Bolwell v NWC Finance Pty Ltd
[2024] VSC 30
•9 February 2024
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2022 01175
BETWEEN:
| CRAIG IVOR BOLWELL IN HIS CAPACITY AS LIQUIDATOR OF ROCK DEVELOPMENT & INVESTMENTS PTY LTD (ACN 168 484 811) (IN LIQUIDATION) & ANOR (according to the Schedule attached) | Plaintiffs |
| and | |
| NWC FINANCE PTY LIMITED (ACN 143 762 583) & ORS (according to the Schedule attached) | Defendants |
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JUDGE: | M Osborne J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 13 and 14 November 2023 |
DATE OF JUDGMENT: | 9 February 2024 |
CASE MAY BE CITED AS: | Bolwell & Anor v NWC Finance Pty Ltd & Ors |
MEDIUM NEUTRAL CITATION: | [2024] VSC 30 |
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EQUITY — SUBROGATION — Whether payment by third party entitles the third party to be subrogated to the debt of a prior mortgagee — Relevance of intention of the third party – Whether circumstances are such that it is unconscionable for the mortgagor to deny the interest claimed — Ghana Commercial Bank v DT Chandiram & Anor [1960] AC 732 — Cochrane v Cochrane (1985) 2 NSWLR 403 — Challenger Managed Investments Ltd v Direct Money Corp Pty Ltd [2003] NSWSC 1072 — Highland v Exception Holdings Pty Ltd (in liq) (2006) 60 ACSR 223 — Cheltenham & Gloucester PLD v Appleyard & Anor [2004] EWCA Civ 291 — Dalma No 1 Pty Ltd (2013) 95 ACSR 641 — Aged Care Services Pty Ltd v Kanning Services Pty Ltd (2013) 85 NSWLR 174 — Gandel Metals Pty Ltd, in the matter of Centennial Mining Ltd (Subject to Deed of Company Arrangement) v Centennial Mining Limited (No 2) [2020] FCA 633 — Re H & S Credits Ltd (in liq), Tucker v Roberts [1969] Qd R 280 — Bofinger v Kingsway Group Ltd (2009) 239 CLR 269.
CONSTRUCTION OF CONTRACTS — Whether third party payment fell within the definition of ’Enforcement Expenses’ or ’Other Monies’ set out in a loan agreement — Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104.
RECEIVERS AND MANAGERS — Agents for the mortgagee in possession — Whether solicitors a ‘controller’ of property within the meaning of s 9 of the Corporations Act 2001 (Cth) — Meaning of ‘controller’ - Cooperatieve Centrale Raiffeisen–Boerenleenbank BA v Philips [2011] SASC 139 — Entitlement to relief pursuant to s 434(1)(b) of the Corporations Act 2001 (Cth) — Entitlement to an order for an inquiry pursuant to s 423(1) of the Corporations Act 2001 (Cth) — Re Sahab Holdings Pty Ltd [2022] NSWSC 4.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | T Sowden | FCW Lawyers |
| For the First Defendant | S Rubenstein | ERA Legal |
| For the Second Defendant | B Petrie | K & L Gates |
| For the Third Defendant | A Silver | Nelson McKinnon Lawyers |
HIS HONOUR:
Introduction
The first plaintiff, Craig Ivor Bolwell (the ‘Liquidator’), is the liquidator of the second plaintiff, Rock Development & Investments Pty Ltd (in liquidation) (‘Rock Development’). Rock Development owned a property at 7 Ingram Place, Taylors Hill (the ‘Taylors Hill Property’) which was formerly subject to a registered first mortgage (the ‘BAB Mortgage’) in favour of Bendigo and Adelaide Bank (‘BAB’) and a registered second mortgage (the ‘NWC Mortgage’) in favour of the first defendant, NWC Finance Pty Ltd (‘NWC’).
Rock Development was wound up in insolvency on 28 July 2017 by order of the Federal Court of Australia.
NWC sold the Taylors Hill Property as mortgagee in possession pursuant to a contract of sale made 27 November 2017 for $2.7 million plus GST.
In this proceeding, the plaintiffs seek relief against NWC for the taking of an account of the principal, interest, expenses and fees charged by NWC under the loan between Rock Development and NWC (the ‘NWC Loan’) and an order that NWC pay any surplus from the proceeds of sale of the Taylors Hill Property to the plaintiffs.
The principal issue to be determined arises from the fact that on or about 4 April 2017, NWC paid $2,006,184.77 to BAB (the ‘BAB Payment’) which was the amount then due and payable by Rock Development under a loan between Rock Development and BAB (the ’BAB Loan’) which was secured by the BAB Mortgage. As a result of the BAB Payment, the BAB Mortgage was discharged on or about 18 April 2017. On or about 4 May 2017, Richard Albarran and David Anthony Ross from Hall Chadwick, who had been appointed by NWC as agents for NWC in its capacity as mortgagee in possession of the Taylors Hill property and, by separate appointment, as receivers and managers of specified assets pursuant to a general security agreement between Rock Development and NWC, took possession of the Taylors Hill Property. Given that Messrs Albarran and Ross held dual appointments, it is convenient to refer to them as ‘Hall Chadwick’.
It is common ground that a mortgagor is only entitled to an account if there is, or is likely to be, a surplus after the satisfaction of the mortgage debt.[1]
[1]Batthyany v Walford (1887) 36 ChD 269,276 (Cotton LJ, Bowen and Fry LLJ agreeing).
It is a critical element of the plaintiffs’ claim as to the likelihood of a surplus that the BAB Payment does not fall within the scope of amounts due under the NWC Loan and secured by the NWC Mortgage, and further that the making of the BAB Payment does not entitle NWC to be subrogated to the rights of BAB under the BAB Mortgage. Accordingly, as part of the relief sought and in effect as a precondition to the order for an account, the plaintiffs seek declaratory relief to the effect that the BAB Payment does not constitute an expense under the NWC Loan and otherwise does not give any rights to NWC over the Taylors Hill Property arising from the BAB Mortgage and the BAB Payment.
Separately but relatedly, the plaintiffs also seek orders against the second defendant, Summer Lawyers (‘Summer Lawyers’) that it be required to render proper accounts to the plaintiffs pursuant to s 434(1)(b) of the Corporations Act 2001 (Cth) (the ‘Act’) and an order in the nature of an inquiry under s 423(1) of the Act. Summer Lawyers were the solicitors for NWC. The plaintiffs’ claim for relief against the second defendant rests among other things on the proposition that Summer Lawyers were at all material times a ‘controller’ of all the assets and undertakings of Rock Development (including the Taylors Hill Property) within the meaning of s 9 of the Act.
The plaintiffs seek like relief against Hall Chadwick. Hall Chadwick was a ‘controller’; as such the claim against Hall Chadwick does not does depend on this issue.
For the reasons set out below:
(a) NWC was subrogated to the position and rights of BAB under the BAB Mortgage as a consequence of which the plaintiffs have not established that there is or is likely to be a surplus after the satisfaction of the NWC Mortgage debt;
(b) Summer Lawyers was not a controller of the property of Rock Development and there is in any event no basis for relief against Summer Lawyers under ss 423(1) and 434(1) of the Act; and
(c) the plaintiffs have not established any entitlement to an order against Hall Chadwick under s 434(1)(b) of the Act or any basis for the order for an inquiry pursuant to s 423 of the Act.
The salient facts in more detail
On 4 March 2015, Rock Development entered into the BAB Loan on terms set out in a letter of offer dated 4 March 2015 (later varied by agreement dated 22 April 2016), BAB’s Standard Loan and Security Terms dated 18 August 2014, a General Security Agreement dated 25 June 2014, the BAB Mortgage and Memorandum of Common Provisions number AA953.
Relevantly, the terms of the BAB Loan and the BAB Mortgage included that the facility limit was $1,760,000; the initial term expired 12 months from the initial drawdown, later extended to 27 June 2016; the interest rate was the applicable rate plus 1% with the applicable rate being based on the market floating base rate plus a margin of 1.4%, which at the time of the offer translated to 3.45% plus 1.4%, which equalled 4.85%. The default rate was 1% higher than the interest rate.
Rock Development became the registered proprietor of the Taylors Hill Property on 8 April 2015 with the BAB Mortgage registered on title.
On about 15 September 2016, NWC agreed to provide a loan to Rock Development in the amount of $572,000 secured by, inter alia, the NWC Mortgage. The loan was to expire in December 2017. Interest was payable under the NWC Loan at a standard rate of 33% per annum with a default rate of 66% per annum.[2]
[2]The terms used in the loan agreement in fact provided that the interest rate was 66% per annum whilst the discount rate was 33% per annum. The discount rate would be applicable in the event that the discount would be deducted from the interest amount provided the payment was received by NWC in clear funds before 5pm on the last business day of the relevant interest period.
On 15 September 2016, NWC made an initial advance to Rock Development of $283,668.63 pursuant to the NWC Loan. The $283,668.63 included prepaid interest in the amount of $7,808.63 (which corresponded to one month’s interest at the standard rate) together with set up costs of $28,876, a valuation fee of $10,000 and other costs of $16,984 comprising loan documentation and brokerage fees.
On 9 November 2016, BAB issued a demand for payment under the BAB Loan demanding the payment of $1,808,604.60 being the amount alleged to be owing under the facility as at 9 November 2016. The event of default was the failure to repay the loan on its expiry date of 27 June 2016.
On about 9 December 2016, BAB appointed Matthew James Byrnes and Andrew Stewart Reed Hewitt of Grant Thornton (‘Grant Thornton’) as joint and several agents for BAB as mortgagee in possession of the Taylors Hill Property.
On 20 December 2016, the NWC Mortgage was registered as a second mortgage subordinate to the BAB Mortgage. Prior to this, NWC was content to rely on a caveat which it had registered on title.
On 15 February 2017, Hall Chadwick was appointed by NWC as NWC’s agent as mortgagee in possession and as receiver and manager of Rock Development’s assets and undertakings. As the second mortgagee, NWC ‘s debt ranked below the debt due by Rock Development to BAB pursuant to the BAB Loan and secured by the BAB Mortgage. The amounts payable under the BAB Loan included all costs incurred by BAB’s agent, Grant Thornton. NWC’s director, Giuseppe Morello, gave unchallenged evidence that NWC’s motivation to reach agreement with BAB to pay the amount owed by Rock Development to BAB was because NWC had no control over the costs incurred by BAB in the enforcement of its facility and wanted to limit those costs and control the realisation of the securities granted to Rock Development by NWC. To that end, NWC and BAB entered into a deed to which Grant Thornton was also party, which, inter alia, provided that on 4 April 2017, NWC would provide a bank cheque payable to BAB in the amount of the Payout Sum (defined as $2,006,184.77 if the settlement date was 4 April 2017) (this was the BAB Payment) and that within 14 days of the settlement date, NWC would take all necessary steps to register the discharge of the BAB Mortgage with the Registrar of Titles and notify BAB and its agents in writing.
In the correspondence which preceded the execution of the deed, Grant Thornton requested confirmation from Hall Chadwick as to whether NWC wished to obtain an assignment of the BAB Mortgage over the Taylors Hill property. In response, Hall Chadwick responded on NWC’s behalf, advising that NWC did not require an assignment of the BAB Mortgage and would be satisfied with receiving a discharge of the BAB Mortgage on settlement of the BAB debt.
The BAB Mortgage was discharged on or about 18 April 2017.
On or around 4 May 2017, Hall Chadwick took possession of the property as agents for the mortgagee, NWC. Estate agents were engaged to market and sell the Taylors Hill Property on or around 9 May 2017.
On 27 November 2017, NWC as mortgagee in possession entered into a contract of sale to sell the Taylors Hill Property for $2.7 million plus GST. The contract of sale was signed on NWC’s behalf by Paul Reese from Summer Lawyers pursuant to a power of attorney given to him by NWC.
