Bofinger & Anor v Kingsway Group Limited Formerly Willis & Bowring Mortgage Investments Limited & Ors
[2009] HCATrans 207
[2009] HCATrans 207
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 THURSDAY, 3 SEPTEMBER 2009, AT 10.04 AM
(Continued from 2/9/09)
Copyright in the High Court of Australia
__________________
GUMMOW J: Yes, Mr Harris.
MR HARRIS: Your Honour, can I start by just drawing your Honours’ attention to some of the aspects of the guarantee documentation in response to a question that was raised by Justice Kiefel early yesterday. Can I take your Honours to page 158 of the appeal book, which is effectively the second page of the Rekley guarantee. Your Honours will see that right at the bottom of page 158 in clause 3.1:
The Guarantors guarantee to the lender:
(1)the performance of all of the obligations of the Borrower under the Mortgage -
If your Honours go then back to page 158 to the top your Honours will see “mortgage” defined as:
the Mortgage dated 14 March 2003 between Rekley Pty Limited (as Mortgagee) and B&B –
and that mortgage is found at page 176 of the appeal book. At page 177 your Honours can see under the date:
The mortgagor acknowledges receipt of the principal sum of $1,000,000.00 –
and alongside the heading “Firstly” about halfway down the page the mortgagor agreeing to repay that sum in 12 months time.
It is that mortgage which the Bofingers guaranteed. Their guarantees to the first and third mortgagees were different. They were guarantees of the loan agreements between B & B and Kingsway and B & B and Mr Skehan. I do not think it makes any significant difference in this case, but Justice Kiefel yesterday morning early on did raise that question as to just exactly what was guaranteed.
Can I also while I am at it draw your Honours’ attention, again in the guarantee on page 159, to clause 3.2 which provides that:
If the Borrower does not, on the date provided in the Mortgage, pay any amount payable to the Lender, the Guarantors must immediately pay that amount to the Lender.
If your Honours go over then to page 161 to clause 6.3(2) there is confirmation there that the obligation or the liability of the guarantors does not depend on any demand having been made for payment.
Now, in the circumstances of this case we know that the first mortgage fell due on 1 October 2005. That comes from a letter which is at page 144 of the appeal book which we went to yesterday. As far as the date for payment of the second mortgage is concerned, I just took your Honours to the mortgage at page 177 which says that it was due for repayment in 12 months, which would have been March 2004. My recollection is that there was some extension of that mortgage, although the material relating to that has not been included in the appeal book and so I cannot make any submissions to your Honour as to when the second mortgage fell due.
The third mortgage to Mr Skehan it fell due on 28 October 2005. It is at page 233, if your Honours please, and your Honours will see – no, that is not it. It is the B & B line – yes, the essential part is on page 224. This is the schedule to the third mortgage from B & B to Mr Skehan. Your Honours will see at line 30 the date for repayment was the 28 October 2005. So one has this timetable. The Bofingers sell one of their properties and make a payment to Kingsway in July 2005. They go into default of the first mortgage on 1 October 2005 and they go into default on the third mortgage on 28 October 2005. Sometime during October 2005 they make the payment from the second property that they sold. They make payment to Kingsway. Then by November Kingsway is in possession of all the B & B properties and is selling them all as mortgagee in possession.
Your Honours, can I then go back to clause 6.4 in the guarantee, which is at page 161. Your Honours referred me overnight to the decision of this Court in Andar Transport v Brambles. Your Honour, we recognise that a guarantee is construed more strictly than a normal contract would be construed, but we point out that for clause 6.4 to apply only to rights as surety in relation to the guarantee given by the Bofingers to Rekley and not to apply as well to the rights as surety that they might have under the Kingsway mortgage, requires the insertion in clause 6.4 of words like “under this deed”, or similar, after the words “rights as surety”, so that it would require 6.4 to read, “Each Guarantor waives the Guarantor’s rights as surety under this deed whether legal, equitable, statutory”, et cetera. In circumstances where those words are included in each of the other parts of clause 6, there is no reason why they ought be read into 6.4. If your Honours go to 6.1 on the previous page, your Honours will see that it commences:
The liability of a Guarantor under this deed is not discharged or in any way limited or diminished –
et cetera, by the following things. So that there is an expansion of the liability that a guarantor might otherwise have. In 6.2, there is a similar provision:
The liability of a Guarantor under this deed is not discharged –
et cetera, and 6.3, the same:
The liability of a Guarantor under this deed is not discharged –
et cetera. We say that if it were intended to limit 6.4 to rights as surety under this deed or under this guarantee, a similar formulation would have been included, and the fact that it has ‑ ‑ ‑
HAYNE J: Why is that work not sufficiently done by the reference in line 2 of clause 6.4 to “the provisions of this deed”? The waiver is a waiver of what is inconsistent with the provisions of this deed.
MR HARRIS: That is “or alternatively” which might restrict the lender’s rights, remedies or recourse. Your Honour, that is all we wanted to say on 6.4. As far as 7.1(2) is concerned, we have agreed with Mr Darke that he will deal with that provision. We have set out in our written submissions what we want to say about that. We will not spend any more time on that now.
Can I then pass to Otter v Vaux. Can I just start by perhaps pointing out to your Honours that in all of the cases that your Honours have been referred to in this matter most of them involved disputes as between a surety, a debtor and creditor. There are some that include as a participant a second creditor, but there are none, except for Otter v Vaux and Manks v Whiteley, Whiteley v Delaney, that involve circumstances where there is a contractual agreement between the surety and the second creditor. So, to some extent, none of the cases that your Honours have been referred to deal precisely with the unusual circumstances in this case.
KIEFEL J: I thought in the Court of Appeal it was said that Otter v Lord Vaux should be understood in the context of the contractual arrangement and this case was likened to that position.
MR HARRIS: Yes, it is, your Honour, but the point that I am making is that the situation that one has in the present case has not really been considered precisely in any of the other cases that your Honours have been referred to and, in fact, the facts in Otter v Vaux are closer to the facts in this case than any of the other cases that your Honours have been referred to.
KIEFEL J: I see.
MR HARRIS: Otter v Vaux, if I can take your Honours to the decision on appeal – I am sorry, your Honours, I do not have a reference to that.
HEYDON J: You want Lord Cranworth’s decision.
MR HARRIS: Yes, 69 ER 1381 and at 1383 the Lord Chancellor in the second sentence refers to, “The general principle, that a mortgagor ‑ ‑ ‑
HEYDON J: The Lord Chancellor or the Vice Chancellor? Do you want Sir William Page Wood or Lord Cranworth?
MR HARRIS: Page 1383, your Honour. Lord Chancellor ‑ ‑ ‑
HEYDON J: That is volume 43 of the English Reports.
MR HARRIS: I am sorry, your Honours, volume 43 of the English Reports, I apologise, and it is at page 1383. The Lord Chancellor says in the second sentence:
The general principle, that a mortgagor cannot set up against his own incumbrancer any other incumbrance created by himself, is a proposition that I think has never been controverted . . . I confess that I agree with the Vice Chancellor Wood and think that to make any distinction on that ground –
that is, on the ground that the mortgagor reobtained the property through power of sale –
would be sacrificing substance to form. The case is therefore to all intents and purposes that of a mortgagor liable to pay a sum of money to his first incumbrancer paying it and getting a transfer; but that transfer is something which upon general principle he cannot set up against a creditor claiming by a title subsequent to that of the person whose charge he has so paid off –
et cetera. There is some further reference or clarification of the principle, firstly, in Manks v Whiteley [1912] 1 Ch 735. This was a case which was overturned on appeal but Lord Justice Fletcher Moulton’s dissent is helpful. Starting at page 758 in the final paragraph his Honour says:
We start with the law laid down in the case of Otter v Lord Vaux that a mortgagor purchasing the interest of the first mortgagee cannot set up the anterior charge so paid off against a second mortgage.
