  There is no suggestion of any demand being made on them, and there is no suggestion of even any request for payment and there is no suggestion even that there is a cross‑claim by the second and third mortgagees against the guarantors.  So there is no judgment, no demand, no request for payment, and not even a cross‑claim.  So it would be the guarantee and indemnity provisions.

Now, the thorny part of the construction issues revolves around 6.4 and 7.1 on page 19.  I will come back to those, but it is sufficient to say, your Honours, that the respondents say that by 6.4, the appellants waived their rights at large against the first mortgagee.  Notwithstanding the clauses in the second guarantee, they say that clause extends to waiving the appellants’ rights against the first mortgagee, who has been discharged, and they say that 7.1, subparagraphs (1) and (2), by those clauses, the guarantors agreed not to enforce any right of subrogation they might have until the second and third mortgagees were fully paid.  That is the issue for construction, ie, 6.4 ‑ ‑ ‑

GUMMOW J:   What would be an example of how 6.4 would do some work?

MR McVAY:   As between the appellants as guarantors and the second mortgagee it had work to do because – it is a good question, your Honour, I will have to think about that.  It certainly has nothing to do between the guarantor and the first mortgagee, but I will think about your Honour’s question.  By 6.4 the respondents say, “You have waived any rights you had to subrogation” to the first mortgagee and by 7.1 they say, “You promised – even if you have a right of subrogation – you would not exercise it until the second and third mortgagees had been paid in full”, and we contest that.  I think they are the only matters in the guarantees that will be before your Honours.  The next document that is important, your Honours ‑ ‑ ‑

GUMMOW J:   How do you say 7.1 works?  What it is doing?  These provisions and guarantees have histories and reasons.

MR McVAY:   What the appellants say about 7.1 is that it is restricted to the appellant and the second mortgagee only.  It has nothing to say at all about the relationship between the guarantors and the first mortgagee, because the only right of subrogation we have, of course, is against the first mortgagee.  He is only one who has been paid out.

GUMMOW J:   So you are looking at the opening words then.  Looking at the opening words and the guarantee of the first mortgage, right, you say the guaranteed money has been paid in full?

MR McVAY:   Yes.  We have seen that.  There is a surplus.

GUMMOW J:   Yes.  So therefore 7.1 has no restriction imposed.  Then what do you say as to its materiality as it appears in the second mortgage guarantee?

MR McVAY:   We say that we have partly paid out the first mortgagee, therefore we have the right to claim the benefit or seek the transfer, in whole or in part, of any security taken by the lender.  The lender was the first mortgagee.  It has been paid out.  We partly paid him out.  Under 7.1 there is no restriction now on us saying, “Please give us the surplus”.

GUMMOW J:   How does that fit with 58 (3) of the Real Property Act ‑ ‑ ‑

MR McVAY:   That will be a live issue too, but ‑ ‑ ‑

GUMMOW J:   ‑ ‑ ‑ which on the face of it seems to be statutory command.

MR McVAY:   Yes, but 58 (3) only deals with surplus moneys.  It does not deal with securities, it deals with surplus moneys, and our submission will be that there is no surplus until the first mortgagee, or any assignee of the first mortgagee, has been paid out, whether it is an assignment pursuant to the section 3 of the Law Reform (Miscellaneous Provisions) Act, an actual assignment, or whether it is an “as if” putative notional assignment under subrogation.  The second mortgagee and the third mortgagee have no rights to surplus until the first mortgagee or any of its assigns, or anybody who stands in its shoes, have been paid out.

GUMMOW J:   That may be the understanding of how 58(3) works.  Are there cases that actually say that?

MR McVAY:   There is one case that we have got where Justice Young has found that you do not need to be a registered mortgagee to get a payment under section 58(3).  You do not have to be registered to get a payment under 58(3).  So we say if we had an assignment under the Act, we would be registered because there would be a legal assignment to us and we would have gone to the Land Titles Office and registered.  We would be a 58(3) encumbrancer, but if we were just relying on our equitable rights, we are as if we had an assignment.

GUMMOW J:   At the bottom it is a question of the interaction between the terms of 58(3) in the Torrens systems and the impact on that of equities, is it not, in particular, subrogation?

MR McVAY:   Precisely.

GUMMOW J:   All right.  I took you off your course.  You were taking us through 7.1.

MR McVAY:   Your Honour is right, our position is that we have got priority.

BELL J:    Going back to clause 7.1, if you go to appeal book 161, that is the equivalent provision but in relation to the guarantee in favour of Rekley.  Looking at subclause (2), as I understand the respondents’ position, or at least some of them, it is that your claim involves a claim against the property of the first mortgagee and the first mortgagee is an obligated person, is that right?