Settlement of the contract of sale took place on 16 February 2018. The costs of sale totalled $161,738.51.[3]
[3]Comprising valuation fee - $6,600; geotechnical testing - $594; yield study - $2,750; marketing fees - $21,105.81; sales commission - $66,825; hoarding to secure property - $924; adjustments on conveyancing - $13,067.26 and legal costs - $49,872.44. Once the GST payable on the sale of $270,000 was added, that gave rise to total costs of sale plus GST of $431,738.51.
The net proceeds after the costs of sale and GST was $2,538,261.49 which were, according to NWC, applied as follows:[4]
[4]Aide Memoire handed up by NWC at the hearing.
(a) in payment of the amount paid by NWC to BAB being $2,006,184.77 (the BAB Payment);
(b) in payment of interest payable under the BAB Loan from the date of the BAB Payment to the date of settlement of the Taylors Hill Property calculated at the default rate payable under the BAB Loan totalling $94,445.61;
(c) in payment of amounts due under the NWC Loan as follows:
Costs associated with original advance
(i) initial advance of $220,000;
(ii) loan application fee of $10,000;
(iii) loan establishment fee of $18,876;
(iv) loan documentation fee of $4,400;
(v) brokerage fee of $12,584;
(vi) valuation fee of $10,000;
(vii) prepayment of first month’s interest of $7,803.63.
Loan management
(viii) loan management fee of $9,644.78;[5]
[5]The first defendant's evidence and written submissions listed $29,501.54 as the relevant amount but NWC accepted at hearing that this was overstated and the correct amount was $9,644.78.
Interest
(ix) interest of $433,043.97 which comprises interest at the default rate payable under the NWC Loan; interest at the standard rate is half that amount ($216,521.99).
Costs associated with default
(x) legal costs associated with the loan default of $1,174.34;
(xi) loan termination fee of $7,091.72;
(xii) fee on event of default of $34,000;
(xiii) legal fees and other costs in connection with the deed between NWC and BAB of $11,873.90; and
(xiv) receivership fees of $44,000;
(the total of the items at (a) - (c) is $2,925,122.72.
Having regard to the application of funds set out above, an amount of $386,861.23 remains outstanding to NWC. If interest payable under the NWC Loan is calculated at the standard rate the deficiency is reduced to $170,339.24.
The claim against NWC
As is apparent from the application of the proceeds from the sale of the Taylors Hill Property, whether the plaintiffs are able to establish that there is or should have been a surplus following the sale of the property, depends on whether the BAB Payment (together with the interest on that loan calculated at the default rate set out in the BAB Loan between 30 March 2017 and 16 February 2018) has properly been deducted by NWC from the net proceeds of sale.
The plaintiffs submit that the discharge of the BAB Mortgage combined with the conscious choice made by NWC not to take an assignment of the BAB Mortgage means that the BAB Payment at its highest entitles NWC to prove in the liquidation as an unsecured creditor and does not entitle it to be subrogated to BAB’s rights under the BAB Mortgage. NWC argues that it was subrogated to BAB’s rights under the BAB Mortgage, the discharge of which was procured by the BAB Payment. Alternatively, it argues the BAB Payment constitutes an ‘Enforcement Expense’ or falls within the scope of ‘Other Monies’, as defined in the Memorandum of Common Provisions AA2769 dated 1 September 2015 (‘MCP’) which forms part of the terms of the NWC Loan, due under the NWC Loan and accordingly is secured by the NWC Mortgage. If this argument is accepted then the BAB Payment will carry interest at the higher rates prescribed under the NWC Loan and not that calculated by reference to the default rate under the BAB Loan.
Subrogation
NWC’s primary argument is that upon the making of the BAB Payment, NWC was subrogated to the position and rights of BAB under the BAB Mortgage, which include an entitlement to interest at the default rate thereafter until 16 February 2018.
The plaintiffs accept that where a third party pays off a debt secured by a mortgage, the third party is presumed, unless the contrary appears, to have intended that the mortgage shall be kept alive for the benefit of the third party.
The thrust of the plaintiffs’ case is that NWC intended otherwise. They argue that NWC made a calculated decision not to take an assignment of the BAB Mortgage and instead treated the BAB Loan as ’Enforcement Expenses’ under the NWC Mortgage. The next element in the plaintiffs’ argument is that the payout of the BAB Loan did not constitute ‘Enforcement Expenses’ or ‘Other Monies’ and as such is not secured by the NWC Mortgage.
Relevant Case Law
Ghana Commercial Bank
In order to evaluate the competing positions, it is convenient to start with Ghana Commercial Bank v DT Chandiram & Anor (‘Ghana Commercial Bank’).[6] In Ghana Commercial Bank, a debtor created an equitable mortgage over real property in favour of Barclays Bank by deposit of title deeds. For reasons unclear and not relevant, the title deeds were then sent to the Ghana Commercial Bank with instructions to hold them on Barclays’ behalf.[7]
[6][1960] AC 732 (‘Ghana Commercial Bank’).
[7]Ibid 732.
A writ of attachment against the property was then issued at the instance of a judgment creditor. Under the rules of the Ghana Supreme Court, upon the issue of a writ of attachment, a debtor was prohibited from alienating the property without leave and any alienation without leave was void.
After the issue of the writ of attachment, the debtor executed a legal mortgage of the property in favour of Ghana Commercial Bank, and conveyed the property to Ghana Commercial Bank, to secure repayment of money owing or which would become owing to the bank. On the same day, Ghana Commercial Bank paid out the Barclays debt and retained the title deeds in its custody.
The legal mortgage and conveyance constituted alienations after the issue of the writ of attachment and as a consequence were void.
However, the writ of attachment took effect subject to such encumbrances which existed as at the date of attachment. This included the Barclays equitable mortgage.[8]
[8]Ibid 733, 743.
The relevant issue for present purposes was whether Ghana Commercial Bank was subrogated to the Barclays equitable mortgage even though its advance was made on the basis that it would be secured by the legal mortgage.
The House of Lords held that it was; in delivering the judgment of the House of Lords, Lord Jenkins noted that it was not ‘open to doubt that when a third party pays off a mortgage, the third party is presumed, unless the contrary appears, to intend that the mortgage should be kept alive for his own benefit’.[9]
[9]Ibid 745; Butler v Rice [1910] 2 Ch 277, 282-283.
The House of Lords rejected the argument that the expected legal mortgage sufficed to negative any such intention. Whilst their Lordships accepted that it was Ghana Commercial Bank’s intention to substitute the legal mortgage for the Barclays equitable mortgage, they did not accept that Ghana Commercial Bank intended that the equitable mortgage would be extinguished in the event the legal mortgage proved invalid or ineffective. Ghana Commercial Bank’s intention was to replace the equitable mortgage with a valid and effective legal mortgage, but to keep the equitable mortgage alive for its own benefit save and insofar as it was so replaced.[10]
Cochrane
[10]Ghana Commercial Bank (n 6) 745.
In Cochrane v Cochrane (‘Cochrane’),[11] Kearney J sitting in the Equity Division of the Supreme Court of New South Wales, after referring to Ghana Commercial Bank with approval, observed that the relevant principle was one:
…based on equity’s concern to prevent one party obtaining an advantage at the expense of another which in the circumstances of the case is unconscionable. Hence, there is a common thread running through the relevant cases to the effect that the conscience of the mortgagor should be affected so as to cause the mortgage to be kept alive. This is illustrated in the text book examples first, of a third party not being entitled to a right by way of subrogation where he simply lends the money on an unsecured basis to the mortgagor who then uses such funds to pay off the mortgage; and secondly, of a third party being so entitled where he advances the money to pay out the mortgage on the understanding that security would be provided for such advance upon the mortgage being paid out.[12]
[11](1985) 3 NSWLR 403 (‘Cochrane’).
[12]Ibid 405.
His Honour continued, that as a corollary, equity would not intervene by way of subrogation where the third party had a legal or equitable remedy sufficient to avoid an unconscionable result. In Cochrane, where a co-mortgagor had paid out the mortgage debt, a sufficient remedy was available to the co-mortgagor in the nature of a right of contribution, such that the doctrine of subrogation did not apply.[13]
Challenger Managed Investments
[13]Ibid.
In Challenger Managed Investments Ltd v Direct Money Corp Pty Ltd (‘Challenger Managed Investments’),[14] Bryson J of the Equity Division of the Supreme Court of New South Wales considered the application of the doctrine in an unusual case arising from forgeries of mortgages and other documents which included the use of forged documents to obtain new certificates of title. A forged mortgage was given purportedly by the registered proprietors of a property in Paddington to the Residential Housing Corporation (‘RHC’) to secure a loan of $515,000. The registered proprietors in fact had nothing to do with the mortgages and did not receive the $515,000. Their signatures on the mortgage were forgeries.
[14][2003] NSWSC 1072 (‘Challenger Managed Investments’).
Permanent Trustee Australia (‘PTA’) advanced funds a few weeks later which were purportedly used to pay out the RHC debt and discharge the RHC mortgage. Fortuitously, the RHC mortgage was not discharged.
PTA claimed that it was entitled to rely by subrogation on the registered first mortgage over the Paddington property to RHC to secure the $515,000 which was paid with the intention of securing a discharge of the RHC mortgage.[15]
[15]Ibid [45].
His Honour considered that references to intention or presumed intention of the payer were unhelpful in an understanding of the application of the doctrine:
An explanation in terms of the intention or the presumed intention of the payer of the basis on which a person who pays off an existing mortgage is entitled to be subrogated to the position and the rights of the mortgagee who has been paid does not give the law a basis which is clear or can be readily understood. The reference to the intention or presumed intention of the payer may introduce an element which is not necessary for an understanding of subrogation but is unfortunately distracting, particularly where the intention is presumed or, it might be said, fictitious. It will be seen that in the first paragraph in the passage from Cochrane v. Cochrane which I have set out Kearney J referred to Ghana Commercial Bank v. Chandiram in which the Privy Council stated the rule in terms of presumed intention, but in the second paragraph Kearney J explained the principle in terms of the position in conscience of the mortgagor, to which the intention of the payer that he should or should not have security, if he had any intention about it, is relevant but not necessarily conclusive. …
References to the intention of the payer fail to express anything which is central to the doctrine of subrogation. It sometimes happens that the person to whom a presumed intention to keep a mortgage alive is imputed has actually acted to bring about its discharge; that is so in the present case. The essence of the doctrine is elsewhere than in an intention or presumed intention of the payer to rely on the mortgage which was paid off. Intention may be significant where it is for some reason clear that the payer did not intend to be secured at all; otherwise it appears to me to be unfortunate that it should have a part in a statement of the doctrine.[16]
[16]Ibid [48] – [49].
After noting that Lord Hoffmann’s observations in Banque Financiere de la Cite v Parc (Battersea) Ltd (‘Banque Financiere’)[17] as to subrogation being based on notions of unjust enrichment were not established in Australian law,[18] his Honour observed that although the doctrinal basis was difficult to identify and the classification of the mortgagor’s position as unconscionable was ‘very attenuated’, subrogation was an entitlement which equity accords a payer, firmly established by judicial decisions.[19]
[17][1999] 1 AC 221 (‘Banque Financiere’).
[18]Challenger Managed Investments (n 14) [50].
[19]Ibid.
Although his Honour considered that the assistance which could be provided from presumed or actual intention of the plaintiffs was limited, Bryson J noted that there was, in any case, a clear intention on the part of the plaintiffs that they should have security over the Paddington property with their intention to obtain security being the whole basis of their involvement.[20] The fact that the plaintiffs did not intend that the particular mortgage in favour of RHC would continue to exist and indeed had made firm preparations to discharge it, did not mean that the doctrine did not apply.
[20]Ibid [51].
His Honour held that it was sufficient that the plaintiffs intended to have ‘security of some kind and that the payment went towards discharging the previously existing security’.[21] His Honour then noted that the intention to have security is spoken of in the authorities as presumed intention and may not be a real requirement, but in any case the plaintiffs had an actual intention to that effect. The fact that the intention was to have a different form of security did not matter. Neither did the fact that the plaintiffs sought to have the existing security discharged and did not choose to take an assignment.[22]
[21]Ibid [58].