Then he goes on, the sixth line of page 759, after referring to the judgments in Otter v Lord Vaux:
It is evident that in the minds of both these eminent judges the critical fact was that the two incumbrances were created by the mortgagor and embodied obligations on his part to discharge the two debts, and that therefore he could not be allowed to set up the fact that he had fulfilled the one obligation to shield himself in any way from the performance of the other.
On appeal Viscount Haldane – the appeal is at [1914] AC ‑ ‑ ‑
GUMMOW J: They are talking about a doctrine of merger, are they not?
MR HARRIS: They are there, your Honour, yes.
GUMMOW J: And a qualification, if that is the right word?
MR HARRIS: And pointing out that merger does not occur where it is the mortgagor who purchases the mortgage.
GUMMOW J: What has merger got to do with the present case?
MR HARRIS: Well, your Honour, can I answer that by taking your Honour to ‑ ‑ ‑
GUMMOW J: Merger in the sense of a discharge, producing discharge.
MR HARRIS: I think the principle was that, whereas there might, in normal circumstances be a merger, there is when there is a second mortgagee so that the mortgagor cannot purchase the first mortgage and keep it alive, even though that might be his intention - merger normally, depending on intention. The mortgagor’s intention, in that regard, is irrelevant. Equity will not allow him ‑ ‑ ‑
GUMMOW J: Why?
MR HARRIS: Because to do so would be to derogate from the grant of the interest that he gave to the second mortgagee and, indeed, in the appeal – the Manks appeal – which is named Whiteley v Delaney [1914] AC 132, at page 145 right at the top Viscount Haldane says:
The decision is not an application of what was laid down in Otter v. Lord Vaux, that a mortgagor purchasing the interest of his first mortgagee cannot derogate from his own bargain by setting up the mortgage so purchased against a second mortgagee.
He goes on to – at the bottom of that paragraph – emphasise the importance of the situation such as one had in Otter v Lord Vaux where there was a direct relation of contract with the second mortgagee. Now, in the Court of Appeal, in this case, Justice Handley analysed Otter v Vaux as being a case of conventional estoppel.
GUMMOW J: He may have, but it is not what Lord Haldane was saying.
MR HARRIS: Your Honour, we do not seek to promote Otter v Vaux on any other basis, other than the basis that what the Bofingers seek to do here is analogous to a party derogating from a grant. Admittedly, in the present case ‑ ‑ ‑
GUMMOW J: We have to then identify the grant, I suppose.
MR HARRIS: There is no grant. There is a promise. There is no grant of an interest in land as there is when a mortgagor gives a mortgage. All there is in this case is a promise to pay in the guarantee. So that if your Honours were to take the view that there must be the grant of an interest in land before Otter v Vaux can apply, well then it would not apply in the present case.
Your Honour, the present case is really just an example of a party who has created two successive contractual obligations and then discharges the first but seeks to claim through it to reduce the liability he would otherwise have under the second. The contractual obligations are not interests in land, they are not grants as they were in Otter v Vaux, but he has nevertheless entered into two successive obligations. He has dealt with the first, he has discharged the first, and now seeks through it to defeat the second obligation that he made.
HAYNE J: How is that defeating or reduction occurring? What is the defeat or the reduction?
MR HARRIS: It is the claim to be subrogated to the assets of the mortgagor of B & B and to have those assets instead of allowing them to be taken by Rekley, which would be the order of things if the right of subrogation were not made.
HAYNE J: What obligation owed by the Bofingers to Rekley is diminished, defeated or reduced by that event?
MR HARRIS: Well, it is the obligation that they have to guarantee – the second guarantee that they gave, the Rekley guarantee.
HAYNE J: They remain liable to the full extent of the guarantee, do they not?
MR HARRIS: Yes, they do, your Honour, but nevertheless what they are seeking to do is through the first guarantee to defeat or diminish the second guarantee. In the case of a mortgagor which ‑ ‑ ‑
HAYNE J: No, what is implicit in the proposition is that the defeat or the diminution is in the value over the security which Rekley once had but gave up as support for the guarantee provided by the Bofingers.
MR HARRIS: Your Honour, in the case of a mortgagor who has made two successive mortgages, even if he were allowed to take or to use the first mortgage after discharging it to pay off the second mortgage, or to defeat the interest of the second mortgage, he would remain liable under the second mortgage. So the fact that there may be a remaining liability, in my respectful submission, is not critical. The essence of Otter v Vaux was a person giving successive interests and then using the first to defeat the second and there is, in our respectful submission, a direct analogy to what the guarantors are seeking to do in this case.
Can I say to your Honours that Otter v Vaux was only introduced in this matter by Mr Justice Handley after, in fact, the arguments in the appeal had been completed, and it is our submission that one does not need to have regard to it because just on the basic equitable principles that apply to subrogation and to the principle that subrogation is only available to prevent a party from retaining some benefit which it would be unconscionable for him to retain, we say that that is sufficient and it is not necessary to extend the rule in Otter v Vaux, but having said that, we see no reason why it ought not be extended in the way that his Honour said, but perhaps not on the basis of estoppel, but on the basis that one has a successive contractual obligation created by a party dealing with the same subject matter, and that party then, dealing with the first of those obligations and attempting through it to defeat his liability under the second obligation.
GUMMOW J: For a conventional estoppel one would require rather more than I think one would have on the facts here.
MR HARRIS: His Honour did not refer, and I do not think any of us, in our submissions to him, because further submissions were made after he raised this issue, I do no think that anybody referred to the derogation from a grant basis for Otter v Vaux, so I cannot say that it has really been considered previously, but it seems, as I say, it does not seem like a big step to take Otter v Vaux into that territory, although we do not depend on that for the purposes of our submissions in this case. Thank you.
GUMMOW J: Yes, thank you, Mr Harris. Yes, Mr Darke.
MR DARKE: Your Honours, I wish to deal with the two matters raised by way of our notice of contention, that is namely the clause 7.1(2) point, if I could call it that, and the trust or charge point. I will make some brief references to some of the other issues along the way, but that will be the focus of the submissions.
GUMMOW J: Just before you get into that, Mr Darke, can you look at the notice of appeal for a minute, at 316.
MR DARKE: The one that was filed yesterday, your Honour?
GUMMOW J: Yes, you are quite right. That would produce a result if the appeal were successful that costs in this Court and costs in the Court of Appeal, would it, and costs before Justice Young would all follow that event?
MR DARKE: That is so. That is sought by prayer.
GUMMOW J: Yes. On another matter, can we just look at the statement of agreed facts at page 9. There seems to be a difficulty of dates. It refers to just one date, 8 February. It seems to me that with the first sum there, $268,000, the relevant date is the 7th, with the next sum, 432,000, the relevant date is the 21st, and the 8th is the relevant date for the securities. That would seem to follow from the chronology we were given.
MR DARKE: Yes, 8 February being the date upon which the first mortgagee was fully satisfied and, therefore, the date, if any, upon which a right of subrogation in the appellants would have first arisen.
GUMMOW J: But the securities over lots 1 and 4 relevantly were not held by the second defendant in trust as at the 8th.
MR DARKE: No, they were transferred at different times.
GUMMOW J: Later.
MR DARKE: Yes. As I understand it, the 8th was selected because that was the date when the first mortgagee was fully paid.
GUMMOW J: Yes, I took you off your course.
MR DARKE: Thank you, your Honour. In relation to the clause 7.1(2) point, on 31 January 2003 the various agreements in relation to the advance made by the first mortgagee were entered into and those agreements included the registered mortgage given by the company, which appears at the appeal book page 61. The appellants were named as guarantors in that instrument. The appellants also at that time – that is, 31 January 2003 – gave the guarantee to the first mortgagee, which appears at the appeal book page 13.