MR McVAY:   That is what they say.

BELL J:    Yes.  If you go to the definition of “Obligated Person”:

means any of the Borrower, any Guarantor and any other person who is liable to the Lender for payment of the Guaranteed Money –

Yes, I see.  You say it does not pick up Kingsway?

MR McVAY:   No.

GUMMOW J:   Because “guaranteed money” refers you back to the definition.

MR McVAY:   Exactly and the only lender is Rekley.

GUMMOW J:   That refers you back to 3 and 5 and they refer you back to the second mortgagee.

MR McVAY:   The second mortgagee.  So that is why I submitted that the second guarantee only regulates the relationship between the guarantors and the second mortgagee.  Yes.  Just while I am on that, 7.1(2) – I will come back to it in more detail later – but it refers to making a claim or enforcing a right.  Well, the submission is that subrogation is not a right or a claim, it is a remedy and whether it be a remedy to prevent unjust enrichment or whether it be a remedy to prevent unconscionable use by a holder of securities to the prejudice of the guarantor, it is not a right.  It is just a remedy to do one of those two things.

KIEFEL J:   Do you say that clause 7.1(1) is also written with the rights given by section 3 of the Law Reform (Miscellaneous Provisions) Act in mind?  Is that what they in part refer to?

MR McVAY:   Yes, your Honour.  If the appellants sought a transfer or an assignment under section 3 before the first mortgagee had been paid out, the first mortgagee could say, no you cannot have it because I have not been paid in full.  But once he has been paid in full, we have either got the equitable remedy or the statutory assignment.

BELL J:   Coming back to the statutory assignment, there is a live issue, is there not, about whether you come within the terms of section 3?

MR McVAY:   Yes, and the issue, your Honour, is that because the appellants only paid part of the debt, the respondents say that on a proper construction of section 3 – and they have some dicta ‑ ‑ ‑

BELL J:   There is some weight behind them.

MR McVAY:   Yes – they say “You’ve only paid part”; the section says “the debt”, but we have authority of the Supreme Court of Tasmania to say that “the debt” means part of the debt, and his Honour has some friends in England ‑ ‑ ‑

GUMMOW J:   Justice Zeeman, is it not?

MR McVAY:   Yes, and his Honour has some friends in England who – some text writers in England who agree with that, and O’Donovan and Phillips, the leading text writers in Australia, also say that is correct.

GUMMOW J:   What is correct?

MR McVAY:   That section 3 applies when only part of the debt is paid.  Although the credit has to be paid out in full, of course, but the guarantor has rights, even if it has only paid out part.  So it seems that in England and here, at least the text writers accept it.

GUMMOW J:   So if there were multiple guarantors under separate instruments, each of which have been called as to part, they would each have a right, would they, under the statute?

MR McVAY:   Yes, it could be a whole string of them, and I will come to it when I come to address on unconscionability.  Where the Act applies, unconscionability has nothing to do with it.  If you come within the terms of the Act, then you have a right to the assignment.  Now, that is not to say that a respondent could not say if you waived your rights, or you were estopped, or that you misrepresented the nature of the guarantee, or you induce me in some way, that is not to say there is not a defence, but on the face of it, without more, once you come within the terms of the section you are entitled to the assignment and it does not matter how many guarantees there are after you, or how many mortgages there are after you.

That is because any subsequent mortgagee who makes an advance after a first mortgagee has to be taken to know the law, has to be taken to know that section 3 exists, and if a subsequent mortgagee makes an advance, knowing there is a mortgagee in front of him, if he does not properly draw his documents to waive or release section 3, then it is there, and it is my submission in this case that the second and third respondents made their advances, knowing full well of the first mortgagee, knowing full well of the first guarantee, knowing full well of clause 7.1, but did not seek to contract out of the right of subrogation, either statutory or equitable, and it is too late now.  There is no equity to perfect a bad bargain, and that is what they are trying to do, perfect a bad bargain.

KIEFEL J:   Your submission is seeing the equitable rights to subrogation as alternatives to section 3, or section 3 as a recognition of the equitable doctrine.

MR McVAY:   It is a recognition of an equitable doctrine, but it does not overtake it entirely.  Both still exist.  That has to be the case because – I will just think about that further ‑ ‑ ‑

GUMMOW J:   The section was introduced because there was some problem in Scotland, was there not?

MR McVAY:   That is all it was introduced for.

GUMMOW J:   They do not have equity in the full sense.

MR McVAY:   As I understand it, in England if the guarantor paid out the first mortgagee then that discharged any security that the first mortgagee had and so the guarantor could not take it.  The Act preserves the security that would otherwise be discharged and says you assign it.