[22]Ibid.
According to Bryson J, the essential elements were that the plaintiffs paid money to discharge a mortgage over the property and the further element ‘if it be essential’[23] that they intended to take security for their payment.
Cheltenham & Gloucester
[23]Ibid [59].
In Cheltenham & Gloucester PLC v Appleyard & Anor (‘Cheltenham & Gloucester’),[24] a decision of the Supreme Court in the United Kingdom, the Court held that a lender, Cheltenham & Gloucester PLC (‘C&G’), was subrogated to the rights of a first mortgagee, Bradford & Bingley Building Society (‘B&B’). The lender had advanced money which was to be used to pay off money owing to B&B. It was intended by the lender and the borrower that C&G’s loan would be secured by a registered first legal charge over the property.
[24][2004] EWCA Civ 291 (‘Cheltenham & Gloucester’).
In fact, C&G did not obtain that first legal charge as it was unable to register its mortgage as a result of the position taken by the second mortgagee, Bank of Credit and Commerce International. C&G relied upon the principle that where A’s money is used to pay off the claim of B who is a secured creditor, A is regarded in equity as having had an assignment to it of B’s rights as a secured creditor. It argued that one of the most common circumstances is where one person advances money on the understanding that it is to have certain security for the money advanced, but for one reason or another that person does not receive the promised security. In such a case, that person is nevertheless subrogated to the rights of any other person who had at the relevant time, any security over the same property and whose debts were discharged in whole or in part by the money provided by the lender.[25]
[25]Ibid [25]; see also Burston Finance Ltd v Speirway Ltd (in liq) [1974] 1 WLR 1648, 1652B-C.
In delivering the judgment of the Court, Neuberger LJ set out a series of propositions relating to subrogation. Some of the propositions are not relevant to the issues under consideration here whilst others refer to subrogation as a remedy aimed at preventing unjust enrichment which does not accord with Australian authority. They too can be set to one side. Nevertheless, the fourth, seventh, eighth, ninth, tenth and eleventh propositions bear restating.
The fourth proposition is that which Neuberger LJ described as the classic case of subrogation where a lender’s anticipated security may not have been forthcoming, such that the lender seeks to invoke subrogation. The reasons for the security not being forthcoming were noted as varying in nature including the lender’s ineptitude, the lender being misled, the borrower being an infant and the borrower being ultra vires.[26]
[26]Cheltenham & Gloucester (n 24) [35].
In the seventh proposition, Neuberger LJ stated that a lender cannot claim subrogation if the lender obtains all the security which it bargained for or where the lender specifically bargained on the basis that it receive no security at all.[27]
[27]Ibid [38].
In the eighth proposition, Neuberger LJ stated that it did not matter that the lender’s failure to obtain the security it bargained for was attributable to his own negligence. This was irrelevant and did not operate to prevent the claim for subrogation.[28]
[28]Ibid [39].
In the ninth proposition, Neuberger LJ observed that:
…the absence of a common intention on the part of the borrower and the lender that the lender should have security is by no means fatal to a lender’s subsequent claim for subrogation… However, the intention of the parties to the arrangement which is said to give rise to a claim for subrogation may be “highly relevant”… It would seem that the intention of the lender is particularly important…[29]
[29]Ibid [40] (citations omitted).
In the tenth proposition, Neuberger LJ noted that subrogation could not be invoked so as to put the lender in a better position than it would have been in had it obtained all the rights for which it had bargained,[30] whilst in the eleventh proposition Neuberger LJ observed relatedly that it is difficult, and possibly impossible for a lender who has obtained security to invoke subrogation where the security the lender has obtained gives it all the rights and remedies of security to which it claims to be subrogated.[31]
Highland
[30]Ibid [41].
[31]Ibid [42].
In Highland v Exception Holdings Pty Ltd (in liq) (‘Highland’),[32] a decision of the New South Wales Court of Appeal, the Court of Appeal dismissed an appeal against a judgment of Young CJ in Equity who held that notwithstanding that a charge given over assets by Exception Holdings to Highland was void by the operation of s 267 of the Act, it did not mean that Highland could be subrogated to the rights of Westpac under a charge given to Westpac, notwithstanding that Highland’s moneys had been used to discharge a debt owed by Exception Holdings to Westpac.
[32](2006) 60 ACSR 223 (‘Highland’).
Section 267 of the Act provided in substance, that where a company created a charge on property in favour of a person who is a relevant person in relation to the charge (relevantly, an officer of the company), and within six months of its creation, the chargee purports to take a step in the enforcement of the charge without leave of the Court, the charge is, and is taken to have always been, void.
Young CJ in Equity accepted, and the Court of Appeal agreed, that subrogation did not assist Highland because it received the security for which it bargained, namely the charge which was valid when created. The charge only became void when the person having the benefit of the charge subsequently failed to take the appropriate steps. In so deciding, Santow JA, with whom Hodgson JA agreed (as did Giles JA, albeit Giles JA wrote separately on the question of s 267 of the Act), agreed with the primary judge that subrogation did not assist the lender because the lender obtained all the security for which it had bargained.[33]
[33]Ibid 239 [89].
As to the nature of subrogation generally, Santow JA described it in these terms:
Subrogation is a remedy that involves the substitution of one party for another with respect to rights against third parties. It is the “process by which one party is substituted for another so that he may enforce that other’s rights against a third party for his own benefit”…
Subrogation may be of a contractual character (as where an insurance contract makes specific provision for subrogation between the insured and insurer) or, as here, of an equitable nature. As a creature of equity subrogation does not depend on contract… Nonetheless, parties may contract on terms which exclude or modify what would otherwise be their equitable right of subrogation;… If a party takes substitute security to that discharged, there is ordinarily no occasion for subrogation to operate.[34]
[34]Ibid 239 [90]-[91] (emphasis added) (citations omitted); see for example O’Day v Commercial Bank of Australia Ltd (1933) 50 CLR 200, 213.
Santow JA agreed with Bryson J’s comments that the Australian position that subrogation is not referable to unjust enrichment is differs from the approach of Lord Hoffmann set out in Banque Financiere. Santow JA adopted Bryson J’s description of the Australian approach in Challenger Managed Investments:
… it is enough to see subrogation as an entitlement which equity accords to the payer, firmly established by judicial decisions notwithstanding that a satisfactory doctrinal or basis is difficult to identify, and notwithstanding that classification of the mortgagor’s position as unconscionable seems very attenuated.[35]
[35]Highland (n 32) 240 [97], quoting Challenger Managed Investments (n 14) [50].
His Honour then quoted with approval Kearney J’s statement as to the fundamental basis of subrogation in Cochrane, noting that the doctrine is premised on the distinct but necessarily imprecise notion of unconscionable dealing.[36]
[36]Highland (n 32) 241 [102].
In distinguishing Highland from propositions 4-11 formulated by Neuberger LJ in Cheltenham & Gloucester which dealt with the issue of failed security, Santow JA noted that unlike the cases referenced in those propositions, in Highland the lender obtained precisely that for which it bargained, but the security failed subsequently when the appellant took action without leave of the court contrary to s 267.[37]
Dalma No 1
[37]Ibid 244 [111].
In the matter of Dalma No 1 Pty Ltd (‘Dalma No 1’),[38] Brereton J considered a claim for equitable subrogation brought by Dalma Constructions Pty Ltd (‘Dalma Constructions') with respect to a series of payments that it made in reduction or satisfaction of outstanding superannuation contributions owed by a related company, Dalma No 1 Pty Ltd (‘Dalma No 1’).
[38](2013) 95 ACSR 641 (‘Dalma No 1’).
The payment made by Dalma Constructions discharged a liability that Dalma No 1 owed to employees which liability enjoyed priority in the winding up of Dalma No 1. Having first rejected an argument that Dalma Constructions was entitled to subrogation under s 560 of the Act, his Honour then considered whether Dalma Constructions could take advantage of the equitable doctrine of subrogation.
After noting that the payment by Dalma Constructions was a voluntary one done spontaneously of its own motion absent any express or implied request by the administrators or liquidators of the company, his Honour noted that there is no all-embracing theory that explains when subrogation will be permitted.[39] Instead the equity arises from the conduct of the parties on well settled principles and in defined circumstances which make it unconscionable for the defendant to deny the plaintiff’s right.[40] Those circumstances were identified by the author of Pomeroy’s Equity Jurisprudence and Equitable Remedies,[41] and cited with approval by Young J when sitting in the Supreme Court of New South Wales in Re Trivan Pty Ltd (‘Trivan’),[42] where Young J wrote:
[39]Ibid 647 [23]-[24].
[40]Ibid 647 [24].
[41]John Norton Pomeroy, Pomeroy’s Equity Jurisprudence and Equitable Remedies (Bancroft -Whitney, 5th ed) vol 4, 1074 [1419].
[42](1996) 134 FLR 368 (‘Trivan’).
The doctrine is in general applied in favour of all persons who are required to pay the debt of another for the protection of their own interests. [Without attempting a comprehensive classification of cases in which the doctrine of subrogation may be applied, it is generally held that the right of subrogation will arise where the party claiming it has advanced money to pay a debt, which, in the event of default by the debtor, he would be bound to pay; or where the one making the payment has some interest to protect; or where the money advanced to pay the debt was under an agreement with the debtor, or the creditor, express or implied, that he should be subrogated to the rights and remedies of the creditor.][43]
Brereton J then continued:[44]
As pointed out by the authors of Meagher, Gummow and Lehane’s Equity Doctrines and Remedies, 4th ed, Butterworths LexisNexis, Sydney, 2002 at [9-010], so general a formulation of the doctrine as Ashburner’s does not accommodate the proposition that subrogation is not available to a volunteer who pays the debt of another. Equity does not allow A to assume the rights of B against C merely by voluntarily discharging B’s obligations to C. As Bowen LJ said in Falcke v Scottish Imperial Insurance Company (1996) 34 Ch D 234 (at 248):
The general principle is, beyond all question, that work and labour done or money expended by one man to preserve or benefit the property of another do not according to English law create any lien upon the property saved or benefited, nor, even if standing alone, create any obligation to repay the expenditure. Liabilities are not to be forced upon people behind their backs any more than you can confer a benefit upon a man against his will.
[43]Dalma No 1 (n 38) 647-648 [24], quoting Trivan (n 42) 371 (Young J) (emphasis added).
[44]Dalma No 1 (n 38) 648 [25].
To similar effect, Brereton J quoted the Supreme Court of the United States in Aetna Life Insurance Co v Middleport:[45]
The doctrine of subrogation is not applied for the mere stranger or volunteer, who has paid the debt of another, without any assignment or agreement for subrogation, without being under any legal obligation to make the payment, and without being compelled to do so for the preservation of any rights or property of his own … Subrogation is a matter of right, as it exists in the civil law, from which the term has been borrowed and adopted in our own, is never applied in aid of a mere volunteer.[46]
[45]124 US 534 (1887).
[46]Dalma No 1 (n 38) 648 [26], quoting Aetna Life Insurance Co v Middleport 124 US 534 (1887), 549-550.
Notwithstanding the general proposition, his Honour noted that one of the circumstances in which subrogation was available was the paying off of an existing mortgage or security, noting that ‘subject to a possible qualification about volunteers, a person who pays off a mortgage debt is entitled – and unless the contrary appears is presumed – to preserve the security for its own benefit’.[47] In support of that observation, his Honour referred to Ghana Commercial Bank, Kearney J’s judgment in Cochrane and the judgment of Oliver J in Paul v Speirway Ltd (in liq).[48] Referring to such cases, his Honour observed that the debtor’s concurrence in the transaction is immaterial because the only alteration in the debtor’s position was that it owed the money to the third party instead of to the original creditor.[49] His Honour also referred to Hill v ANZ Banking Group Ltd & Ericksen,[50] where Riley J cited Halsbury Laws of Australia, 3rd ed, 270 [497]:
[47]Dalma No 1 (n 38) 649 [29].