Some two and half months later the various agreements in relation to the advance made by the second mortgagee, Rekley, were entered into, including the mortgage given by the company, which appears at appeal book 176, and that mortgage would be taken to be understood to become a second ranking mortgage behind the registered mortgage given earlier to the first mortgagee.
However, it was not, to adopt the words of Lord Romilly in Drew v Lockett, a matter of indifference to Rekley at that time whether the first mortgagee or its surety is a prior claimant to the extent of the amount advanced under the first mortgage. To the contrary, Rekley by entering into the deed of guarantee and indemnity with the appellants, which is at appeal book 155, bargained for and obtained various protections so as to prevent the appellants from competing with it in relation to the pursuit of the borrower. Can I take your Honours to the deed of guarantee and indemnity, which is at appeal book ‑ ‑ ‑
GUMMOW J: You use this word “protection”.
MR DARKE: I wish to take your Honours to some specific provisions. Page 155 is the commencement of the deed, and if your Honours go to page 158, clause 2.1 towards the foot of the page records that:
The Lender enters into the Mortgage (“Mortgage”) –
and that is the mortgage between Rekley and the company –
with the Borrower at the request of the Guarantors and in consideration of the Guarantors entering into this deed.
Then your Honours see clauses 3.1 and 3.2, which your Honours were taken to this morning by Mr Harris. By clause 3.1 in particular the guarantors, in effect, promised Rekley that they would ensure that the borrower repaid the money, all of the money, and if it did not they would do so, and they would also see that Rekley suffered no loss as a consequence of the borrower’s default, and that comes in particular from the provisions of 3.1(2). They are guaranteeing there:
the payment of all damages suffered by the Lender . . . arising from any breach or termination of the Mortgage.
Now, your Honours, still on page 159, you will see there is the indemnity at 5.1. I do not need to trouble your Honours with that, it was referred to in argument yesterday. Then over to page 161 is clause 6.4, I do not wish to say anything further to that. It was the subject of discussion this morning with my learned friend, Mr Harris. Then 7.1, which operates:
Until the Guaranteed Money is paid in full and all obligations of the Borrower under the Mortgage are fully and finally discharged or released ‑ ‑ ‑
GUMMOW J: What is the objective of a provision like clause 7.1? It is quite often seen in these instruments.
MR DARKE: Yes. The objective is that the – and, in particular, by reference to clause 7.1(2) – assets or property of all obligated persons should remain available, untouched by the appellants, so as to facilitate recovery of the guaranteed money by Rekley.
KIEFEL J: Is it also not to delay a claim by Rekley whilst the obligated persons have a dispute between themselves?
MR DARKE: It also has that effect. Subclause (2) refers to the guarantors making certain claims or enforcing certain rights and the clause uses very clear language. In the first sentence the words “must not in any way” are employed, words of the widest import, and then in 7.1(2) they must not make any claim or enforce any right “against any other Obligated Person”.
GUMMOW J: The obligated persons are ‑ ‑ ‑
MR DARKE: “Obligated Person” is defined in clause 1.1, towards the top of page 158.
GUMMOW J: It is the principle debtor and any co‑surety.
BELL J: It includes B & B as the borrower.
MR DARKE: It does, as the borrower.
BELL J: Yes.
GUMMOW J: So it is the principle debtor.
MR DARKE: The definition of “Obligated ‑ ‑ ‑
GUMMOW J: Just a minute.
MR DARKE: I am sorry, your Honour.
GUMMOW J: Would not the guarantor have a right of indemnity from the principal debtor and would it not have a right of contribution against any co‑surety and is not 7.1(2) directed in a way to freezing any exercise of those rights?
MR DARKE: It is not restricted in that way, your Honour.
GUMMOW J: No, I realise that, but does it not at least extend to that?
MR DARKE: At least extends to that. Your Honour, at the time of ‑ ‑ ‑
GUMMOW J: What else does it extend to?
MR DARKE: Well, there could be all range of contracts or arrangements made between the borrower and an obligated person, and the overwhelming notion ‑ ‑ ‑
GUMMOW J: Such as what?
MR DARKE: A loan to the company by someone associated with it, all range of possibilities, your Honour, and the plain intention, we respectfully submit, is that all claims that the guarantors may have against any other obligated person are not to be brought unless and until Rekley is paid in full.
GUMMOW J: What is the objective of that?
MR DARKE: The objective is to ‑ ‑ ‑
GUMMOW J: Is to preserve all these other potential avenues of recovery to the creditor.
MR DARKE: Yes, to preserve the borrower and its property, or protect it from claims which might be made against it or the property prior to Rekley being paid in full, because Rekley wishes to have all of such property available to it, in order to recoup its money. That is the intention. The provisions, 3.1 and 7.1, are consistent with the – and evidence and intention on the part of the parties that Rekley will go first, as it were, in relation to the debtor or the debtor’s property and that is the effect of those promises given by the guarantors, by the appellants, to Rekley. Your Honours, the definition of “obligated person” ‑ ‑ ‑
GUMMOW J: Do you have to say all this is preserving the access of the creditor, not simply to facilitate recovery under the guaranteed obligation, but other extraneous obligations?
MR DARKE: No, it is all directed to facilitating recovery ‑ ‑ ‑
GUMMOW J: Outside this instrument.
MR DARKE: ‑ ‑ ‑ under this instrument by Rekley. It is to keep it, as it were, ahead of the guarantors in relation to the borrower itself and its property.
GUMMOW J: For what debt?
MR DARKE: For the mortgage debt, the guaranteed money, which ‑ ‑ ‑
HEYDON J: The second sum advanced.
MR DARKE: The second sum advanced, yes.
HEYDON J: But the right of subrogation arises in relation to the first sum advanced.
MR DARKE: It does arise in relation to the first sum advanced. However, the making of the claim for subrogation is the making of a claim or the enforcement of a right against the debtor or its property. What the appellants seek to do is to ‑ ‑ ‑
GUMMOW J: No, the question is a right arising how? I think we are back to where we were before, I think, on the question of construction.
MR DARKE: Your Honours, there is no limitation in these words. The guarantors must ‑ ‑ ‑
GUMMOW J: We are back where we were with Andar, Mr Darke, are we not, for one thing?
MR DARKE: No, with respect, because it is not a situation where there is ambiguity ‑ ‑ ‑
GUMMOW J: This is a pro forma instrument, is it not? It is not bespoke. We know that because it appears a number of times in the appeal book.
MR DARKE: We know that appears in similar terms, but it is not a case of ambiguity. The words are clear, with respect. These guarantors must not in any way make a claim or enforce a right against the borrower’s property ‑ ‑ ‑
GUMMOW J: The words “absolutely free” are pretty clear, too, Mr Darke.
HEYDON J: But if the Bofingers had entered some transaction totally unrelated to this with B & B, on your construction the enforcement of rights under that transaction would be a matter for consideration under clause 7.1.
MR DARKE: Yes, it would because ‑ ‑ ‑
HEYDON J: It seems, if not an extreme, at least a broad construction.
MR DARKE: It is a construction which conforms with the plain words of the provision, your Honour. It does make commercial sense because if there was such an arrangement or dealing between the guarantors and the borrower the effect of enforcement by the guarantor against the borrower is to diminish that which the second mortgagee, Rekley, wishes to have available to it for so long as it remains unpaid. It is within the power – subject to financial realities – of the guarantors to lift this restriction at any time by paying the guaranteed money in full because it only operates for that period of time.
HAYNE J: In this respect the construction you are urging for subclause (2) stands radically apart from the construction that must follow in respect of subclauses (1) and (3), does it not? Subclauses (1) and (3) are confined to securities held or taken by the lender, in effect, in connection with this transaction. Subclause (3) is concerned with set‑offs, et cetera, in reduction of the guarantor’s liability under this deed. By contrast (2), you say, is to be construed as having a broader reach than either (1) or (3)?