BELL J:   So your contention is that, bearing the history in mind, the provision of section 3 is to be understood as conformable with the equitable right and, accordingly, available to the surety who pays part of the debt, whereas a reading of the language of the provision without the knowledge of that history would not necessarily support that view?

MR McVAY:   Not necessarily.

BELL J:   Your proposition is that one is to read the section in light of that history and the section gives a statutory right that is of the breadth of the equitable right, is that so?

MR McVAY:   Yes, that is so.

BELL J:   Is there any other basis for contending that one would read the section in that way, that is, as a forwarding protection to the surety who pays part – it might be a small part – of the debt?

MR McVAY:   Yes.  The way the Tasmanian judge, Justice Zeeman I think it is, read it – he said there is no reason to say that debt in section 3 has to be the whole of the debt, as long as it is a payment off the debt.

BELL J:   It is “who being liable” – I am sorry, I am reading part of it – but it is the significance of the words “pays that debt” surely?

MR McVAY:   Yes.  The debt from time to time – for example, I might borrow $1 million and Mr Sibtain might guarantee it, I might pay off $800,000 and there is only 200,000 left, but that is only 200,000, not $1 million.

BELL J:   I understand that.

MR McVAY:   So if the guarantor pays off the 200,000 he is paying off my debt.  That is all that is left.

BELL J:   Yes.

MR McVAY:   Not the million.

BELL J:    But the agreed facts do not tell us anything about the payment in this instance, other than the amount that was paid by the appellants, the amount of the original borrowing, and it is clear from the agreed facts that the amount that the appellants paid was not sufficient to pay off the debt.

MR McVAY:   No, but the debt was ultimately paid off; that is the important part, it was ultimately paid off.

BELL J:   Yes, but it just seems to me that does not entirely accord with the example you last gave, that is all.

GUMMOW J:   It is paragraph 12A, is it not?

MR McVAY:   Yes.  It does insofar as ‑ ‑ ‑

GUMMOW J:   It says “The full amount” was paid.  “Only part . . . was required to pay”  It does not say who paid the balance.

MR McVAY:   Yes, well, the borrower paid the balance.  The borrower paid the balance.  What he did not pay the appellants paid.

GUMMOW J:   Probably a reasonable inference.

MR McVAY:   Your Honour Justice Bell is quite right.  I will be taking you to the state of the law as it stood when section 3 was put into it.  It was not too long ago – 1990 or so – and by then part payment was well and truly established in New South Wales.

GUMMOW J:   Why do you need the statute on your case?

MR McVAY:   Why do you need the statute, your Honour?

GUMMOW J:   Yes.

MR McVAY:   Because under the statute –

GUMMOW J:   What does the statute give you that equity would not give you?

MR McVAY:   It gives you a legal assignment which a guarantor can take to the Land Titles Office and become a registered mortgagee, a registered proprietor of a mortgage.  He can then enter in possession, issue a 57(2)(b) notice and sell as a mortgagee in possession.  That is what it does.  Equity does not do that, of course, not without more.

BELL J:   But none of that had happened here.

GUMMOW J:   That is right.

MR McVAY:   No, because the titles and the money went straight to the second mortgagee.  It bypassed us entirely.

BELL J:   Consistently with 58(3) of the Real Property Act, your point is again coming back to paragraph 11 of your agreed facts, is it not?

MR McVAY:   Yes.

BELL J:   That is the inference that was to be drawn by Kingsway in dealing with the surplus funds in circumstances where there was a second mortgagee registered on the title.  It paid money to the second mortgagee.  You say, though, its knowledge that ‑ ‑ ‑

MR McVAY:   There was an equity there, a prior equity, to the second mortgagee.

BELL J:   Yes.  That does not depend on the statutory assignment.

MR McVAY:   No, it does not depend on the statutory assignment at all.  It is independent of it.

KIEFEL J:   Is it the case – I have not looked at the figures – that if the appellants had not paid under the guarantee the $1.5 million or so, that the first mortgagee would have received a complete payment from the borrower – not quite?

MR McVAY:   It is pretty lineball.  I do not think anybody suggests that the first mortgagee would not have been paid out entirely.  The second mortgagee would have got nothing, or next to nothing.

KIEFEL J:   We do not know what the figures are in the townhouses, but we say there is no dispute.

MR McVAY:   No.  It is about even; it is about 1.5.

KIEFEL J:   What happens in the case then where the borrower tenders the full amount due but a mortgagee has received tender from a guarantor of part of that amount?  What is the mortgagee supposed to do – return the guarantor’s money because their obligation never arose and they have somehow stepped the mark, they have acted prematurely?  But this has not formed any part of your case or argument to date.