[48][1976] Ch 220.
[49]Dalma No 1 (n 38) 649 [30].
[50](1974) 4 ALR 634.
Although there has been no actual transfer of the mortgage, a person who advances money for the purpose of paying it off, and whose money is thus applied, becomes an equitable assignee of the mortgage and is entitled to have it kept alive for his benefit … and even though the mortgagor is not a party, a stranger who pays off a mortgage is presumed to intend to keep it alive for his own benefit, and effect is given to this intention.[51]
His Honour then noted that the role of the payer’s intention is obscure, quoting Bryson J’s judgment in Challenger Managed Investments as follows:
An explanation in terms of the intention or the presumed intention of the payer of the basis on which a person who pays off an existing mortgage is entitled to be subrogated to the position and the rights of the mortgagee who has been paid does not give the law a basis which is clear or can be readily understood. The reference to the intention or presumed intention of the payer may introduce an element which is not necessary for an understanding of subrogation but is unfortunately distracting, particularly where the intention is presumed or, it might be said, fictitious. It will be seen that in the first paragraph in the passage from Cochrane v Cochrane which I have set out Kearney J referred to Ghana Commercial Bank v Chandiram in which the Privy Council stated the rule in terms of presumed intention, but in the second paragraph Kearney J explained the principle in terms of the position in conscience of the mortgagor, to which the intention of the payer that he should or should not have security, if he had any intention about it, is relevant but not necessarily conclusive. Observations of Lord Hoffmann in Banque Financière de la Cité v. Parc (Battersea) Ltd at 232-4 illustrate the difficulties of relating subrogation in this context to intention, when intention is a fictitious element and also when it is not.
References to the intention of the payer fail to express anything which is central to the doctrine of subrogation. It sometimes happens that the person to whom a presumed intention to keep a mortgage alive is imputed has actually acted to bring about its discharge; that is so in the present case. The essence of the doctrine is elsewhere than in an intention or presumed intention of the payer to rely on the mortgage which was paid off. Intention may be significant where it is for some reason clear that the payer did not intend to be secured at all; otherwise it appears to me to be unfortunate that it should have a part in a statement of the doctrine.
I would respectfully say that Lord Hoffman’s relation, at 234, of subrogation to unjust enrichment was not articulated in the authorities to which his Lordship referred, and is not established in Australian case law. In my understanding explanation of subrogation in terms of restitution and unjust enrichment was introduced by Millett LJ in Boscawen v Bajwa [1996] 1 WLR 328 at 334; [1995] 4 All ER 769 at 391;, and was not earlier found. Lord Hoffmann’s reference to the law of restitution does not, in my respectful opinion, provide an explanation for the mortgagor’s being treated as bound, in equity, to treat the person who paid off the previous mortgage as entitled to security under it. Restitution would provide a basis for treating the mortgagor as obliged to restore to the person who paid it the amount which had been paid to the mortgagee: the concept is inadequate for also treating the mortgagor as obliged to hold the payer secured. This is particularly clear where, as in this case, and in other cases where subrogation has been held to exist, the mortgagor in fact had no dealings with the payer, or where the payer believed that he was getting security under arrangements in which the mortgagor was not in fact involved. To my mind it is enough to see subrogation as an entitlement which equity accords to the payer, firmly established by judicial decisions notwithstanding that a satisfactory doctrinal basis is difficult to identify, and notwithstanding that classification of the mortgagor’s position as unconscionable seems very attenuated.[52]
[51]Dalma No 1 (n 38) 649 [30], quoting Hill v ANZ Banking Group Ltd & Ericksen (1974) 4 ALR 634, 637 (emphasis added).
[52]Dalma No 1 (n 38) 649-650 [31], quoting Challenger Managed Investments (n 14) [48]-[50] (Bryson J).
Brereton J described Bryson J’s observations as highly persuasive and agreed with them subject only to the caveat that in his Honour’s view it is difficult to disregard entirely the role of the payer’s actual or presumed intention when it has been mentioned in so many of the authorities. His Honour posited that the relevance of intention to unconscionability of the mortgagor, is that it is sufficient to amount to unconscionability for the mortgagor to insist that the effect of the third party’s payment is to discharge it from the encumbrance unless that is the basis on which the third party made the payment.[53]
[53]Dalma No 1 (n 38) 650 [32].
Brereton J also referred to Cook v Italiano Family Fruit Company Pty Ltd (in liq).[54] In that case, Finkelstein J allowed a claim for subrogation in respect of an unsecured debt. His Honour considered it as being ‘supported by analogous, well established categories in which a right of subrogation is recognised’.[55] Relevantly, Finkelstein J observed that:
…it is unclear whether the voluntary nature of a payment is a bar to subrogation where prior securities have been paid out … . The position appears to be that, in those cases, subrogation will be denied where subrogation would put the claimant in a better position than he/she bargained for.[56]
[54](2010) 190 FCR 474. .
[55]Ibid 499 [109].
[56]Ibid 499-500 [115] (citations omitted).
Finkelstein J concluded that in all the circumstances it would be equitable to permit subrogation and unconscionable to deny it, as otherwise the company (and indirectly its unsecured creditors) would enjoy a windfall from the company’s debts being paid out of charged assets when they could have been otherwise paid out of the company’s free assets.[57] Finkelstein J’s decision was later considered and followed in Re Damilock Pty Ltd (in liq)[58] by Mansfield J.
[57]Ibid 500 [116].
[58][2012] FCA 1445.
In Dalma No 1, Brereton J concluded that the spontaneous voluntary payment by a third party may found a claim for subrogation only in the ‘exceptional’ category of the payment off of existing securities. The exceptional circumstances did not extend to unsecured debts and accordingly, his Honour rejected the claim for subrogation.[59]
Aged Care Services
[59]Dalma No 1 (n 38) 652 [37].
The Court of Appeal in New South Wales considered a claim for subrogation shortly after Brereton J’s decision, in Aged Care Services Pty Ltd v Kanning Services Pty Ltd (‘Aged Care Services’).[60] The leading judgment was written by Gleeson JA with whom Meagher JA and Leeming JA agreed. The case concerned a priority dispute between Aged Care Services Pty Ltd (‘ACS’) and Kanning Services Pty Ltd (‘Kanning’) in respect of a property (lot 2) owned by Macedonian Aged Care & Accommodation Ltd (‘MACAL’).[61]
[60](2013) 86 NSWLR 174.
[61]Ibid 176 [2].
Kanning provided consulting services for MACAL for which it had rendered invoices which were not paid. MACAL and Kanning entered into an agreement that in the event of non-payment of the debt by a particular date, Kanning would be entitled to lodge caveats over various properties while mortgage documents were being prepared pending registration. Kanning requested that MACAL execute a form of mortgage and deliver a copy to Kanning. MACAL did not execute the mortgage. The properties included lot 2 which was the subject of a registered mortgage in favour of Australia and New Zealand Banking Group Ltd (‘ANZ’).[62]
[62]Ibid 176-177 [2]-[6].
On 1 May 2010, ANZ in the exercise of its power of sale as mortgagee, entered into a contract to sell lot 2 to Dragica Mircevski for $910,000. Mrs Mircevski was the mother-in-law of Mr Tiricovski, the sole director of MACAL. Shortly thereafter, Kanning’s caveat lapsed following a service of a lapsing notice from ANZ.[63]
[63]Ibid 177 [7]-[8].
On 8 October 2010, MACAL entered into a joint venture agreement with ACS to develop lot 2 and another lot for the construction of 57 retirement units. The joint venture obliged ACS to pay $4.5 million to facilitate the purchase by MACAL of the other lot from a third party and to discharge all encumbrances registered or unregistered against lot 2. In consideration of the payment of the $4.5 million, ACS was to receive security from MACAL in the form of an equitable charge over the property of MACAL including both lots.[64]
[64]Ibid 177 [9]-[10].
On 11 October 2010, MACAL requested that ACS pay out the ANZ mortgage urgently because ANZ was threatening to sell lot 2 as mortgagee. ACS agreed initially on the basis that it would lend Mrs Mircevski the funds on mortgage so she could pay out ANZ on completion of the contract of sale entered into on 1 May 2010. ACS was to receive security in the form of a caveatable interest over lot 2 and $90,000 interest payable in three months’ time.[65]
[65]Ibid 177 [11].
Shortly after, MACAL requested a different arrangement which did not involve Mrs Mircevski. MACAL requested that ACS pay out the ANZ mortgage and MACAL would retain lot 2. ACS agreed to MACAL’s request on the basis that ACS would obtain a caveatable interest over the property and one over the home of Mr Tiricovski. Mr Tiricovski agreed on behalf of MACAL.[66]
[66]Ibid 177 [12].
On 14 October 2010, ACS provided a cheque for $792,198.08 to discharge the ANZ mortgage. It received a discharge of the ANZ mortgage and registered the discharge.[67]
[67]Ibid 177 [13].
On 27 October 2010, ACS lodged a caveat over lot 2 claiming an estate or interest under the joint venture agreement dated 8 October 2010. Mr Tiricovski in his capacity as the sole director of MACAL had signed a consent to the caveat on 25 October 2010.[68]
[68]Ibid 177 [14].
In November 2010, a dispute arose between ACS and MACAL which led to litigation purportedly compromised on the basis of, inter alia, a consent declaration that the joint venture agreement be set aside ab initio.[69]
[69]Ibid 177-178 [15]-[16].
ACS commenced proceedings and claimed that it was entitled to be subrogated to the security right of ANZ and thus to be treated in equity as if it had security over lot 2. On that basis, the case involved a priority dispute between ACS’s claim to an interest by way of subrogation to the position of ANZ as secured creditor and Kanning’s claim to an equitable interest arising under the promise to execute a mortgage over lot 2.[70]
[70]Ibid 178 [17].
ACS argued that its subrogation claim was a classic case in which it is presumed that a third party who pays off a mortgage intends to keep the mortgage alive for its benefit unless the contrary appears and this had not been established. The primary judge rejected ACS’s claim for subrogation finding that the contrary had been shown, and as such the earlier equitable interest of Kanning prevailed over ACS’s later interest in lot 2 which was assumed to be equitable.[71]
[71]Ibid 178 [18]-[19].
Their Honours agreed that an equity of subrogation did not arise in favour of ACS in and as such dismissed the appeal. The primary judge’s decision rested on the proposition that the payment was made under or pursuant to, or in partial performance of the joint venture agreement entered into on 8 October 2010, the terms of which entitled ACS, in consideration of the payment of $4.5 million, to receive an equitable charge over, inter alia, lot 2 and that the joint venture agreement contained the terms on which security would be given to ACS for the performance of MACAL’s obligations which relevantly included the creation of a charge upon payment in full the amount of $4.5 million.[72]
[72]Ibid 178-180 [20], [24], [27], [30].
Notwithstanding the presumption in favour of subrogation where ACS as a third party had paid out a secured debt owed by MACAL, the presumption had been rebutted because the impact of the joint venture agreement between MACAL and ACS was that ACS was not properly to be regarded as a third party for the purposes of the presumption in favour of subrogation.[73]
[73]Ibid 182 [37].
Gleeson JA set out the relevant legal principles governing subrogation noting that the main area of disagreement between the parties concerned the significance of the intention of the third party who paid out the secured creditor.[74] The legal principles set out by his Honour in summary form encompass, firstly, that in a general sense subrogation is the ‘process by which one party is substituted for another so that he may enforce the other’s rights against the third party for his own benefit’;[75] secondly, as explained by the High Court in Bofinger v Kingsway Group Ltd (‘Bofinger’),[76] the equitable doctrine of subrogation is not a ”tangled web” in need of the imposition of the ”top-down” reasoning which is characteristic of some all-embracing theories of unjust enrichment[77] but rather:[78]
…the relevant principles of equity do not operate at large and in an idiosyncratic fashion. So it was that in Boscawen v Bajwa, Millett LJ, after denying that subrogation is a remedy which the court has a general discretion to impose whenever it thinks fit to do so, went on:
The equity arises from the conduct of the parties on well settled principles and in defined circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff.