MR DARKE: It does, but it is not a radically different range. It selects any claim or any right against any obligated person. It uses very broad language. That is accepted, that is part of our argument. But the mere fact that it is placed in a clause where other additional – I hesitate to use the word “protections” – are contained it does not mean that the clear words of the provision should be read down. There is no relevant ambiguity in this clause which would call into play the principles in Andar and Ankar.
There was some discussion yesterday, in this context, about the definition of “obligated person”. In our respectful submission, the definition of “obligated person” identifies the members of the class of persons against whom claims or rights cannot be enforced for the purposes of clause 7.2. It obviously has other work to do because the expression “obligated person” appears in many places throughout the guarantee.
The words in the definition “who is liable to the Lender for payment of the Guaranteed Money” do not qualify or apply to the borrower but only to the other persons who are brought within the class, that is, other persons apart from the borrower itself who is plainly liable for those moneys and any guarantor. In our respectful submission, the plain intention of the provision, having regard to the guarantee as a whole, including clause 3.1, is, as we put it, namely, that the assets and property of obligated persons should remain available and untouched by the appellants so as to facilitate recovery by Rekley.
KIEFEL J: Was it not just that their property should be made available but more strictly construed perhaps that the guarantors are not to enforce a right against the borrower or their property which would adversely affect Rekley’s rights against that personal property and those rights of Rekley are the rights of Rekley under the second mortgage? You have to see it through that channel, do you not? You have to determine what the rights of Rekley are under the second mortgage.
MR DARKE: Yes, your Honour, but the rights of Rekley are to be repaid the whole of the guaranteed money.
KIEFEL J: Under the second mortgage. You are looking at Rekley’s rights against the borrower under the second mortgage.
MR DARKE: Yes.
KIEFEL J: In that clause you are looking at something that the guarantors could do which would cut across its rights against the company under the second mortgage.
MR DARKE: No, it should not be so narrowly read, your Honour, because any claim or the enforcement of a claim against the borrower can have the practical consequence that the enforcement by Rekley of its rights under the second mortgage will be ineffective because there may not be sufficient assets to go around. That is precisely what the appellants are doing in these proceedings, your Honours. Having promised that they would see to it that the borrower met its obligations and having promised that it would see to it that Rekley suffered no loss if there was any breach by the borrower, it now seeks to assert a right of priority. The assertion of the right of priority by its nature gives rise to the very risk which they promised they would shield Rekley from, namely, a loss following a default on the part of the mortgagor. That is the relevant inequity here, your Honours, but at this point in time, the time of the giving of the guarantee ‑ ‑ ‑
HEYDON J: Inequity does not matter. You are just appealing to a straight construction of a contract. What is the relevance of it being inequitable or not?
MR DARKE: Well, the equitable right, if it would otherwise exist, has been taken away by their contractual ‑ ‑ ‑
HEYDON J: Wiped out by a contract which would have been perfectly enforceable in 1189.
MR DARKE: Yes, it has been taken away by these provisions in this guarantee. Even if your Honours were against our submissions on the construction of 7.1(2), however, we would submit that the provisions of clauses 3.1 in particular, and 3.2, illustrate the inequity that I have endeavoured to outline. On the one hand, we will stand behind you. We will make sure that the borrower performs its obligations. We will pay you in respect of any loss you suffer if there is any breach by the borrower under the mortgage.
GUMMOW J: Well, the guarantee still exists, does it not?
MR DARKE: It does, but when the time comes they wish to say, “We want to go first”. In other words, they want to put the risk of loss ‑ ‑ ‑
GUMMOW J: When you say go first, on what bus?
MR DARKE: Well, they are asserting a right of priority based on their right of subrogation.
GUMMOW J: Priority assumes a particular form of structured conflict which the rule recognises.
MR DARKE: Well, to adopt the way that the appellants are putting it ‑ ‑ ‑
GUMMOW J: A particular form of structure here includes the first, second and third mortgage, to which is applied the well‑understood principles of subrogation where there is a guarantee, which everybody is taken to have known when they entered into these sequential funding arrangements.
MR DARKE: The difference being here ‑ ‑ ‑
GUMMOW J: There being no indication on the facts or anything like a sharp practice or particular form of conduct which would provide some form of defence, to use that expression, to the operation of the ordinary equitable principles, beyond the matters which you are now agitating to us.
MR DARKE: Yes, that is quite so. Beyond the matters I am now agitating, which are that the ‑ ‑ ‑
GUMMOW J: The question is then the sufficiency of those matters you are agitating to us.
MR DARKE: Essentially, yes. The argument runs that 7.1(2) plainly excludes, or at least modifies, any right of subrogation. Even if your Honours were to be against us on that construction, however, we would submit that the provisions of clause 3.1 in particular indicate that the parties intended that if there was to be a loss arising from the default of the mortgagor it is not going to be borne as between these parties by Rekley, it would be borne by the appellants.
And yet the very claim they make is to have some form of interest – they claim a trust, I will come to that – some form of interest in the property ahead of Rekley’s interest as second mortgagee. So in the event that the security properties ultimately are not sufficient, Rekley will bear the loss, not the appellants and we respectfully submit that that is in the face of the intention, as evidenced by clause 3.1, and thus the Court of Equity would not, in those circumstances, come to the aid of the appellants to, in effect, achieve that result.
The appellants effectively come to the Court without having made any offer to perform or any actual performance of their obligations under clause 3.1 which, we submit, is a provision which seeks to allocate risk in a particular way, and the risk is thrown onto the appellants. They seek to avoid that by the prosecution of the claim based on subrogation. We respectfully submit that that is inequitable and the Court should not countenance it.
Yesterday there were a number of questions about what the Court of Appeal may have had in mind, in particular, Mr Justice Handley at paragraph 47, about the agreement in substance. The provisions of clause 3.1 in particular may be – we do not know – but may be what his Honour was referring to.
GUMMOW J: Do you understand the mortgages referred to there, in the second line of 47, as being the mortgages in support of the guarantees?
MR DARKE: They are talking about the mortgages to be ‑ ‑ ‑
HEYDON J: The mortgages between B & B and the first mortgagee, the second mortgagee and the third mortgagee.
MR DARKE: Yes, your Honours. The mortgage is given by the company, the principal debtor.
HEYDON J: But it is difficult to grapple with this reasoning whether it be based on clause 3 or clause 7 and Justice Handley has not employed those provisions as integers in his argument.
MR DARKE: But those provisions ‑ ‑ ‑
HEYDON J: This is a true notice of contention point that you are running. It is not a resistance to a ground of appeal device.
MR DARKE: The provisions, 2 and 3.1, are pivotal and important provisions in the guarantee on any view of it, and having regard to the fact that his Honour, at paragraph 57 found it unnecessary to consider clauses 6.4 and 7.1, whilst that does not clearly answer the point, it would seem that this substance that his Honour was referring to would be clauses 2 and then 3.1, but I accept that it is not possible to be clear about that.
The point we do make is that for whatever reason his Honour had in mind, those provisions do, as a matter of substance, make out that proposition which is in that paragraph of his Honour’s judgment, paragraph 47. I neglected to mention when dealing with the construction argument in relation to 7.1(2), his Honour Mr Justice Young at paragraph 43, I think that was mentioned in ‑ ‑ ‑
GUMMOW J: What page?
MR DARKE: Page 258. Justice Bell mentioned that yesterday. The clauses in his Honour’s view clearly showed –
the sureties are not to claim their rights of subrogation to prejudice the secured rights of the second and third mortgagees in the mortgages from B & B which the Bofingers have guaranteed.
We respectfully submit that his Honour’s conclusion is correct.
GUMMOW J: Now you are going to take us to trusts, are you not?
MR DARKE: There are a couple of particular matters put against us on construction by the appellants which I should deal with briefly. The first argument put against us is contained in the appellant’s submissions, paragraph 60, and then paragraph 4 of their reply. It is essentially put that in making a claim for subrogation the appellants are not making a claim against the borrower or its assets. It is submitted by the appellants that all such a claim does is –
prevent the holder of securities using them to the prejudice of the guarantor.