MR McVAY:   It is not part of the facts of it.  That never happened.  But if it did happen the first mortgagee has to say to itself, “This is not my money.  I’ve been paid out.  I have to give it to somebody.  Who does it belong to?  I either give it to the guarantor ‑ ‑ ‑

KIEFEL J:   But this case has never been characterised in this way.  It is whether or not the appellant’s money should have been returned to them when it was obvious that the borrower was going to pay the full amount of the first mortgage.

MR McVAY:   No.  The appellants’ payment was made long before the first mortgagee took possession.

KIEFEL J:   And was paid without an obligation having arisen under the guarantee?

MR McVAY:   It was paid as a surety.

KIEFEL J:   But no obligation had arisen under the guarantee to pay?

MR McVAY:   It had, because the pay date, the date by which the borrower had to pay had long passed and the guarantor had said if the first mortgagee does not pay by that date, he has to.

KIEFEL J:   I am sorry, could you take me to that provision that causes the date by which you say the obligation had arisen?

MR McVAY:   Yes, I will take your Honour to that.  If your Honour goes to page 49 of the appeal books.  Now, that is the particulars to the loan agreement between the company and the first mortgagee.  At this stage it was only 7 million, but it went up.  If you go to item 6 on the page, “Expiry Date 1 February 2004”, however, that was extended.  If your Honours go to appeal book 144, it is a letter from the first mortgagee to the company, and item 4, “Loan Expiry:  1 October, 2005 (an extension of 6 months).”  So, prior to that, at 134, it had been extended to 1 March 2005 and the appellants made their payments in July 2005.  So the time for payment had passed, so they were obligated.

GUMMOW J:   So at that stage there was a default, but there had not been a call.

MR McVAY:   They had not called, no, but there was a default.  I think I was taking your Honours through the relevant documents.

GUMMOW J:   So, in the situation where there has been a default but there has not been a call, I think the cases suggest that the guarantor can pay, go in and pay, to preserve the value of the subrogated rights in a falling market.

MR McVAY:   Not only that, a guarantor can make a payment at any time, absent of demand, to protect his own position.  If he sees a falling market, he can step in and pay off a mortgagee, even if there is no default.

GUMMOW J:   Subject to this, I suppose, if that brings about an early payment of the mortgage, that requires – it is 93, is it, of the Conveyancing Act (NSW)? Do we need to know about that?

MR McVAY:   No.

GUMMOW J:   In other words, early payment is out. 

MR McVAY:   Yes.

GUMMOW J:   Maybe in defiance of covenant, but the Conveyancing Act says you have the right to pay out early, does it not?

MR McVAY:   You can, and guarantors do it all the time.  They do not have to pay out the whole of the debt, they can pay out ‑ ‑ ‑

GUMMOW J:   Is it 93?  I have forgotten the number.

MR McVAY:   I have forgotten it too.  But they can pay out half of it or something.

HAYNE J:   But the oddity in this case is that guarantors pay out by resort to the security that they have given in support of the guarantee, is that right?

MR McVAY:   No, your Honour.  The guarantors paid out in the – following the guarantors’ payment, they seek the securities which the first mortgagee ‑ ‑ ‑

HAYNE J:   I understand that, but the guarantors paid out by realising the properties that they had given as security for their guarantees.

MR McVAY:   The second and third guarantees, yes, and the first as well.

HAYNE J:   On its face it would have required an engagement of clause 7.1 of the guarantee, but we are told nothing of these matters.

MR McVAY:   Nothing at all.  It might be some clue – I will come to it later – you will see the same solicitors acting for the first, the second, at least in part, and the third.  The same solicitors acted definitely for the first and third and to an extent for the second.  That is probably how it came about.  No independent mind came along and advised any of the second or third respondents to say, “Well, you’d better make sure that there’s a deed of priority or something like this”.  Because the same solicitors were there, it never occurred.

HEYDON J:   The principals of those solicitors were significant officers in the first mortgagee.

MR McVAY:   It appears that way.  It is the same name – Willis & Bowring Solicitors, Willis & Bowring Finance.  I will take you to some documents where the solicitors actually signed ‑ ‑ ‑

HEYDON J:   Messrs Tosolini, Mattiussi and Polito.

MR McVAY:   Yes.  I will take you to some documents where they actually signed on behalf of the first mortgagee.  That is just to show how it all came about.  It does not help us, I do not think, in our subrogation case.  While I am on that, I will take your Honours to that.  If your Honours go to page 56 of the appeal book, that is the loan agreement between the first mortgagee and the borrower.  Your Honours can see the directors are Messrs Polito and Tosolini, who are partners of the firm of Willis & Bowring.