(Citation omitted)
[74]Ibid 182 [47].
[75]Ibid 183 [49].
[76](2009) 239 CLR 269 (‘Bofinger’).
[77]Ibid 300 [90].
[78]Aged Care Services (n 60) 183 [50], quoting Bofinger v Kingsway Group Ltd (2009) 239 CLR 269, 301 [94].
Thirdly, Gleeson JA described one well recognised area of subrogation where there has been payment out by a third party of a prior security. Accordingly, where a third party has paid off a mortgage it is presumed, unless the contrary appears, to intend that ‘the mortgage shall be kept alive for its own benefit’.[79] Fourthly, the expression ‘kept alive’ means that the legal relations between the third party and the debtor are regulated as if the benefit of the security had been assigned to the third party.[80] This principle (which derives from Ghana Commercial Bank) applies unless it is shown that the circumstances are such to displace the presumption.[81] Gleeson JA quoted from the judgment of Kearney J in Cochrane and referred to Bryson J’s judgment in ChallengerManaged Investments as to the relevance of intention noting that Bryson J accepted that intention may be significant ‘where it is for some reason clear that the payer did not intend to be secured at all’.[82]
[79]Aged Care Services (n 60) 183 [51].
[80]Ibid 183 [53].
[81]Ibid 183 [54].
[82]Ibid 184 [55].
Fifthly, his Honour then referred to Brereton J’s recent judgment in Dalma No 1 and in particular his Honour’s observation that:
…the explanation is no more than that sufficient unconscionability to engage the doctrine is to be found in the mortgagor insisting that the effect of the third party’s payment is to discharge it from the encumbrance, unless that was the basis on which the third party made the payment. In other words, the position of a mortgagor who claims to be discharged as a result of the third party’s payment, rather than that the mortgage subsist for the benefit of the third party, is prima facie unconscionable, even if that characterisation is somewhat ‘attenuated’; but that prima facie position is displaced if it is shown that the third party intended otherwise.[83]
[83]Ibid 184 [57], quoting Dalma No 1 (n 38) 650 [32].
Sixthly, his Honour noted that there is no need for subrogation where there is an available remedy for the third party at law or in equity sufficient to avoid the unconscionable result, for example, where one co-mortgagor has repaid the mortgage debt, subrogation does not apply because adequate justice can be done by an entitlement to contribution. [84]
[84]Aged Care Services (n 60) 184 [58].
Gleeson JA then referred to the judgment of Santow JA (with whom Giles and Hodgson JJA agreed on the question of subrogation) in Highland where Santow JA cited Neuberger LJ’s 13 propositions regarding subrogation with approval, noting that propositions 4-11 dealt with the issue of failed security,[85] observing that for present purposes propositions 4, 7, 9 and 10 were relevant.[86]
[85]Highland (n 32) 242 [106].
[86]Aged Care Services (n 60) 184 [59].
In his analysis, Gleeson JA started with the proposition that because ACS has paid off the ANZ mortgage it was presumed, unless the contrary appeared, to intend that the ANZ mortgage should be kept alive for its own benefit. His Honour then accepted that the primary judge correctly turned his attention to the relevant question which was whether the circumstances displaced the presumption that ACS intended to keep the ANZ mortgage alive for its own benefit which required a consideration of the character of the payment made by ACS to ANZ and whether ACS did not obtain the security that it intended. In that context, his Honour considered that there were three matters of significance; first, the trial judge’s rejection of the evidence of the payer that the payment was not made under the joint venture agreement which was not challenged on the appeal and that the intention of the payer was clearly relevant to whether the presumption had been rebutted; secondly, the primary judge was correct to focus upon whether ACS did not obtain the security, if any, that it intended and that this issue could be approached in one of two ways, either on the approach adopted by the primary judge where the payment was made pursuant to the joint venture agreement, or on the approach advanced by ACS on appeal which was that the payment was made independently of the joint venture agreement. His Honour considered that on either approach, the circumstances were not one of failed security upon the ANZ mortgage being paid out. Thirdly, his Honour also accepted that it was relevant to the enquiry as to unconscionability, that MACAL would be excused from discharge of its obligations to ANZ but concluded that the circumstances of the present case did not involve the inequitable discharge of MACAL’s obligations to ANZ.[87]
[87]Ibid 185-186 [60]-[65].
His Honour rejected ACS’s attempt to rely by analogy on the second category of case referred to by Kearney J in Cochrane, namely where the third party advances money to pay out the mortgage on the understanding that security would be provided for such advance upon the mortgage being paid out. Noting the primary judge’s finding (apparent from the terms of the joint venture agreement), that security was only to be provided upon payment of the $4.5 million, the joint venture agreement was not an agreement which provided for security to be provided upon the ANZ mortgage being paid out. The reason why ACS did not acquire the security under the joint venture agreement was that it never provided the $4.5 million.[88]
[88]Ibid 186-187 [66], [69], [73].
Gleeson JA also considered the alternative claim that the payment by ACS to ANZ was independent of the joint venture agreement. On that approach, there was no failed security, nor any inequitable discharge of MACAL of its obligations to ANZ because ACS paid out the ANZ mortgage on the understanding with MACAL that it would receive a caveatable interest over lot 2. To that end, MACAL consented to the registration of such a caveat by ACS which occurred on 27 October 2010. On that basis, ACS received exactly that which it bargained for when it paid out the ANZ mortgage.[89]
Gandel Metals
[89]Ibid 188 [79]-[80].
NWC also relied upon Gandel Metals Pty Ltd, in the matter of Centennial Mining Ltd (Subject to Deed of Company Arrangement) v Centennial Mining Limited (No 2) (‘Gandel Metals’).[90] Gandel Metals Pty Ltd (‘Gandel’) claimed an entitlement to the benefit of certain securities equivalent to those of a creditor (‘Squadron’) whose debt it had refinanced, under the equitable doctrine of subrogation. Gandel sought a declaration that it was entitled by way of subrogation to the benefit of a mining mortgage granted by Centennial Mining Limited (No 2) (‘Centennial’) to Squadron.[91]
[90][2020] FCA 633.
[91]Ibid [1].
The Squadron loan was due to be repaid, and on two occasions before the date due for repayment, Centennial asked Gandel to refinance the loan. Gandel agreed to do so provided it received a transfer of Squadron’s rights or otherwise was given security on the same terms enjoyed by Squadron. These discussions notwithstanding, Centennial did not pursue the refinance with Gandel; instead it obtained an extension of time to repay the loan to 10 August 2018.[92]
[92]Ibid [11], [19].
Mr Gandel gave evidence that on 9 August 2018 he received a request that Gandel provide funding to satisfy the Squadron loan as Centennial had been unsuccessful in securing a loan from alternative sources. He responded saying that Gandel would provide the funds to pay out the Squadron loan in full but only on the basis that Gandel was provided the same security as enjoyed by Squadron. The parties agreed that owing to the urgency of the situation, Gandel would advance the necessary funds prior to any agreement being documented.[93]
[93]Ibid [20]-[21].
On 10 August 2018, Centennial emailed a binding terms sheet which set out the terms and conditions upon which Centennial would borrow the amount of $2,171,272.14. The binding terms sheet did not refer to security but did provide that before the repayment date the company and the lender would agree to discuss and negotiate in good faith an amendment to the terms sheet or a separate agreement allowing the conversion of the loan into securities in the company subject to shareholder approval which was required under the ASX listing rules.[94]
[94]Ibid [22].
Gandel approved a draft email to be sent by Centennial to Squadron stating that the funds were paid under duress and requesting the release of all securities held over Centennial.[95]
[95]Ibid.
A week or so later, Centennial provided draft loan terms to Gandel which granted Gandel a first ranking general security agreement over its assets.[96]
[96]Ibid [24].
On 17 October 2018, Centennial published an ASX release which, among other things, referred to its receipt of an unsecured loan from Gandel and on 26 October 2018, Gandel and Centennial entered into a binding terms sheet (‘BTS’) which provided that the use of the proceeds from the Gandel loan was for the repayment of convertible notes due to Squadron payable on 10 August 2018 and the Gandel loan was repayable six months from 10 August 2018. The BTS further provided that prior to repayment the parties were to convert the Gandel loan into convertible notes issued by Centennial, the terms of which were set out in a non-binding annexure to the BTS which set out a contemplated potential conversion agreement and which further provided that execution of the convertible loan agreement was conditional on obtaining relevant shareholder approvals and that the terms of the proposed convertible notes included security arrangements where the company would grant to the holders a first ranking general security agreement over the assets of the company.[97]
[97]Ibid [28], [30]-[31].
The BTS was never given effect to; Centennial did not proceed to enter into the convertible note agreement. Centennial later entered into voluntary administration.[98]
[98]Ibid [32], [34], [36].
Gandel asserted that it was entitled to be subrogated to Squadron’s securities.[99]
[99]Ibid [38].
Middleton J noted the general agreement between the parties as to the relevant legal principles governing the equitable doctrine of subrogation,[100] noting the synthesis of a number of previous authorities to be found in the judgment of Rees J in Harmon International Holdings Pty Ltd[101] and Gleeson JA in Aged Care Services.[102]
[100]Ibid [45].
[101](2019) 136 ACSR 94, 103 [41]-[42].
[102]Aged Care Services (n 60) 183- [49]-[59]; Gandel Metals (n 90) [56].
After referring to the rebuttal presumption that the security is to be kept alive for the lender’s benefit, his Honour referred to the judgment of Lord Jenkins in delivering the advice of the Privy Council in Ghana Commercial Bank which his Honour said remains good law in Australia.[103]
[103]Gandel Metals (n 90) [52]-[54].
His Honour quoted with approval Rees J’s adoption of the proposition from Parkinson in The Principles of Equity:
Sometimes it is said that this form of subrogation is only attracted if the whole circumstances of the lending transaction make it clear that the parties intended the lender to have security for the loan. However, the better view may be that a lender will be subrogated to security rights of a paid-out creditor unless the circumstances of the transaction indicate a contrary intention. In effect, the defendant bears the burden of rebutting the doctrines [sic] application.[104]
[104]Gandel Metals (n 90) [55], quoting Harmon International Holdings Pty Ltd (2019) 136 ACSR 94, 103 [42] (citations omitted).
Turning to the question of whether the presumption had been rebutted, his Honour observed that the phrase ‘kept alive’ means that the legal relations between the incoming lender and the debtor are regulated as if the benefit of the security had been assigned to the incoming lender.[105]
[105]Gandel Metals (n 90) [85].
His Honour later observed that the mere fact of a discharge of a debt by a third party lender without more is not sufficient to evidence an intention that the security should not be kept alive, noting that in Challenger Manager Investments the Court had awarded subrogation in circumstances where the person to whom a presumed intention to keep the mortgage alive is imputed has actually acted to bring about its discharge. As Millett LJ noted in Boscawenv Bajwa[106], the discharge of the creditor’s security at law is not a bar to subrogation in equity, rather it is a precondition.[107] The contradictor, a party which claimed to hold a first ranking security over the tenement, submitted that the presumption was also rebutted because there was no understanding that Gandel was to have security for the advance and that instead Gandel intended to negotiate a transaction entirely different from that between Centennial and Squadron whereby, subject to shareholder approval, Gandel would be given an interest as a convertible note holder which would entitle it to convert its debt to equity.[108]
[106]Boscawen v Bajwa; Abbey National plc v Boscawen [1995] 4 All ER 769.
[107]Ibid 782.
[108]Gandel Metals (n 90) [70]-[71], [87], [100].
In rejecting that submission, his Honour found the statement of Bryson J in Challenger Manager Investments to be persuasive[109], noting that:
…although the intention of the parties to a transaction is not conclusive, it is nevertheless relevant to the Court’s assessment of whether the conscience of the borrower is so affected so as to cause the mortgage to be kept alive.[110]
[109]See Challenger Managed Investments (n 14) [48]-[49].