The reference is made to Acting Chief Justice Gibbs in the Mainline Constructions Case, but what his Honour was there discussing was the principle said to underlie the doctrine of subrogation, that is to prevent inequitable conduct on the part of the creditor in dealing with its ‑ ‑ ‑
GUMMOW J: What paragraph are you referring to, Mr Darke, in the appellant’s submissions?
MR DARKE: It is in the appellant’s submissions, paragraph 60, but then paragraph 4 of the reply ‑ ‑ ‑
GUMMOW J: That might be the better place, I think.
MR DARKE: Paragraph 4 of the reply has the footnote reference to Mainline Constructions.
GUMMOW J: Yes, thank you.
MR DARKE: What his Honour was talking about there was the principle said to underlie the doctrine of subrogation. It was not there dealing with the nature of a claim for, or by way of, subrogation and what clause 7.1(2) does is direct attention to the nature of the claim being made or the right being enforced by the surety.
Your Honours, at least in the context of sureties who pay off some of the guaranteed debt, subrogation is a means by which the surety can enforce its right of indemnity against the debtor. We have referred to Mr Justice Powell’s decision in McColl’s Wholesale in our written outline, in particular at pages 378 and 379, for the proposition that the notion of subrogation cannot be divorced from the enforcement of the right of indemnity. That is what it is for.
The next argument put against us on 7.1(2) is found in the appellants’ reply submission, paragraph 6, and proceeds upon the basis that the purpose of the subrogation should be seen as the prevention of unjust enrichment rather than unconscionability. That argument runs counter to their first argument and needs to be seen as an alternative. Your Honours, we respectfully submit that the authorities make it plain that unjust enrichment is not seen in this country as the underlying basis of subrogation.
GUMMOW J: It is a judgment of Mr Justice Bryson, is it not?
MR DARKE: Yes, referred to by Justice Santow in the Highland Case, particularly at paragraph [47]. Mr Justice Santow stated that the law in this area was unsettled, then went on to cite numerous authorities in Australia which ‑ ‑ ‑
GUMMOW J: No, it has been settled. The question is whether it should be unsettled by an importation from another country.
MR DARKE: Precisely, your Honour. All the authorities his Honour cited were to the effect that it is settled in Australia. The appellants have shown no good reason why that orthodox view should be overturned. The argument also suffers from a problem similar to that which afflicts the first of their arguments, namely, that it focuses upon the principle said to underlie subrogation rather than the nature of the claim or the right being enforced, which is the matter that clause 7.1(2) directs attention to.
Lastly on 7.1(2), your Honours, in the appellants’ submissions, paragraph 61 and paragraph 5 of their reply, it is put that 7.1(2) is not intended to deal with subrogation at all, and that is shown by the fact that clause 7.1(1) deals with that matter. But, your Honours, 7.1(1) is only concerned with the appellants claiming the benefit of or seeking the transfer of guarantees or securities held by the lender Rekley. Going back to Justice Hayne’s comment earlier, 7.1(1) is directed to that situation, not to the subrogation situation which would be encompassed by the making of a claim against the debtor, which falls within 7.1(2). Could I then turn, your Honours, to the question of trust and charge.
HEYDON J: Is the significance of this question that if it is a trust, Barnes v Addy might come into operation against various defendants, but if it is not a trust, that is thought not to be possible?
MR DARKE: Yes, that is so.
HEYDON J: Would you agree that even if it is not a trust, there would be some fiduciary duties attaching to the first mortgagee who is in possession of moneys surplus to those needed to pay out that mortgagee?
MR DARKE: The first mortgagee upon complete satisfaction is faced with the statutory provision of section 58(3) in this instance. As was discussed yesterday in the Adams Case, Justice Moffitt left the question open as to whether there was a trust or not. Mr Justice Hutley proceeded on the basis that it was. The third member of the court agreed with both and Justice Samuels agreed with both. So whether it is a trust or not or whether it is something else has not been determined.
GUMMOW J: But that is a trust in favour of the puisne mortgagee.
MR DARKE: Yes.
GUMMOW J: That is what is being spoken of there, is it not?
MR DARKE: Yes, that is right. So the first mortgagee undoubtedly at that point where there is a true surplus holds the moneys pursuant to the regime, whatever it may be described, set out in section 58(3).
GUMMOW J: But the question in this case in a way is analogous to the question that arises with a trustee’s right of lien over the trust assets which are said to be anterior to the ascertainment of the quantum of the beneficial interest of the beneficiaries. Do you see what I mean?
MR DARKE: Yes. But, in this particular case, your Honour, the ‑ ‑ ‑
GUMMOW J: It is a question whether the surplus held on trust for the second mortgagee is ascertained only after the working out of the subrogation and what are those rights involved in the working out of the subrogation where the funds upon which they would operate are paid out to someone else.
MR DARKE: In this case, your Honour, the first mortgagee, prior to its satisfaction – can I take your Honours to the appeal book at page 13, which is the guarantee taken by the first mortgagee.
GUMMOW J: Page 13?
MR DARKE: It starts at page 13 and if I could take your Honours in particular to 17, clause 6.1 provides:
The liability of a Guarantor under this deed is not discharged or in any way limited or diminished because the Lender does any of the following things –
Then over on page 18, subclause (7):
Releases, exchanges, varies or deals in any other way with any other guarantee, indemnity or security held or taken by the Lender –
indicates that the ‑ ‑ ‑
GUMMOW J: Has this provision been in play before in the arguments below?
MR DARKE: I do not recall whether I mentioned it in the Court of Appeal argument, your Honour. If I did so, it was not developed. So clause 6.1 indicates the position that the first mortgagee held in relation to the guarantors and it would be, in our respectful submission, an unusual and unnecessary step to impose fiduciary obligations upon the first mortgagee at the point in time when it becomes fully satisfied, as opposed to merely holding whatever surplus it has subject to a right, if any, on the parts of the appellants to exercise a charge, an equitable charge over the surplus.
GUMMOW J: What is the rationale for the charge?
MR DARKE: The rationale for the charge would be that the appellants ‑ ‑ ‑
GUMMOW J: Is that was developed in Lord Napier?
MR DARKE: Lord Napier is a case involving ‑ ‑ ‑
GUMMOW J: There were solicitors involved in Lord Napier, were there not?
MR DARKE: They were holding the moneys, the settlement moneys, and that is an insurance case, so it is a different situation. In the area of subrogation it seems clear enough that the right of subrogation of a surety arises when the creditor is paid in full and it may arise even if the surety has only paid part of the debt. So a surety’s interest, if you like, in seeking indemnity from the debtor and obtaining subrogation as an aid to pursuit of its right of indemnity may have a very limited interest. The interest is to recoup the sum of money that it has paid as part of the debt. It is appropriate, in our respectful submission, that that interest at least would be an appropriate remedy short of the imposition of the constructive trust.
GUMMOW J: But you say it has some proprietary characteristics attached to it?
MR DARKE: Yes.
GUMMOW J: Otherwise it could not found the charge.
MR DARKE: It does have some proprietary characteristics, but it is not an ownership interest. It is an interest by way of security. So that it would be open to the appellants ‑ ‑ ‑
HAYNE J: Interest by way of security over what? What is the subject of the charge?
MR DARKE: In this case there are two parts to the surplus, effectively. One being the surplus moneys, so there is a fund and, secondly, there is the mortgages over the properties which remain unsold following satisfaction of the creditor.
HAYNE J: The guarantor if entitled to subrogation could interrupt the discharge of the mortgage, could it not, and have itself substituted, the guarantor substituted?
MR DARKE: It could, and force against the property to the extent of its payments.
HAYNE J: Just so. But in addition to that it has what right in respect of the fund which is the surplus remaining after satisfaction of the first mortgagee?