GUMMOW J:   What page is it?

MR McVAY:   I am sorry, it is 54; I beg your pardon.  Your Honours can take it from me that that is the loan agreement between the first mortgagee and the borrower.  The two directors are solicitors of the firm.  If your Honours go to the next page, 56, this is the mortgage between the guarantors and the first mortgagee and down at the bottom you will see that Mr Polito signs as solicitor for the mortgagee and is a director of the mortgagee. 

GUMMOW J:   Is there provision in the New South Wales rules that permits the drawing of inferences from agreed facts?  There used to be.  You are inviting us to draw an inference from these documents.

MR McVAY:   That the solicitors acted for all of the parties.

GUMMOW J:   Yes.  Someone needs to look up the relevant rules for the New South Wales court to see that this is legitimate.  My recollection is that it is, but we need to be sure.

MR McVAY:   I will look at that.

MR McVAY:   I will look at that, but be that as it may, it is not an inference, it is expressed.  He signs as solicitor for the mortgagee.

GUMMOW J:   At that time, on that day.

MR McVAY:   Yes, that is right, but I will take you to some more documents of the same vein.  If your Honours go to 130 of the appeal book ‑ ‑ ‑

GUMMOW J:   Over lunch someone had better look up and tell us what the relevant Rule of Court was that provided for this separate question.

MR McVAY:   Yes, provided for the separate question.  I am just thinking about what your Honour said.

GUMMOW J:   Your junior has a note.

MR McVAY:   I hope so, I am sure she has.  Page 130 is a variation of the mortgage between the first mortgagee and the company.  Your Honour will see the principle increased to $8.28 million, and it is signed by Mr Tosolini as solicitor for the mortgagee who also signed, you will recall, the loan agreement.  I will only go through this just to perhaps indicate how all this came about, how the parties got themselves into this position.

BELL J:   Against the way this litigation has been conducted, and the spare agreed facts, what is the utility in taking us to what you suggest is the explanation for how the parties got themselves into this position?

MR McVAY:   As I said, it was only sort of an explanation as to how it - because Justice Hayne said to me, how did this come about, and without any intervention, mortgages being paid out, second and third respondents discharging mortgages to allow it to happen, did anybody do anything, and I am really only demonstrating, probably, how it happened.

HAYNE J:   I think what I said to you was there is no agreed fact about those matters and we are to proceed in ignorance of them as a result.

MR McVAY:   Yes, either in ignorance or they do not exist.  I think I got to the point where I was going through the documents.  The first mortgage starts at page 61, and the only relevant clause in the mortgage is at page 99, clause 11.6 “No competition”.  It more or less repeats the guarantee clause:–

Until the Secured Moneys have been irrevocably paid and discharged in full the Mortgagor is not entitled on any grounds whatsoever:

(1)      to be subrogated to the Mortgagee –

But it does not apply to us because we are not the mortgagor, we are the guarantors.

The second guarantee is found at page 157.  Your Honours will note that it is between the second respondent and the appellants.  We have been to the one between the first respondent and the appellants.  This is the one between the second respondent and the appellants.  All the clauses I took you to before in the first guarantee are precisely the same in the second guarantee.  I do not hear an objection, so it is probably right.  That was secured by mortgage and the mortgage is at 176.  That is one of the mortgages that was discharged to allow the guarantors to sell their properties.

The third guarantee is at 197.  It is between the third mortgagee, the third respondent here, who is submitter now, Mr Skehan, and the guarantors, the appellants here, and it, for all intents and purposes, contains the same clauses as the first mortgagee – as the first guarantee and the second guarantee.  It was supported by the mortgage which is at 233.

GUMMOW J:   Now, these instruments, the mortgage instruments, incorporate the standard memorandum Q860000?

MR McVAY:   They do.

GUMMOW J:   I suppose we can look at that.

MR McVAY:   Yes, it is in the appeal books.

GUMMOW J:   Is it?

MR McVAY:   Yes.  It is reproduced in full at 66.

GUMMOW J:   The memorandum seems to be at page 192.

MR McVAY:   Yes.  The first mortgage has the covenants at page 66 and the third mortgage has the covenants at 192.

GUMMOW J:   Yes, thank you.

MR McVAY:   This is all I propose to do in relation to the walkthrough of the relevant documents.  I will have to come back to them, of course, when I deal with the construction arguments and other arguments, but I can go now, I think, to the cases that I say support the appellants’ contention that ‑ ‑ ‑

GUMMOW J:   Before you get into the cases, assume that at the end of the day in this Court the view was taken that there was no holding on trust but that there was a charge, how could that be expressed in an answer?  The only question that is asked is in trust.  If one answered that no, can one say, no, but it is a charge?  You had better think about that.