[110]Gandel Metals (n 90) [107].
His Honour found that at the time Gandel advanced funds to Centennial, both parties intended that Gandel would be provided with security, although what exactly that security would comprise and the terms on which it would be provided would be negotiated at a later time.[111]
[111]Ibid.
Whilst his Honour accepted that the loan was unsecured, until any security had been negotiated and approved, he did not regard this fact as inconsistent with an intention by the parties that the security be kept alive for the benefit of the lender, holding that in the time in which Gandel had to rescue Centennial from the imminent threat that Squadron would exercise its security over Centennial’s assets, there was no opportunity afforded for the parties to formalise any agreement. This was amongst the circumstances by which his Honour considered that it affected the conscience of the borrower so as to cause the Squadron mortgage to have been kept alive.[112]
H & S Credits
[112]Ibid[108].
One case difficult to reconcile with Ghana Commercial Bank and the overall approach to unconscionability is a decision of the Full Court of the Supreme Court of Queensland, Re H & S Credits Ltd (in liq), Tucker v Roberts (‘H & S Credits’).[113] In H & S Credits, W.B. Campbell J, with whom Lucas and Douglas JJ agreed, rejected a claim that a third party who paid out an existing mortgage was entitled to equitable subrogation in respect of the prior mortgage.
[113][1969] Qd R 280.
The company had executed a debenture trust deed in favour of a trustee for debenture holders. Subsequently, the company executed two mortgages over separate parcels of land.[114]
[114]Ibid 282.
The company was wound up by court order and a liquidator appointed. The liquidator was also appointed receiver of the assets and undertaking of the company by the trustee for the debenture holder.[115]
[115]Ibid.
Prior to his appointment as receiver, the liquidator had called for tenders for the purchase of certain of the company’s assets and a tender was received from a syndicate of four persons, two of whom included the mortgagees. At that time the total amount owing under both mortgages was $31,014. A condition of the tender was that the liquidator accept the surrender of both mortgages in part payment of the purchase price to the extent of the amount owing under the mortgages, namely $31,014.[116]
[116]Ibid 282-283.
The liquidator accepted the tender in a capacity expressed in a letter of acceptance as receiver and official liquidator. The parties subsequently agreed that the amount of $31,014 owing by the company on the mortgages was satisfied with such amount being provided by the debenture holders.[117]
[117]Ibid 283.
The liquidator (also the receiver) believed that the effect of obtaining a release of the mortgages was to benefit the debenture holders of the company. Unknown to him, s 339 of the Companies Act 1931-1960 (Qld) rendered void a deed registered in New South Wales but not registered in Queensland as a security on the company’s property in Queensland as against the liquidator and any creditor of the company. As a consequence, the debenture trust deed was void as against the liquidator. The liquidator (also the receiver), therefore, sought, inter alia, by way of summons to obtain answers to various questions arising in the course of the liquidation including, relevantly, whether the mortgage which had been paid out by the debenture holders as to $31,014 enured by way of subrogation for the benefit of the debenture holders.[118]
[118]Ibid 283-284.
Both the primary judge and the Full Court accepted that had the liquidator been aware of the non-registration of the deed in Queensland and its effect, he would have requested the tender as to assign the mortgages to him as receiver.[119]
[119]Ibid 283.
W.B. Campbell J considered that the liquidator had made a mistake as to the effect of the debenture deed of a unilateral nature which caused him to believe that he could cause the mortgages of the Smiths to be extinguished and that ‘at no material time did he have the intention of keeping these mortgages alive for the benefit of the debenture holders, his plain intention being to rely for their protection upon an existing security which he considered valid and effective’.[120]
[120]Ibid 287-289.
His Honour referred to the Ghana Commercial Bank case where the Ghana Commercial Bank’s intention was to substitute a legal mortgage for the equitable charge (the underlying debt in respect of which it had paid out) quoting their Lordships’ judgment where they wrote:
While not disputing that the Ghana Bank’s intention was to substitute the legal mortgage for the equitable charge, they find it impossible to accept the view that the Ghana Bank intended the equitable charge to be extinguished in the event of the legal mortgage proving for any reason to be invalid or ineffective.[121]
In other words, their Lordships considered that the intention of the Ghana Commercial Bank was not to replace the equitable charge by a valid and effective legal mortgage, but to keep it alive for their own benefit save insofar as it was so replaced.[122]
[121]Ibid 288, quoting Ghana Commercial Bank (n 6) 745.
[122]H & S Credits (n 113) 288.
After observing that the Ghana Commercial Bank’s intention was to substitute a legal mortgage for a prior equitable mortgage and that the execution of the abortive legal mortgage did not negative the intention to keep alive the equitable mortgage, W.B. Campbell J stated that:
No parallel should be drawn between the ineffectiveness of the Ghana Bank’s substitute legal mortgage and the ineffectiveness of the debenture deed upon which [the receiver] intended to rely.
…
In my opinion, [the receiver] evinced a plain intention at all material times to have the Smith’s mortgages extinguished and for them not to be kept alive for the benefit of the debenture holders.[123]
[123]Ibid 288-289.
W.B. Campbell J considered that the actual discharge of the mortgages in 1962 was inconsistent with an intention to keep them alive and that the liquidator intended that the debenture holders be promoted to first encumbrances not by taking the benefit of the prior securities in favour of the Smiths, but by having those securities discharged so that the charge pursuant to the debenture would take effect in its own right.[124]
[124]Ibid 289.
Analysis and conclusion
I accept that NWC is entitled to be subrogated in equity to the rights that BAB formerly had under the BAB Mortgage prior to its discharge.
The BAB Payment was used to pay out the secured debt owing by Rock Development to BAB. The starting point therefore is that NWC is entitled to be subrogated to the position of BAB with respect to the BAB Mortgage (Ghana Commercial Bank; Cochrane; Challenger Managed Investments; Highland; Dalma No 1; Aged Care Services; Gandel Metals).
The fact that the BAB Mortgage was discharged by the BAB Payment does not matter (Challenger Managed Investments). Nor does it matter that Rock Development did not know of or agree to the transaction (Dalma No 1).
Acceptance of Rock Development’s argument would have the effect that it is discharged from the BAB Mortgage, although not making payment itself leaving NWC at best to prove as an unsecured creditor. This is sufficiently unconscionable to engage the doctrine (Dalma No 1; Aged Care Services).
The relevant question then is whether Rock Development can point to any other matters which renders equitable, Rock Development’s denial of the BAB Payment being secured by the BAB Mortgage (Challenger Managed Investments; Cochrane; Highland; Aged Care Services; Dalma No 1; Gandel Metals).
Here, the plaintiffs point to two matters; first, the BAB Mortgage was not assigned to NWC despite that being offered by Grant Thornton to Hall Chadwick;[125] secondly, in the letter from Summer Lawyers to the plaintiffs’ solicitors, Wisewould Mahony dated 12 March 2018, Summer Lawyers asserted that the BAB Payment fell within the ambit of ‘Enforcement Expenses’ or ‘Other Monies’ as defined in the MCP, which forms part of the terms of the NWC Loan, and as such were secured by the NWC Mortgage (not the BAB Mortgage). The plaintiffs submit that these matters show that NWC’s intention was for the BAB Payment not to be secured by the BAB Mortgage but rather by the NWC Mortgage.
[125]See [20] above .
The payer’s intention is not always easy to discern, hence the reference to ‘presumed’ intention. Such is the case here; the two pieces of evidence relied upon give rise to different issues. The fact that Hall Chadwick, on behalf of NWC, declined the offer made by Grant Thornton on behalf of BAB to assign the BAB Mortgage may give rise to the inference that NWC did not wish to stand in the shoes of BAB but it is also explicable on the basis that NWC, which already held a registered second mortgage which would become the priority registered mortgage upon the discharge of the BAB Mortgage, simply did not need to obtain the advantages that registration provides in transferring Torrens land, given that it already held a registered mortgage.[126] The letter dated 12 March 2018 was sent about 11 months after the payment and after a letter had been written by the liquidator’s solicitors, Wisewould Mahony, demanding an explanation as to the treatment of the BAB Payment. Whilst it is reasonable to assume that the letter was sent on instructions from NWC, the fact that the payment was justified in this way sometime later does not necessarily carry with it the inference that as at the time of the BAB Payment, NWC had formed the view that it wished to treat the BAB Payment as an Enforcement Expense under the NWC Mortgage. There is every chance that NWC formed no view at the relevant time aside from that expressed by Mr Morello and unchallenged, which was that NWC wished to take control of the mortgagee sale so that agent and other costs could be contained, thus preserving to the extent possible the value of its security.
[126]Such as the right of a registered mortgagee to execute a transfer as transferor pursuant to s 77(2) of the Transfer of Land Act 1958 (Vic)
In any event and to the extent to which intention plays a role, its relevance is limited to its impact on the conscience of the mortgagor. To put it another way, does the third party’s intention (here NWC) have the effect that it is neither inequitable nor unconscionable for the mortgagor Rock Development to deny the interest asserted by NWC.
It is difficult to see how an uncommunicated intention of a third party payer can affect the conscience of the mortgagor. This explains the outcome in Aged Care Services where the third party’s intention for the payment to be made pursuant to the joint venture agreement to which it and the mortgagor were parties, as well as Neuberger LJ’s seventh and ninth propositions. Here, the communications which preceded the deed between NWC, BAB and Grant Thornton took place between Hall Chadwick (as agent of NWC) and Grant Thornton as agent of BAB. There is nothing in the evidence to suggest that the relevant intention was conveyed to Rock Development. The 12 March 2018 letter from Summer Lawyers is not relevant either, as it was sent 11 months after the BAB Payment. For those reasons, the alleged intention can be put to one side; even if I accept the plaintiffs’ characterisation of NWC’s intention, which I do not; no such intention was communicated to, or known by Rock Development at any relevant time, and as such does not affect nor make conscionable, that which otherwise is not, namely, the denial of NWC’s subrogated interest in the BAB Mortgage.
Further, as stated the only direct evidence of intention was given by Mr Morello; which is to the effect that the BAB Payment was made to protect NWC’s existing security interest. The making of the payment for the purpose of preserving the benefit of an existing interest is another basis which supports the conclusion that NWC is subrogated BAB’s interests consistent with the reasoning of Young J in Trivan, approved by Brereton J in Dalma No 1.[127]
[127]See [67] above.
The statutory context indicates that the words “possession” and “control” in the definition of “controller” refer to a legal right to possession, or de facto possession, which is effective against the proprietary interests of the corporation in that property. A person will be in control of the property of the corporation if he or she has a legal or de facto capacity to use, occupy, sell or otherwise dispose of the property against the wishes of the corporation.[132]
[132]Ibid [31]-[32].
Kourakis J observed that the mere crystallisation of security and the appointment of the accountants as agents did not give the bank itself (and therefore much less its agents) any right to or de facto possession of the secured assets.
Applying this analysis, Summer Lawyers was not a controller of Rock Development’s property simply because it was retained as solicitors for NWC. This conclusion follows from the following:
(a) Summer Lawyers was not entitled in any time to legal or de facto possession of Rock Development’s property;
(b) Summer Lawyers did not have a legal or de facto capacity itself to use, occupy, sell or otherwise dispose of Rock Development’s property against Rock Development’s wishes (that capacity vested in the receivers and managers or alternatively NWC); and
(c) Summer Lawyers did not at any time have a degree of possession or control sufficient to remove Rock Development’s property from Rock Development (that possession or control was vested in the receivers and controllers or alternatively NWC).
Summer Lawyers simply acted at all times as NWC’s solicitors or otherwise, in Mr Reese’s case pursuant to the power of attorney given to him. Summer Lawyers was not the relevant controller of Rock Development’s property, more specifically the Taylors Hill Property. That conclusion is sufficient to dispose of the claim by the plaintiffs against Summer Lawyers both for relief pursuant to s 434(1)(b) and for an order for an inquiry pursuant to s 423(1) of the Act.