MR DARKE: We would submit, your Honour, that a charge, equitable charge, over that fund would be an adequate remedy for a surety in this position.
GUMMOW J: Does the charge carry interest?
MR DARKE: The surety in pursuit of its right of indemnity would be able to claim interest against the principal debtor on the basis of indemnity only. I think Justice Powell’s judgment in McColl’s Wholesale makes the point that a subrogated surety does not get the benefit of all the interest covenants, for example, in the mortgage. It only gets the mortgage ‑ ‑ ‑
GUMMOW J: Well, that is a debatable question, I suppose. Is there any other authority apart from McColl’s on that point? It seems rather an important point.
MR DARKE: Yes, I am not aware of any other, your Honour. We can certainly look at that.
HAYNE J: If the guarantor is entitled to interrupt the discharge, become registered as mortgagee, I would have thought there is at least a footing on which you could say until payment it has the benefit of the interest arrangement in the mortgage.
MR DARKE: I think it does, your Honours, come down to the point that the underlying rationale for the equity of subrogation in a surety is the indemnity from the debtor. So that to recover that indemnity, the appropriate proprietary interest sufficient to deal with that would be a charge over any surplus property to the extent of recovering an indemnity, and that may include interest, but not necessarily interest in accordance with ‑ ‑ ‑
GUMMOW J: With respect to the land where the Torrens system intervenes, I suppose, if there is an inconsistent registered interest, subsequently, that is the end of it, is it not?
MR DARKE: If there is a proprietary interest here, it would be in the Torrens context seen as being in the nature of a personal equity which could be advanced as against the first mortgagee. So that it does not, in that sense, do violence to the statutory order of registration, but there is a personal equity there, and that is consonant with the equitable ‑ ‑ ‑
GUMMOW J: That would not run against the purchaser. He got on the register and did not know anything about this.
MR DARKE: It would not run against the purchaser who obtained registration.
GUMMOW J: If there is a charge, is that then not protected in any way against the activities of third parties which are destructive of its continued persistence?
MR DARKE: The interest of an equitable chargee would be able to be protected by the lodging of a caveat.
GUMMOW J: That is for the land.
MR DARKE: For the land.
GUMMOW J: And as to the moneys?
MR DARKE: In the event that the holder of the fund was in some way recalcitrant, there may be a need to approach the court to protect its interest in the fund. Of course, it should not be assumed that the satisfied first mortgagee was going to act in any recalcitrant fashion and simply pay money away. If a party asserts its interest, and does not receive satisfactory undertakings, it would be able to protect itself. Of course, the other element of this is that whilst the first mortgagee knows of that ‑ ‑ ‑
GUMMOW J: The problem may arise whether the fund then passes through the hands of another party and is subsequently dissipated.
MR DARKE: There can be practical difficulties and it would be incumbent upon the ‑ ‑ ‑
GUMMOW J: If they were trust moneys, the party through whose hands the moneys passed on their way to dissipation could have accountability ‑ ‑ ‑
MR DARKE: Would have a personal liability.
GUMMOW J: Yes, but is there any analogy to that in the situation where we are dealing with the moneys subject to this charge?
MR DARKE: Well, there would not be. If there is an equitable charge, as we would see it, there would be no personal liability attaching if the first mortgagee paid the money away. It is really up to the equitable chargee to assert its right, whether by way of writing a letter, seeking undertakings or lodging a caveat, it can do so. Of course, the first mortgagee, whilst it knows that it has received some money from the guarantor at some point in reduction of its debt, or the debt to it, the first mortgagee knows nothing about the state of the account as between the guarantor and the principal debtor. So it ought to be, we respectfully submit, incumbent upon the equitable chargee to advance its interest, and it can do so, and be sufficiently protected without the need for the imposition of any fiduciary duties upon the first mortgagee.
HEYDON J: What you just said indicates, perhaps, that it is not possible to answer this question until one knows, in this case, what the state of knowledge was of the first mortgagee, the second mortgagee and the third mortgagee of their interrelationship and the state of the accounts between them. This is outside the agreed facts, maybe.
MR DARKE: Your Honours only need to answer the question yes or no, and if on the agreed facts the appellants do not establish that as at 8 February 2006 these surplus funds and properties were held on trust for them, the answer should be no. It may be difficult for the court to go further and say what other interest the appellants may have, but that is the question that they have advanced.
HEYDON J: Underneath that submission is an acceptance on your part that they would be at liberty, when the matter returns to the Equity Division, to put their thinking caps on, try and assemble some evidence, which might lead to them having rights which get them in the same position as they would have got if the had question had been answered yes.
MR DARKE: Your Honours, the appellants following the answering of the separate question by Justice Young consented to judgment in favour of the present respondents on the basis that the answer ‑ ‑ ‑
HEYDON J: All of them?
MR DARKE: I think all. The judgment is in the appeal book at 262. The judgment for the defendants was awarded – the case has not been hitherto advanced on any basis other than that. Your Honours, I was not proposing to deal further than is contained in our written submissions in relation to the section 3 point.
GUMMOW J: Just a minute, Mr Darke. We are starting to be confused. Page 262 is the order of the primary judge, is it not?
MR DARKE: Yes.
GUMMOW J: Does that follow the discussions which he indicated at page 260, paragraph 52?
MR DARKE: I assume that is the case, your Honour.
GUMMOW J: Further thought “as to the ongoing conduct”. The product of that is this order the case collapsed.
MR DARKE: Yes.
GUMMOW J: But the order sought from the Court of Appeal – in the notice of appeal to the Court of Appeal it was simply that the orders be set aside and the question be answered in the affirmative, so that would produce the result that there would be further proceedings. Yes, thank you.
MR DARKE: Only if answered in the affirmative. I think, subject to any matters your Honours wish to raise with me in relation to the trust or charge point that we have dealt with it sufficiently in our written outline, which we of course rely upon. I was not proposing to take your Honours through any of the argument concerning section 3 unless your Honours require it.
GUMMOW J: We do not need to hear you.
MR DARKE: May it please the Court. In relation to Otter v Lord Vaux I was not proposing to deal with that either, anything in addition to our written outline.
GUMMOW J: I think we are sufficiently airborne.
MR DARKE: Could I just say one thing arising from a discussion this morning. Mr Justice Clarke in the Sussman Case said something about merger and the ‑ ‑ ‑
GUMMOW J: Well, he set out the passage from Sir Humphrey Waldock’s book, I think, at page 50.
MR DARKE: At 51 his Honour expressed the view that:
The principle remains alive and well and is based not on any doctrine of merger but on the equities arising from the contractual relationship –
At page 42 Justice Kirby also stated his agreement that:
the principle stated in Otter v Lord Vaux is a general equitable principle.
I just thought I should draw your Honours attention to those references. Unless there is anything your Honours wish me to deal with further, those are the submissions for the fifth to seventh respondents.
GUMMOW J: Thank you, Mr Darke. Yes, Mr McVay.
MR McVAY: Your Honours, just to correct a factual error that may have occurred. The date the first mortgagee was paid out was not 8 February, but 2 February, agreed fact 12A.
GUMMOW J: Well, what is the significance of that date, the selection of that of all the other possible dates as the only date in question?
MR McVAY: That just happens to be the day that the first mortgagee was fully paid.
GUMMOW J: What does - 8 February?
MR McVAY: No, 2 February, agreed fact 12A.
GUMMOW J: I know, but what does the question ask? As at what date?
BELL J: The question is directed to 8 February 2006, is it not?
MR McVAY: Yes, it is.
GUMMOW J: Why?
MR McVAY: That can only be a reference to the day that the townhouse titles were transferred, but strictly ‑ ‑ ‑
GUMMOW J: That is the securities?
MR McVAY: That is the securities, yes.
GUMMOW J: But the $432,000 that was paid over on 21 February, was it not?