MR McVAY:   Yes.  It will be fully argued, so it certainly is something that your Honours could say.  The first lot of cases I will take your Honours to is to demonstrate how the equity arises when a surety pays the debt and how it is extended to a surety who pays part only of the debt.  Some of the cases are quite old.  The first case is that of Duncan Fox & Co v North & South Wales Bank.

GUMMOW J:   That is a case about bills of exchange, is it not?

MR McVAY:   It is, but the Privy Council held that there was sufficient ‑ ‑ ‑

GUMMOW J:   House of Lords, I think.

MR McVAY:   House of Lords, Lord Selborne.  That is common.  I will come to it.  For the facts of the case it is much easier to go to Lord Blackburn’s ‑ ‑ ‑

GUMMOW J:   We have to know which party to the bill of exchange is being assimilated to the position of a surety.

MR McVAY:   I will certainly take your Honours to that.  Lord Blackburn’s statement of the facts are much easier to understand.  The appellants in this case were the endorsers of bills of exchange.  The drawer and acceptor was Samuel Radford and Sons and Samuel Radford and Sons had pledged his estate or his property to the North and South Wales Bank as security for advances made by the Bank to Samuel Radford and Sons from time to time.

The appellants endorsed the bills which were drawn and accepted by Radford and when Radford could not pay, the North and South Wales Bank came after the endorsers as primary liable and the endorsers said, well, we will pay the bills or so much of them as outstanding, but only if you transfer the acceptor’s equitable mortgage to us.  So they want to subrogated to the bank for the payment.

GUMMOW J:   The acceptor?

MR McVAY:   No, subrogated to the bank for the acceptor’s securities.  Of course, the unsecured creditors of Radford did not like that.  They wanted the appellants to pay the bill off and not get subrogated.  So the case was about that.  Could the appellants be subrogated to the securities which the bank held and it was answered, yes, and the reasoning is this.  Can I take your Honours first to Lord Selborne at page 12 where at about point 7 on the page he refers to Aldrich v Cooper:

That seems to be the proposition in the authorities to which the Court directed the parties earlier on.  That seems to be the interpretation that arises from the Delaware Court of Appeal decision in Baio; equally, in terms of equitable defences, the availability of equitable defences to the statutory position in Schaefer v Sterling, to which the Court has directed our attention.

Unless there are any other matters it seems that the doctrinal basis in Australia certainly has been maintained on the bases of unconscionability.  I do not know whether or not the Court wishes to hear from me on that notion?  It does not seem to be the subject of any ground of appeal, except to say that regardless of the doctrinal basis for the reasons that I ‑ ‑ ‑

GUMMOW J:   I think…..wrote a case note after Parc (Battersea).  It said the result would not have been any different.

MR SIBTAIN:   Yes, well the result would not have been any different in this case, in my submission, either for the reason that the fund that was released ‑ ‑ ‑

GUMMOW J:   Well, why get on this bus just because Lord Hoffmann and Lord Millett are driving it.  I do not understand.

MR SIBTAIN:   Unless there is anything further, those are my submissions.

GUMMOW J:   Just remind us, which lot has fallen to you?

MR HARRIS:   Your Honour, I propose to deal very briefly with the terms of the guarantee itself and the effect that it has, in our submission, on the idea of unconscionability in this appeal.

GUMMOW J:   Is there much left unsaid on that point?

MR HARRIS:   Your Honours have not been directed to clause 6.4.  Now, 6.4 on page 161 is an express waiver of the guarantor’s rights as surety and the only issue is really whether or not that waiver should be read as being limited to the rights as surety which may arise under the deed or whether it is a waiver of the rights as surety which also might arise under the Kingsway mortgages.  In our written submissions we have referred to the recent authorities identifying the way in which contracts ought be construed and, in particular, the decision of this Court in CIC Insurance Ltd v Bankstown Football Club 187 CLR 384.

GUMMOW J:   But this is a contract of guarantee.  I thought we had an appeal from Tasmania a few years ago – Andar, I think it is.

HAYNE J:   TNT or something.

MR HARRIS:   Yes.

GUMMOW J:   Is that on the list?

MR HARRIS:   I am sorry, your Honour, the cases that are relevant are the ones that I have set out in paragraph 31 of the submissions, which are Pacific Carriers Ltd v BNP Paribas and Toll v Alphapharm.

GUMMOW J:   Yes, but Andar makes the point that contracts of guarantee are rather differently looked at because of the court’s traditional tenderness for sureties.  Perhaps that can be looked at overnight.

HAYNE J:   I think it is Andar v Brambles 217 CLR 424.