The claim against the third defendant
That leaves for determination the plaintiffs’ claim against Hall Chadwick.
Unlike Summer Lawyers, Hall Chadwick accepts that it falls within the definition of ‘controller’ and as such is amenable if the relevant elements are established, to orders being made against them pursuant to ss 434(1)(b) and 423(1).
The gist of the plaintiffs’ complaint against Hall Chadwick is in paragraph 26 of the ASOC and in effect amounts to a complaint by the plaintiffs that Hall Chadwick responded inadequately to a series of requests for information made of them by the liquidator.
The plaintiffs then particularise a series of requests for information and it is convenient to refer briefly to those requests and the response. First, the plaintiffs refer to letters sent to Hall Chadwick and Summer Lawyers dated 2 August 2017 and 3 August 2017 respectively. In the letter to Hall Chadwick, the liquidator addresses the request to Hall Chadwick as controllers and receivers and managers of the property. The liquidator’s request includes a request for, inter alia, a copy of the charge under which the receivers and managers had been appointed and copies of their statements of receipts and payments to date, among other matters. The plaintiffs refer only to a response from Summer Lawyers which is described as containing ‘limited information’ but in any event included a copy of the NWC Mortgage and a statement that the principal under the loan was $572,000. A copy of the MCP was also provided.
Secondly, the plaintiffs refer to notices addressed to NWC (and sent by email to Mr Reese) pursuant to ss 530A(1), 530A(7), 530B(1), 530B(4) and 530B(5) of the Act requiring the delivery up of certain books and records of NWC. This cannot assist the plaintiffs as it was not sent to Hall Chadwick.
Thirdly, the plaintiffs rely upon a response from Mr Reese of Summer Lawyers of 6 February 2018 to the first plaintiff enclosing the NWC Loan statement together with invoices. Given that this was not sent to Hall Chadwick and, in any event, constituted the provision of information, this cannot assist the plaintiffs as against Hall Chadwick.
Fourthly, the plaintiffs rely upon a request for information from Wisewould Mahony about the NWC Loan and the sale of the Taylor Hill property and Summer Lawyers’ reply both dated 13 February 2018. Once again, as Hall Chadwick was not party to this exchange of correspondence, this too can be put to one side.
Fifthly, the plaintiffs again rely upon correspondence between Wisewould Mahony and Summer Lawyers in August, September and November 2020. This does not assist for the same reason.
Sixthly, the plaintiffs rely upon three letters written by Wisewould Mahony to Hall Chadwick dated 21 August 2020, 20 October 2020 and 7 January 2021, which correspondence is said to have sought ‘details of the sale of the Taylors Hill property and the fees incurred by Hall Chadwick. In the first letter, Wisewould Mahony requested, among other things, an explanation as to what the remuneration of $48,000 charged by the receivers and managers related to, and requested that the information be provided within seven days. In its response dated 28 August 2020, Hall Chadwick advised that it took control and marketed the Taylors Hill Property for sale but did not settle the sale and attached email correspondence sent to the liquidator dated 14 August 2020. It otherwise stated that no further discussion was warranted regarding the matter. By way of a follow-up request on 28 August 2020, Wiseswould Mahony requested copies of all documentation in support of the receivers and/or controllers’ fees of $48,000 which would include invoices or other relevant documents.
When there was no response from Hall Chadwick, Wisewould Mahony followed up seeking a response on 11 September 2020.
On 14 September 2020, Hall Chadwick provided copies of invoices in relation to the receivers and controllers’ fees and enclosed copies of two invoices, one for $4,000 inclusive of GST and the other for $44,000 inclusive of GST. Wisewould Mahony responded that same day by requiring ‘all documentation which demonstrates what work was undertaken by the receivers and controllers in respect of the fees which were then received from the sale of the property pursuant to these invoices’.
When no response was provided, on 13 October 2020 Wisewould Mahony followed the matter up again requesting that the information be provided as a matter of urgency. Ultimately, on 16 October 2020, Hall Chadwick sent an email to Wisewould Mahony advising that the total remuneration that had been incurred with respect to the receiver appointment and controller appointment was in the sum of $146,947.30. The name and position of each employee, their rates and the hours they had spent on the engagement were then set out. The email concluded by observing that the balance of fees incurred remained outstanding and that in the circumstances more than sufficient information had been provided to the plaintiffs.
On 20 October 2020, Wisewould Mahony wrote a further letter asserting an entitlement to ‘a full breakdown of in respect of all work undertaken’ by Hall Chadwick, and gave Hall Chadwick ‘one final opportunity’ to provide the information sought, failing which Hall Chadwick would be reported to the Australian Securities and Investments Commission (‘ASIC’). Neither the basis of the asserted entitlement or the relevance or basis of the threatened report to ASIC was identified in the letter.
It appears that Hall Chadwick may have queried the basis of the asserted entitlement because on 7 January 2021, Wisewould Mahony sent a further letter informing Hall Chadwick ‘With respect, we should not have to inform you of the basis for this request….[the liquidator] is entitled to examine the reasonableness of the remuneration and expenses…..and the proportionality as to the work which was undertaken….In addition, you should provide details of the work which was undertaken to demonstrate that the Receivers complied with section 420…. and sold the Taylors Hill property at market value.’
Against that background, the plaintiffs seek an order pursuant to s 434(1) of the Act. There was some debate between the plaintiffs and Hall Chadwick as to whether the use of the word ‘and’ between each of the integers in s 434(1)(b) makes each integer cumulative in order to satisfy the sub-section. Hall Chadwick argued that use of the word ‘and’ pointed to the requirements being cumulative, that is to say that the obligation only arose in the event that there was an amount payable over to the liquidator.
It is not necessary to decide that question because in my view it is clear that the sub-section is not enlivened even if the integers are not cumulative. That is so because:
(a) Hall Chadwick has not been required by the liquidator to render proper accounts or vouch their receipts and payments;
(b) in fact, Hall Chadwick never had any receipts or payments of company property (as is made plain by the statutory reports) and cannot therefore fail to render proper accounts of that which does not exist; and
(c) Hall Chadwick has not been required by the liquidator to pay over any amount properly payable to the liquidator and nor has it failed to comply with a request to pay over any amount properly payable to the liquidator (it received nothing in respect of which it might pay).
Even if the preconditions set out in s 434(1)(b) are satisfied, which they are not, the Court nevertheless has a discretion as to whether to make such an order. In the present case, I would not order that Hall Chadwick provide proper accounts and vouch for the controller’s receipts and payments in any event because they have already lodged statutory reports with ASIC in its capacity as NWC’s agent. Those accounts confirm that Hall Chadwick:
(a) did not receive any proceeds of sale (or any other receipts from company property);
(b) did not make any payments on account of the company; and
(c) received $48,000 (inclusive of GST) from NWC on account of their work as agent and applied those funds to their invoices.
Separately, Hall Chadwick also lodged statutory reports with ASIC in its capacity as receiver and manager of Rock Development. Those statutory reports record no receipts and no payments in respect of the company and corroborate the fact that the identifiable assets were the subject of external control (namely that of the mortgagee in possession).
Accordingly, I will dismiss the claim against Hall Chadwick for an order directing the controller to make good any default within the meaning of s 434(1)(b) of the Act.
The remaining claim concerns the application by the plaintiffs for an inquiry pursuant to s 423(1) of the Act.
The principles to be applied in respect of s 423 were summarised by Rees J in Re Sahab Holdings Pty Ltd:[133]
[133][2022] NSWSC 4, [109]-[117].
Section 423(1) is “primarily concerned with empowering the Court and also ASIC to enquire into faithful performance of functions of controllers of property, and of other requirements imposed on controllers”: GE Capital Australia v Davis (2002) 180 FLR 250; [2002] NSWSC 1146 at [63] (Bryson J). The function of section 423(1) is “disciplinary”: Naxatu Pty Ltd v Perpetual Trustee Co Ltd (2012) 207 FCR 507; [2012] FCAFC 163 at [16], citing Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434 at 438; (1989) 1 ACSR 79 (“Section 423 is concerned with aspects of the conduct of liquidators which are liable to attract sanctions or control for what might broadly be described as disciplinary reasons”); Hall v Poolman (2009) 75 NSWLR 99; [2009] NSWCA 64 at [67]-[68]; Macchia v Nilant (2001) 110 FCR 101; [2001] FCA 7 at [50]; Belvista Pty Ltd v Murphy (1993) 11 ACSR 628 at 630. Section 423(1) “cover[s] complaints about incompetence or lack of diligence as well as complaints about failure to perform duties faithfully”: Hall v Poolman at [90], applied to section 423(1)(b) in S & D International at [223].
The Court’s decision to inquire into the acts or omission of a receiver pursuant to section 423(1)(b) depends on a two-part test. First, the court must be satisfied, as a matter of fact, that the complainant has put on the necessary evidence to establish a prima facie case that there is some act or omission deserving of inquiry. An applicant “must show a sufficient basis for making an order, that there is something which requires inquiry”: Leslie, Re Aboriginal Councils and Associations Act 1976 v Hennessy [2001] FCA 371 at [6]. The level of evidence required to satisfy the prima facie standard will depend on the circumstances. As Young J held in Burns Philp Investment Pty Ltd v Dickens (1993) 11 ACLC 272 at 273:
It seems to me the proper construction of the section is that the court must be given some material to suggest that it would be in the public interest to conduct an inquiry. That means that the complaint of the plaintiffs must put forward material which prima facie satisfies the court of that matter. Just what will satisfy the court will obviously depend on the circumstances. If, as I put in argument in a hypothetical case, it would seem that the liquidator had suddenly left Australia or there has been a reported deficiency in his trust account probably little else would be needed but if on the other hand the complaints are mere unspecified allegations of overcharging, then the court would need to look at the matter in far more detail to see whether it would be justified in using the resources to pursue the matter.
There is no exact test or strict bar that an applicant must meet in order to establish such a prima facie case. The standard of proof is not particularly high. As Dodds-Streeton J held ASIC v Edge [2007] VSC 170: “the threshold precondition for the instigation of an inquiry should not be a very high one. At the primary stage, the Court should not make any finding on the reasonableness or otherwise of the liquidator’s conduct, but if there are sufficient matters prima facie calling for further investigation, then subject to “proper safeguards as to the scope of the inquiry, an inquiry should be permitted’”: at [69], citing Burns Philp Investment Pty Ltd v Dickens (No 2) (1993) 31 NSWLR 280; (1993) 10 ACSR 626 at 633 (Young J). Further, the exact type and volume of evidence required for the applicant to discharge their onus is likely be fact dependent. As Tamberlin J held in Sydlow Pty Ltd (in liq) v TG Kotselas Pty Ltd (1996) 144 ALR 159; (1996) 65 FCR 234 at 242:
The discretionary power of the Court to grant leave must be exercised having regard to all the circumstances of the particular cases and bearing in mind the need to protect the integrity of its process. It does not necessarily follow that, in order to obtain leave, a prima facie case must be demonstrated. There is no specific threshold appropriate in all cases, however there must be more than mere assertion. The Court’s discretion may be exercised on many grounds including, but not limited to, the sufficiency of the evidence adduced as to the prospect of success of the action on the application for leave.
See also Mamone v Pantzer [2001] NSWSC 26; (2001) 36 ACSR 743 at [5] (Santow J).
Second, and even if a prima facie case has been established, the court must consider whether it ought to exercise its discretion to order such an inquiry: S & D International at [210]; Vink v Tuckwell (2008) 216 FLR 309; [2008] VSC 100 at [84]; Oswal v Carson (No 3) (2013) 300 ALR 149; [2013] FCA 357 at [61]. As the Full Court of the Federal Court explained in Leslie (at [6]):
Many factors will be relevant to that exercise. They include the strength and nature of the allegations, any answers offered by the liquidator, other available remedies, the stage to which the liquidation has progressed, the likely amounts of money involved, the availability of funds to pay for any inquiry, the likely benefit to be derived from it and the legitimate “interest” of the applicant in the outcome.