MR McVAY: Yes. There was one payment on the 7th, agreed fact 12B; another payment on the 21st, agreed fact 16 and the titles were transferred on the 8th or given on the 8th. So, as my friend just said and he is quite right by the 8th they appreciated they were fully paid. Your Honours, I have three things to say about the trust charge issue. Two of them are rather pithy, but the other, I think, has got considerable substance.
HEYDON J: Pithy?
MR McVAY: Pithy, yes.
HEYDON J: A pithy thing usually has substance.
MR McVAY: I withdraw that then. There are three things I want to say. The first is this whole idea of trust rather than charge seems to have been accelerated by Lord Templeman’s speech in Napier’s Case. I do not know whether Lord Templeman is still alive, but if he is he would be bemused to find that his speech was being used as a springboard for a charge on surplus moneys. If I can take your Honours to something that Lord Templeman said three years before Napier, and that is in a case, China & South Sea Bank v Tan (1990) 1 AC. At page 545 his Honour said, between lines C and E, three or four lines up from the bottom of the middle paragraph:
The creditor does not become a trustee of the mortgaged securities and the power of sale for the surety unless and until the creditor is paid in full and the surety, having paid the whole of the debt is entitled to a transfer of the mortgaged securities –
His Honour, three years previously, albeit dicta, expressed the view that a surplus was held on trust as soon as the first mortgagee was paid out. Hence, my comment about his bemusement. The second point is that the concept of surplus moneys being held on trust ‑ ‑ ‑
GUMMOW J: Is there any discussion of this question in any of the leading texts, such as Rowlatt?
MR McVAY: I have not found it, I must say. I looked and I did not find it. I have a case which I think will be very instructive to the Court as soon as I mention this point. The cases I took your Honours to yesterday show that this concept of surplus moneys being held on trust has been around for 150-odd years.
GUMMOW J: Yes, but that is surplus money held on trust for the puisne mortgagee. That is what has been around for 150 years.
MR McVAY: Some of the cases were dealing, of course, with sureties and their right of subrogation. I only brought along surety cases. Those statements were made in the context of surety cases.
GUMMOW J: You had better take us to them.
MR McVAY: They are in my submissions.
GUMMOW J: I think they are said, rather than developed. The point is, just assume that it is not debated. I do not think it was ever debated until Lord Napier’s Case. I may be wrong about that.
MR McVAY: The references to the cases – I took your Honours to them yesterday – is footnote 6 in my submissions in reply – Davison’s Estate, Dale v Powell and Parker; Morgan v Hill.
GUMMOW J: You took us to Davison, did you not? That is the Irish case?
MR McVAY: Yes. I took your Honours to the three cases.
GUMMOW J: In none of them is there any discussion, I do not think.
MR McVAY: It is a bald statement, but there is a trust.
GUMMOW J: I am not criticising you for that, but that seemed to be as far as they go. Were those cases discussed at all in Lord Napier?
MR McVAY: I do not think so, but I will have my junior check on that. The more important point is this. We handed up this morning before your Honours came onto the Bench copies of section 3 and section 6 of the Real Property Act (NSW). Justice Hayne referred to this yesterday and sharpened our focus on this point. Section 3 defines a “charge” for the purpose of the Act as:
Any charge on land created for the purpose of securing the payment of an annuity, rent‑charge or sum of money other than a debt.
So a charge cannot be a security for a debt, it has to be a mortgage. Now, if your Honours go to section 56(1) of the same Act:
Whenever any land or estate or interest in land under the provisions of this Act is intended to be charged with, or made security for, the payment of a debt, the proprietor shall execute a mortgage in the approved form.
GUMMOW J: If it is charged with the payment of a debt.
MR McVAY: If it is to be charged with the payment, it must execute a mortgage.
GUMMOW J: Just read 56(1), “charged with the payment of a debt” or “made security for the payment of a debt”. What is the point that you are making?
MR McVAY: The point is that if it is only an equitable – I will make a point by reference to a case that is on our list, your Honours.
HEYDON J: No. What is the point you are making about this statutory language?
MR McVAY: That if it is only an equitable charge, as my friends contend for, then it is not a charge within section 3 of the Act because that section 3 defines “charge” as only securing annuities and rent charges and the like. It does not secure a debt.
HEYDON J: Correct, and what is the point of section 56(1)?
MR McVAY: Section 56(1) provides that if there is to be a charge secured on land, it must be by way of a registered mortgage.
GUMMOW J: You have to look at the definition of “mortgage”, Mr McVay. A mortgage is a particular species of the genus charge.
MR McVAY: For securing a debt. The mortgage secures a debt, the charge only secures an annuity or a rent charge, that is the point. Justice Young has looked at this in a case that your Honours have got. It is the case of Avco Financial Services Ltd v Commonwealth Bank of Australia (1989) 17 NSWLR 679. I will just take your Honours to his Honour’s judgment on page 680:
In August 1988, Advance Bank Australia Ltd paid into Court $11,771.38 being the surplus on the sale by that Bank of real property . . .
The affidavit accompanying the payment in, indicated that the possible claimants to the surplus were:
(a)the mortgagors;
(b)the present plaintiff claiming under a loan contract of 29 July 1986; and
(c)the defendant claiming under an equitable mortgage of 11 February 1987.
The defendant claimed the fund in court ‑ ‑ ‑
HAYNE J: Well, perhaps instead of reading the whole case to us, Mr McVay, you could be good enough to tell us what the proposition is you seek to deduce from it?
MR McVAY: Yes. The proposition is that his Honour held, as I read it, that an equitable charge is not within section 3 and that the equitable chargee could not become registered as a mortgagee if he has only got an equitable charge. That is the proposition. So if a guarantor with a right of subrogation only has an equitable charge, then he will never be able to exercise the power of sale or become registered as a registered proprietor of a mortgage. Of course, contrast that with section 3 ‑ ‑ ‑
GUMMOW J: Has this case been in your written submissions?
MR McVAY: No, it has not. We brought the case along, but Justice Hayne’s comment sharpened our focus on it.
GUMMOW J: Well, I am worried that it has sharpened Mr Darke’s focus on it.
MR McVAY: Be that as it may. Under section 3, of course, the surety becomes an actual assignee and he can go and get registered as a registered proprietor of a mortgage with all the powers of a mortgagee in possession.
GUMMOW J: What do you say about the passage at 682 between letters C and D?
MR McVAY: Yes, that is right – no, between C and the bottom of the page.
GUMMOW J: Page 683 letter B.
MR McVAY: The paragraph at the top of the page. So under section 3 of the Miscellaneous Provisions Act, of course, if an assignment is given, then the subrogated surety becomes an actual registered mortgagee because it is a transfer of a mortgage. I heard your Honour talking to Mr Darke this morning about interest, well, if he is an assignment under the mortgage then he gets the full powers of the first mortgage or the first mortgagee as an assignee.
GUMMOW J: What do you say about Justice Powell’s decision in McColl’s?
MR McVAY: He was talking about the equitable right of subrogation. If it is under section 3, then he gets all the powers of the first mortgagee. That is all I want to say about trust or charge, your Honours, and that Real Property Act analysis is a real difficulty for the respondents. I want to say something about clean hands and doing equity, only briefly. In the fourth edition of Equity: Doctrines and Remedies at paragraph [3-050] ‑ ‑ ‑
GUMMOW J: Just going back to Avco for a minute, having unleashed this creature, what is the significance of the reference to subtrust on 683, “there is virtually a subtrust”? Letter C on 683.
HEYDON J: You would like that, presumably?
MR McVAY: Beg your pardon, your Honour?
HEYDON J: You adopt that presumably.
MR McVAY: I have to say honestly I did not quite go that far, I stopped a few lines earlier, but I would adopt it, yes.
GUMMOW J: Very well.