MR HARRIS:   Your Honours have been taken through the chronology of events.  The first mortgage and the guarantees of the first mortgage were entered into only six weeks before the second mortgage and the guarantees of the second mortgage.  Your Honours have been referred to Drew v Lockett which speaks about a second mortgagee making his loan in the knowledge that there is a loan ahead of him and in the knowledge of the rights that might arise in a surety if a surety of that loan makes a payment towards the first creditor.

If a second creditor is aware that there is a first creditor ahead of him, how does he ensure that he will not have to compete with the surety if some payment is made?  The answer is, to insert a provision in his guarantee similar to clauses 6.4 and 7.1(2) of the guarantees, that is, he inserts provisions which effectively waive the guarantor’s rights as a surety and in 7.2(2) he inserts a provision which prevents the guarantor from competing with him for the property of the borrower until and unless he has been paid in full.

GUMMOW J:   The relevant passage in Andar is in (2004) 217 CLR 424 at 433 and following, paragraphs 17, I think, through to 23.

MR HARRIS:   I will examine those overnight, your Honours.  The submissions of the appellant would have it that the guarantee that was given by them to Rekley has no legal significance in the facts of this case.  If the Rekley loans had not been guaranteed by the Bofingers, if they had guaranteed the Kingsway loan but not the Rekley loan, and they had then sold their properties and paid down the Kingsway loan, there seems to be little doubt on the authorities that they would then be entitled by way of subrogation to recover whatever they had paid in priority to Rekley. 

But in circumstances where they have given a guarantee of that loan, in our respectful submission, there must be some legal significance to that guarantee.  The position cannot be the same as it would be if no guarantee had been given.  The significance of that guarantee is that it makes it unconscionable for the guarantors then to assert that right of subrogation against Rekley.  In a nutshell, that is what we say the significance of the guarantee to Rekley is. 

The mortgages that we had from the Bofingers to secure the guarantee are not really of any significance, they are gone.  The rights, not the rights that we have, but rather the unconscionability that would otherwise prevent us, Rekley, from being able to retain the benefit that we obtained when a payment was made by the guarantors to the first mortgage does not arise in circumstances where the guarantors have guaranteed the loan to Rekley as well.

Your Honours were referred to the decision of Mr Justice Lowe in the Supreme Court of Victoria in The Equity Trustees Case [1940] VLR 201 and your Honours were referred to the passage at page 205 of the judgment where his Honour said:

When a guaranteed debt is paid by the surety he is entitled, unless the right is excluded by agreement or his conduct makes it inequitable to enforce it, in respect of the amount he has paid under his guarantee to the securities which the creditor holds –

We say in this case that that right has been excluded by the agreement that was made between the Bofingers and Rekley in the guarantee that they gave to Rekley.

But we say in addition to that that the principle that his Honour enunciates and the submissions that are made to your Honour by the appellants in the present case to the effect that once a payment is made by a surety a right of subrogation arises is not an accurate description of the way in which equity treats subrogation.  In our respectful submission, there must be a payment by the guarantor.  It must create a benefit for the party against whom subrogation is asserted and it must be unconscionable for that party to retain that benefit. 

It is only in circumstances where all three of those factors exist that a right of subrogation would arise, and we say in the present case because of the guarantees given by the Bofingers to Rekley and in particular because of the provision for those guarantees that I have taken your Honours to, it would not be unconscionable for Rekley to retain any benefit that they receive if it could be described – if the payment could be described as a benefit at all.  We have referred to that in paragraphs 13 and following of our written submissions.  Can I perhaps then pass on to one other aspect.  Your Honours, there is authority for the proposition that a party who seeks equity should do equity and that includes a party seeking subrogation.

Can I refer your Honours to a decision of Mr Justice Young in the New South Wales Supreme Court of Re Trivan Pty Ltd (1996) 134 FLR 368. This was a case where a large building was being constructed. The builder went into liquidation at a time when apparently it was owed about $3 million by the proprietor. The proprietor terminated the building contract when the builder went into liquidation and completed the contract itself and in doing so, it kept all of the subcontractors on the job and it paid them not only for the work they did for it after the building agreement had been terminated but it also paid the subcontractors amounts that had been owed to them at the time the building contract was terminated, and the proprietor then subsequently claimed to be subrogated to the rights of the subcontractors against the builder because of the payments which it had made. His Honour noted at page 372 on the third line, subrogation is not a right:

but a remedy, that is, it is a remedy which a court of equity will grant in order to prevent there being an unconscionable situation.

He goes on in the next paragraph to say it will only be granted where it is appropriate to do so, and then about halfway down the page:

Ordinarily, a person who seeks an equitable right must offer to do equity, and in fact do equity.