In GE Capital, Bryson J observed:
63… the discretion to award a remedy under s423 should only be acted on where an inquiry into the conduct of the controller has revealed the existence of a liability which can be established simply and is not open to any substantial dispute Except in clear cases it would not in my opinion be appropriate to press subs 423(1) into service to extemporise procedures and remedies against controllers of the property of corporations; except for remedies for which simple summary procedures are appropriate, the ordinary procedures of the Court should be followed…
65 I do not regard Artistic Builders [[2002] NSWSC 16] as establishing that the power of the Court should be exercised in cases where the grounds of the remedies sought are in any way complex, or that it should be readily exercised in cases where use of that power is contentious.
In Belvista, in relation to section 536, McLelland J noted where “a creditor or other interested party wishes to challenge the decision of a person in the position of a scheme administrator, or a liquidator, apparently arrived at in good faith, it is generally inappropriate to utilise the ‘complaint’ provisions of s 536 of the Corporations Law”: at 630, applied to section 423 of the Corporations Act in ASIC v Forestview Nominees Pty Ltd (Receivers and Managers Appointed) (2006) 236 ALR 652; [2006] FCA 1530 at [15]. The Court will not interfere with the decisions of a controller to the extent that those decisions are really decisions of “commercial judgment”: Naumoski v Parbery (2002) 171 FLR 322; [2002] NSWSC 1097 at [13]-[14], citing Leon v York-O-Matic Ltd [1996] 1 WLR 1450; [1966] 3 All ER 277; Re Peters; Ex parte Lloyd (1882) 47 LT 64, 65 (“The Court will not interfere unless the trustee is doing that which is so utterly unreasonable and absurd that no reasonable man would so act.”). Underlining the rationale for this discretion is the view of Santow J in Mamone: “courts recognise that liquidators, like administrators, often have to make decisions on the run; to expect perfection in those circumstances is unrealistic.”
The Court will exercise its discretion not to order an inquiry where the subject of the application for an inquiry is the vindication of individual rights. As the Full Court of the Federal Court (Dowsett, Jagot and Yates JJ) held in Naxatu at [16]:
… the court should not generally order an inquiry for the sole purpose of enforcing individual legal or equitable rights. Such matters will generally be more efficiently dealt with by well-established procedures, in courts having appropriate jurisdiction. On the other hand, where the relevant conduct is likely to affect creditors or shareholders generally, or classes of creditors or shareholders, it may well be appropriate to proceed pursuant to s 423.
The Court takes seriously attempts to intervene in or inquire into the actions of controllers it has appointed as court appointed receivers are officers of the court: Re Flowers & Co [1987] 1 QB 14. The rationale for the caution was explained more fully by Young J in Re Biposo Pty Ltd; Condon v Rodgers (1995) 13 ACLC 1271; (1995) 120 FLR 399 at 403:
The court will be very jealous of its delegate exercising the powers that it is given. The court will take every precaution to make sure that those powers are used impartially and for a proper purpose. The corollary of this is that the court will not permit its officers to be sued by a creditor or have an inquiry made under s 536 unless it is satisfied that there is a prima facie case.
See also Re Siromath Pty Ltd (No 1) (1991) 9 ACLC 1580 at 1582 (per McLelland J).
More recently, in Eighty Second Agenda Pty Ltd v Handberg [2014] VSC 665; (2014) 32 ACLC 14-081, Croft J reviewed the authorities at [18]-[22]:
18… The rationale behind this requirement derives from two distinct, yet related, aspects of the protective role that a court often must undertake; in this instance, that role is enlivened to ensure that a court appointed liquidator be unencumbered so as to allow them to perform their official functions, as well as providing a means of protecting the court’s own processes.
19 This latter aspect focuses on the role which a court-appointed official – in this case, a court appointed liquidator – undertakes as a representative of the court. When acting in such a position, the court takes the view that the actions of the appointed official are to be deemed as actions of the court. This proposition can be traced back to a decision of Lord Chancellor Brougham in Aston v Heron (1834) 2 My & K 390 at 396-7; 39 ER 993 at 995…
21 The rationale behind the first branch of the principle to which I referred earlier – that a court will act to protect its own officers so as to ensure they may perform their official function - was explained by Robb J in Fortress Credit Corp (Australia) II Pty Ltd v Fletcher (as liquidator of Octaviar Administration Pty Ltd) (in liq) (No 2) [2013] NSWSC 1625, where his Honour said:
The … principle is intended to protect liquidators from being subjected to claims against them in their personal capacity in relation to the performance of their duties, so putting their personal assets at risk, by any application made outside the winding up of the company, unless leave be given by the winding up court.
22. As the judicial statements in these cases indicate, there is a close relationship between a court and a court-appointed liquidator; so much so that it will protect the liquidator as one of its officers, through the same processes by which it will protect its own processes.
See also Brereton J in Re St Gregory’s Armenian School (in liq)[2012] NSWSC 1215; (2012) 92 ACSR 588 at [112].
There is no pleading as to the basis upon which the plaintiffs seek such an inquiry. I note among other matters that:
(a) Hall Chadwick has provided the plaintiffs with a breakdown of work in progress by the fee earner and a summary of the nature of the work done and subsequently (albeit that it contends that it is not required to) a ledger verifying each time entry on the file;
(b) in respect of the complaint that Hall Chadwick failed to provide any or any reasonable details regarding the sale of the Taylors Hill Property, Hall Chadwick referred the plaintiffs to Summer Lawyers as the solicitors for the vendor in that transaction;
(c) in respect of the complaint that Hall Chadwick failed to provide the liquidator with a copy of the executed contract of sale of the Taylors Hill Property, it in fact provided a copy;
(d) in respect of the complaint that Hall Chadwick failed to provide copies of any valuations obtained by the defendants for the Taylors Hill Property including a valuation undertaken by Preston Rowe Patterson dated 23 February 2017 and a valuation undertaken by Preston Rowe Patterson dated 11 April 2017, NWC asserted a claim of legal professional privilege in respect of such documents which was advanced on its behalf by Summer Lawyers—it was not for Hall Chadwick to proceed in the face of that objection to production;
(e) in respect of the complaint that Hall Chadwick failed to provide the basis for the calculation of interest each month, that is not a matter for Hall Chadwick and in any event has been addressed by Summer Lawyers and NWC including in this proceeding; and
(f) in respect of the complaint arising from a failure to provide details of legal expenses charged in connection with the marketing and sale of the Taylors Hill Property, that is not relevant to Hall Chadwick.
In the hearing, a complaint emerged that notwithstanding that Hall Chadwick had taken possession of the Taylors Hill Property as agents for the mortgagee in possession, NWC, the contract of sale was not executed by them as agent for NWC but was rather executed by NWC through its attorney Mr Reese. Nothing turns on this for two reasons; first, Mr Albarran’s evidence was to the effect that this was not unusual; secondly, in any event, in circumstances where there is no other attack on the sale, nothing follows from the fact that the contract was signed by NWC and not by Hall Chadwick as agents for NWC.
There is no conduct identified which gives rise to a basis for the order of an inquiry. In any event, if there was such a basis I would exercise my discretion against ordering an inquiry for the following reasons:
(a) to the extent to which the plaintiffs rely upon a failure to provide documents, the plaintiffs had powers to compel production of documents rather than seek an order for an inquiry, such as those set out in ss 596A and 596B of the Act;
(b) the fact that there is no money involved given that Hall Chadwick did not receive any of NWC’s money, spent no money on NWC’s behalf and did not in fact sell the property, means there is no utility to any inquiry;
(c) there are no funds available to pay for the inquiry; and
(d) as a result of the above, there is no benefit from the inquiry.
It follows therefore that the claim against Hall Chadwick for an inquiry pursuant to s 423(1) of the Act is dismissed.
Sundry matters
In relation to the plaintiffs’ claim for an account against NWC, the plaintiffs also sought to challenge various other expenses charged by NWC. These expenses were not referred to in the ASOC or the plaintiffs’ outline of opening submissions. Nevertheless, NWC sought to address them in Mr Morello’s affidavit sworn 25 August 2023 save in relation to the enforceability of the default interest rate charged under the NWC Loan, which was asserted to be an unenforceable penalty.
A proceeding commenced seeking relief in the form of an order for an account is not a proper vehicle for a roving inquiry in relation to various expenses charged by a secured party, save where those expenses have been specifically challenged and pleaded as impugned expenses which if wrongly charged, result in a surplus. Although no point to this effect was taken, a pleading which alleges an entitlement to an account in respect of a sale of mortgaged property must plead as a material fact that there is a surplus owing under a power of sale.[134] A surplus would have resulted if the plaintiffs succeeded in their contention that the BAB Payment was unsecured as it did not fall within the scope of either the BAB Mortgage (in respect of which NWC was subrogated) or the NWC Mortgage, but not otherwise. The various other charges such as the appropriateness of valuation fees, payments made for hoarding, quantum of legal expenses and the like, as were the subject of criticism at the hearing, are properly matters for the taking of the account, not the application for the taking of account. In any event, each of the challenged expenses was appropriately explained by NWC.
[134]C2C Developments Pty Ltd v Commonwealth Bank of Australia [2012] NSWSC 1162; Greville Healey, Fisher and Lightwood’s Law of Mortgage (Lexis Nexis Butterworths, 13th ed, 2010) [39.20].
The only challenged charge not explained by Mr Morello related to the submission raised for the first time in the plaintiffs’ oral opening which was to the effect that the default interest rate payable under the NWC Loan was an unenforceable penalty. The plaintiffs articulated a contention to that effect based upon Bellas v Powers,[135] a decision of Robb J in the Equity Division of the Supreme Court of New South Wales handed down on 10 October 2023. This decision, although only recently handed down, adopted the same reasoning as Meagher JA, sitting at first instance, in Aquamore Credit Equity Pty Ltd v Hung.[136] As such and contrary to the submission, it did not represent a new development in the law. The assertion that the default provision in the NWC Loan was an unenforceable penalty was not pleaded, nor referred to in the plaintiffs’ written outline of submissions. Not only was NWC understandably not prepared to deal with that argument, it may have wished to lead evidence seeking to justify the default rate.
[135][2023] NSWSC 1198.
[136][2021] NSWSC 1681.
Accordingly, I did not allow that claim to be pressed at this hearing. That said, even if the default rate charged by NWC is unenforceable, interest charged by it at its standard rate on the amount advanced by NWC would nevertheless still result in a deficiency on the amounts owing to NWC as its effect would be only to reduce the interest claimed by NWC under the NWC Loan by $216,521.99 which would still leave a deficiency owing to NWC.[137] It would not produce a surplus. As such, the penalty argument has no impact on the outcome in this proceeding.
[137]See [25]-[26] above.
Disposition
The plaintiffs’ claims against each defendant will be dismissed. I shall hear the parties as to costs.
SCHEDULE OF PARTIES
| S ECI 2022 01175 | |
| BETWEEN: | |
| CRAIG IVOR BOLWELL IN HIS CAPACITY AS LIQUIDATOR OF ROCK DEVELOPMENT & INVESTMENTS PTY LTD (ACN 168 484 811) (IN LIQUIDATION) | First Plaintiff |
| ROCK DEVELOPMENT & INVESTMENTS PTY LTD (ACN 168 484 811) (IN LIQUIDATION) | Second Plaintiff |
| - and - | |
| NWC FINANCE PTY LIMITED (ACN 143 762 583) | First Defendant |
| SUMMER LAWYERS PTY LTD (ACN 161 361 931) | Second Defendant |
| RICHARD ALBARRAN AND DAVID ANTHONY ROSS IN THEIR CAPACITY AS JOINT AND SEVERAL CONTROLLERS AND JOINT AND SEVERAL RECEIVERS OF ROCK DEVELOPMENT & INVESTMENTS PTY LTD (ACN 168 484 811) (IN LIQUIDATION) | Third Defendant |
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