MR McVAY: At paragraph [3‑050] of that fourth edition speaks about doing equity when seeking equity, but the passage makes it clear, your Honours, that the obligations which equity requires a plaintiff to fulfil before equitable relief is granted, must arise out of the subject matter of the dispute. There has got to be a close connection. In our particular case, the subject matter of the dispute is whether there is a right of subrogation in the guarantors to the first mortgagee pursuant to a payment made under the first guarantee and that has got nothing at all to do with an allegation, still yet unmade, that there is a claim under the second guarantee for either indemnity or for payment. So it does not arise out the same dispute.
The dispute we are having is whether or not we are entitled to be subrogated to the first mortgagee when my friends are talking about a dispute, still yet unmade, about a claim under the second guarantee. There is just no commonality about the subject matters. So we do not have to do equity by paying out the second mortgagee under the guarantee before we can seek subrogation under the first mortgage because they are not connected. The same theme runs through the clean hands, paragraph [3‑130]:
the impropriety complained of “must have an immediate and necessary relation to the equity sued for”.
“An immediate and necessary relation to the equity sued for”. In this case the equity sued for is to be subrogated to the first mortgagee, but my friends allege that the non‑payment of a claim yet to be made under the second guarantee is an impropriety. Well, there is just not an immediate connection with it. Coming out of clause 6.4, and your Honours will find that on page 161 of the appeal book. That clause only applies as between guarantor and second mortgagee. It is, at best, totally ambiguous and therefore has to be construed in the appellant’s favour. It is ambiguous because of the last few words:
in any way restrict the Lender’s rights, remedies or recourse.
Of course it does not say to whom or to what. The rights, remedies or recourse, of course, in our submission, is the rights, remedies and recourse against the guarantor. What my friends want to say is the rights, remedies and recourse against the first mortgagee. I want to read those words into it. So it is ambiguous. Does it mean rights, remedies and recourse to the borrower or does it mean rights, remedies or recourse to the guarantor? It means the latter.
What else can be said about 6.4 is this. So it is only between the parties to the deed and the rights, remedies or recourse can only be against the party to the deed which is the guarantor. That is made even more plain by where 6.4 appears in the document. It appears in clause 6 which is a general heading, although you cannot take the general heading into account, it does properly reflect the terms. “Matters Not Affecting Guarantor’s Liability” and everything in 6.1 does not affect the guarantor’s liability, 6.2 the “Guarantor’s Liability”, 6.3 “Notice or Consent” – lack of consent does not affect the guarantor’s liability and precisely the same with 6.4. It waives all rights that affect his liability.
I come now to clause 7.1(2). It has to be construed in respect that it relates to the second advance only and not the first advance and that is the narrower view. If there is a broader view and it relates to the advance of the first mortgagee, then it still does not assist my friends because Drew v Lockett clearly explains it, that subrogation leaves the borrower’s property totally unaffected, totally unchanged. The purpose of 7.1(2) is to ensure that the second mortgagee’s value in its security is not diluted. Subrogation does not do that. The guarantor makes a payment and he gets the same amount back. It is all square at the end of the day. He makes a payment of 1.5 and he gets 1.5 back. The position of the borrower is totally unchanged.
The second mortgagee had $8 million ahead of him when he gave the second mortgage. After subrogation he still got $8 million ahead of him, because 1.5 went in and 1.5 comes out. So it does not in any way prejudice the second mortgagee one bit, because the net effect is 1.5 in, 1.5 out, no change to the value of the borrower’s assets. The further point that 7.1(2) in no way contemplated subrogation as this, that subrogation is a right against the holder of the securities. In this case it is the first mortgagee. It is a right in personam. It is a right to prevent or restrict the first mortgagee from dealing with those securities.
GUMMOW J: You want to say it is more than a right in personam, do you not?
MR McVAY: That is the second step of the argument. We do not need an equity for our indemnity, that is there, that is implied, but we do need an equity to stop the first mortgagee from wrongfully dealing with the securities. That is the right in personam, to injunct the first mortgagee. That is not against the property of the borrower. They are the submissions in reply.
BELL J: Mr McVay, just one aspect. You say that the dispute is about whether or not your clients are entitled to be subrogated. That is not the dispute that the separate question asks. The separate question is directed to the specified sums and securities and to the status of those things as at 8 February 2006. Now, you point to paragraph 11 in the agreed facts in order to establish that the first mortgagee was on notice of the fact of the total amount that your clients had paid out in reduction of the debt, but how do you deal with Mr Darke’s point concerning the absence of evidence about the first mortgagee’s knowledge of the account as between – there is no knowledge about how that account stood at the relevant date. How can the Court determine that the securities and the total of the sum was money held on trust, accepting that your clients were entitled to be subrogated to the extent of the sum then owing?
MR McVAY: Well, the first mortgagee holds any surplus on trust, any surplus at all, whether it be in money or whether it be in ‑ ‑ ‑
BELL J: Yes.
MR McVAY: So whatever was surplus to its needs on 8 February belonged to somebody else and whatever it was, whether they ‑ ‑ ‑
BELL J: But this is in trust for the plaintiffs, that is, for the Bofingers as at 8 February. How, without knowing more about the state of the account, do you know that the whole of the surplus, represented by the two sons and the securities, were held in trust for the plaintiffs?
MR McVAY: The first mortgagee knows that the plaintiffs paid $1.5 million. So it knows that to that extent any surplus has to satisfy at least that. Now, if there is more than $1.5 million, then the Bofingers, as subrogated to the rights of the first mortgagee, would hold that on trust for the second mortgagee. If there is more in the surplus than is needed to pay out the Bofingers and all of it is paid to the Bofingers, then the Bofingers can only recoup what they are entitled to recoup. If there is any more, the Bofingers have to deal with it, account to whomsoever is entitled to it.
GUMMOW J: You say it is in trust for the plaintiffs up to 1.5?
MR McVAY: Yes, up to 1.5. They cannot get any more than what they have paid.
GUMMOW J: And the two sums of money do not reach that.
MR McVAY: No, they do not.
GUMMOW J: The assumption seems to be that lots 1 and 14 will not go over that.
MR McVAY: That is right, yes. But if they do, the Bofingers are not entitled to it and would have to hold it for whoever is entitled to it.
GUMMOW J: That may require more than a yes/no answer.
MR McVAY: Yes.
BELL J: What the agreed facts tell us is that the securities and the sums were paid to the second mortgagee. So simply answering a question, if it be the case, that the whole was held in trust for your clients in circumstances in which in fact a part of it was, on your analysis, held by your clients in trust.
MR McVAY: Only if there was more than necessary to pay out the subrogated ‑ ‑ ‑
BELL J: I understand that, Mr McVay. I am just pointing to the specificity of the question and the difficulty of dealing with it in light of ‑ ‑ ‑
MR McVAY: Well, of course, no one knew, as at the date the first mortgagee was paid out, just how much the units would sell for. Nobody knew that. Until they were turning into money, nobody knew, but the only way of turning them into money was to sell them.
GUMMOW J: And the statement is there, paragraphs 12A and following, as to what was paid, now supported by the letters we were taken to at 238 and 240.
MR McVAY: Yes, they are.
GUMMOW J: Which puts some pressure on it.
MR McVAY: They are the submissions in reply, your Honour.
GUMMOW J: Mr Darke, do the fifth, sixth and seventh respondents seek leave to put in within seven days such submissions as they may be advised as to the reliance placed by the appellants upon Avco?
MR DARKE: Yes, if we may have that leave, your Honours.
GUMMOW J: I think it is sufficient if you deal with it. It does seem to be in your bailiwick.
MR DARKE: Yes, I think so. Thank you, your Honour.
GUMMOW J: Is there anything else? The Court will consider its decision in this matter. We will adjourn to 9.30 am tomorrow in Sydney and 9.30 am also in Melbourne.
AT 12.05 PM THE MATTER WAS ADJOURNED
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