Then in about the sixth‑last line on the page:

In the incident case, Mr Wigney, for the applicant/appellant, says that his client is under no legal obligation to pay any part of the $3 million claimed by the builder because the appropriate process has not been undergone.  That is a technical legal answer to a claim which equity does not allow to be said by a person seeking equitable relief. 

What the applicant was saying was that although there might have been about $3 million outstanding, until the proper process had been undergone as set out in the building contract, there was in fact no money due.  His Honour goes on then, in the third‑last line on the following page:

It follows that the prerequisite for establishing the claim of subrogation has not been made out and, accordingly, the appeal must be dismissed with costs.  

Now, if your Honours take the view, as we submit, that subrogation only arises to prevent unconscionability and that a plaintiff who asserts a right to subrogation must show that without it unconscionability will arise, if your Honours take the view that subrogation ought not be considered in that way, then the maxim that “he who seeks equity must do equity” will just be subsumed in the inquiry as to what would constitute unconscionability in those circumstances.

If, however, your Honours take the view that subrogation arises in accordance with the submissions made by the appellants and that all that is necessary is for a surety to make a payment to a creditor and then he is entitled to subrogation unless in some way he loses it, then the maxim would apply in that case, and to the extent that he might have had some right he would lose it unless he were prepared to do equity.  In the present case that means that he would have no right to the money and the title deeds to which he claims subrogation unless he were prepared to pay to Rekley first the moneys that ‑ ‑ ‑

GUMMOW J:   Why would that be doing equity?

MR HARRIS:   Because he has entered into a guarantee in which he has guaranteed that he would pay to Rekley whatever B & B was unable to pay, and before being entitled to any right of subrogation he ought to make that payment.  So far as he and Rekley are concerned, that would be doing equity.

KIEFEL J:   But what follows his liability has not altered, it is just that the fund from which it was to come has been utilised.  So we are actually talking about the fund.

MR HARRIS:   Well, in a net sense there is no alteration, but there may be significance depending on the financial position of the guarantor.  In other words, if it is a condition of any right of subrogation that he seeks that he make payment to us and he is unable to do that then he has no right of subrogation and we are entitled to retain the moneys that we have.

If, of course, he is financially able to pay the money that he has guaranteed, then he makes that payment to us and it then becomes entitled through subrogation to the surplus proceeds of sale we obtain from Kingsway and the two certificates of title that were handed over to us as well.  Can I move on, your Honours, to section 3.  In our written submissions we have set out the history of the ‑ ‑ ‑

GUMMOW J:   How much longer do you think you will be, Mr Harris?

MR HARRIS:   Your Honour, I think that I just need to deal with this quickly.  There is only really one point I want to make here.  I want to deal very briefly with Otter v Lord Vaux and then I think that I will be finished. 

GUMMOW J:   Subject to Andar?

MR HARRIS:   Yes. 

GUMMOW J:   Yes, go on.

MR HARRIS:   I do not want to say anything more about section 3.  We have set out in paragraphs 20 and following the way in which we say section 3 should apply and we say that it is clear when its history is looked at, the mischief which it was designed to address is looked at, it is clear that it does not arise unless there is an equitable right of subrogation and that if there is no equitable right of subrogation, it does not assist the Bofingers and does not create anything that would assist them in this case.

There is one other issue that is not referred to in our written submissions and that is the American case Mr Sibtain referred to very briefly, the case of Baio v Commercial Union Insurance.  I believe your Honours have copies of this decision.  I will not take your Honours through the facts of it.  Can I just say that it stands for the proposition that, even where the right of subrogation arises from a statute rather than in equity ‑ ‑ ‑

GUMMOW J:   There are a number of statutes which from time to time use the word “subrogation” in setting up a regime.

MR HARRIS:   Yes.  The significance of this judgment, your Honour, was that even though the plaintiff was claiming a statutory right of subrogation the court concluded that he had to do equity to be entitled to that, because even a statutory right of subrogation was equitable in form.  If your Honours took the view that section 3 has the effect that the appellants say it has and that it creates an independent right of subrogation they must nevertheless do equity and they must offer us the money that is outstanding.  Your Honours, can I turn very briefly to Otter v Vaux?

GUMMOW J:   I do not think you will turn briefly to Otter v Vaux, Mr Harris.  Let me ask Mr Darke how long he will need.

MR DARKE:   I will probably be about half an hour, your Honour.

GUMMOW J:   Very well.  We will adjourn now, Mr Harris, and resume at 10.00 am tomorrow.

AT 4.17 PM THE MATTER WAS ADJOURNED
UNTIL THURSDAY, 3 SEPTEMBER 2009