Building Central Pty Ltd v Trustee of the Property of Kris Halliday
[2011] FMCA 605
•10 August 2011
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| BUILDING CENTRAL PTY LTD v TRUSTEE OF THE PROPERTY OF KRIS HALLIDAY & ANOR | [2011] FMCA 605 |
| BANKRUPTCY – Failure by incoming mortgagee bank to register release of outgoing mortgage and its incoming mortgage security – original mortgage release and mortgage instruments lost – fresh release and mortgage prepared and lodged for registration and registered – new instruments defective and in need of rectification. In interim two equitable charges attach to subject real property. Capacity to transfer mortgage in circumstances where secured debt discharged. Question of indefeasibility of interest – was bank’s registered interest defeated by fraud – s.184(4) Land Title Act – or defeated by an equity arising from an act by the bank or assisted by the bank – s.185(1)(a) Land Title Act – claims of conduct giving rise to claims under each limb of rule in Barnes v Addy. If bank’s indefeasible title impeached did it have an equitable mortgage – order of priority or competing equitable mortgages. Question of circumstances warranting postponement of first equitable mortgage to subsequent equitable mortgages. |
| Bankruptcy Act 1966 (Cth), ss.58(5), 124(2)(d) Land Title Act 1994 (Qld), ss.62, 81, 126(4), 181, 184(3)(b), 185(1)(a) Property Law Act 1974 (Qld), ss.78(1), 94, 94(1) Queensland Building Services Authority Act 1991 (Qld) |
| Australian Guarantee Corporation (AGC) Ltd v De Jager [1984] VR 483 Fisher & Lifewoods Law of Mortgages, 2nd Aust. Ed. 2005 |
| Applicant: | BUILDING CENTRAL PTY LTD |
| First Respondent: | TRUSTEE OF THE PROPERTY OF KRIS HALLIDAY |
| Second Respondent: | REECE PTY LTD |
| File Number: | BRG 664 of 2008 |
| Judgment of: | Burnett FM |
| Hearing date: | 16 April 2011 |
| Date of Last Submission: | 16 April 2011 |
| Delivered at: | Brisbane |
| Delivered on: | 10 August 2011 |
REPRESENTATION
| Solicitor for the Applicant: | Piper Alderman |
| There was no appearance by the First Respondent |
| Solicitors for the Second Respondent: | Patane Lawyers |
ORDERS
The parties submit a minute of order to give effect to these reasons by 4.00pm on 19 August 2011.
Liberty to apply.
Costs reserved.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE |
BRG 664 of 2008
| BUILDING CENTRAL PTY LTD |
Applicant
And
| TRUSTEE OF THE PROPERTY OF KRIS HALLIDAY |
First Respondent
| REECE PTY LTD |
Second Respondent
REASONS FOR JUDGMENT
Introduction
At the time of his sequestration Kris Halliday (the bankrupt) was the registered proprietor of real property situate at 14 Ralston Street, West End, Townsville (the Property). The Property was subject to a registered mortgage in favour of the Commonwealth Bank of Australia (CBA) which had not been released. In 2007, prior to sequestration, the bankrupt refinanced with BankWest Australia (BWA). He agreed to transfer the CBA mortgage (CBA transfer) and register a mortgage in favour of BWA (BWA mortgage).
For reasons which cannot be explained, the CBA transfer and the grant of the BWA mortgage were not registered. Subsequently, other equitable charges were granted by the bankrupt to support credit facilities granted to various trade creditors. Those equitable chargees had caveats registered over the Property securing sums due to them. After becoming aware of the equitable chargees and alert to the non registration of the CBA transfer and BWA mortgage, BWA caused a caveat to be lodged. While the first caveat remained registered it lodged a second caveat. The CBA transfer was then registered. At that time the second caveat was cancelled and subsequently the first caveat was permitted to lapse. An issue now arises as to whether or not the equitable chargees have priority ahead of the BWA mortgage.
BWA seeks declarations that the BWA mortgage be declared a legal mortgage or alternatively that it holds its interest as an equitable mortgagee and in either event that such mortgage has priority over the equitable charges over the Property claimed by the trade creditors. The declarations will impact the priorities of the respective chargees in circumstances where there will be a general deficiency following the realization of the Property.
Background Facts
On 9 September 2008 the bankrupt was subject to a sequestration order made upon his own petition. At that time he was the sole registered proprietor of real property situate at 14 Ralston Street West End Townsville more particularly described as Lot 1 on Survey Plan 166517, County of Elfinstein, Parish of Coomambah contained in Certificate 50566435 (the RPD).
The bankrupt was registered as proprietor of the Property on 1 August 2005. A search with the Department of Natural Resources (DNR) shows the title was subject to a registered mortgage in favour of CBA concurrent with the registration of the bankrupt’s interest.
In July 2007, prior to the bankrupt’s sequestration, the bankrupt refinanced with BWA the debt then secured by CBA’s registered mortgage. The refinancing occurred on 3 July 2007 when BWA paid out the CBA loan by an advance made to him. A check search made immediately prior to settlement revealed the CBA mortgage as the only registered encumbrance on the title Deed as at that date. It remained so until the later events described hereunder. At that date there were no unregistered interests affecting the title to the Property.
In support of the advance by BWA to the bankrupt he agreed to provide a mortgage over the Property and to cause Building Central Pty Ltd (BCPL) (as it then was) to provide a guarantee. BCPL gave its guarantee by irrevocable authority dated 18 June 2007 and on 17 June 2007 the bankrupt executed a form of mortgage over the land in favour of BWA as mortgagee. In addition CBA executed a transfer of its interest in “707560175”[1] to BWA, being the CBA’s registered mortgage. It is evident from the Office of State Revenue stamp on the instrument that this form was lodged with it in conjunction with the mortgage form[2]. The completion of the instruments and intended lodgement of them for registration following stamp duty assessment is entirely consistent with the “advance instructions” generated on 27 June 2007.[3] Settlement occurred on 3 July 2007 as agreed and unquestionably from then BWA ought to have been in a position to register the transfer of mortgage and to register its interest as mortgagee or at least cause their registration.
[1] The interest described in item 1 of the transfer instrument as being transferred.
[2] So much is open to be inferred by the additional information contained in the impressed duty stamp. First the duty stamp on the mortgage notes “duty $282.40 transferred from MORT 707560175 now PSD to $560,000” (I assume PSD is an abbreviation for “paid stamp duty”). It would seem up stamping was required because a greater sum was being advanced than provided for by the CBA mortgage. The same assessor appears to have assessed each instrument and such assessment occurred on the same day being 6 July 2007. Each instrument is subject to a differing “duty code” reflecting the differing nature of each transaction. The code for the mortgage is “MORT” and the code for the transfer is “TRMO” (I assume “TRMO” is an abbreviation for “transfer registered mortgage”). That fact probably accounts for the differing transaction numbers.
[3] See affidavit Melanie Jane Talbot filed 29 March 2010, Annexure MJT8 – page 60.
However for reasons which cannot be provided registration of those instruments never occurred as it appears the CBA transfer and the BWA mortgage forms were misplaced. BWA did not become aware of the failure to register until about 22 August 2008 when the bankrupt’s file was transferred to its asset recovery section.
BCPL had been incorporated in 2005 and the bankrupt was its sole shareholder and director. It conducted business as a builder. On 28 May 2007 it had entered into a credit agreement with Reece Pty Ltd (Reece), the second respondent. On that date and in consideration of Reece entering into a credit agreement with BCPL the bankrupt guaranteed to Reece payment of all amounts whatsoever owing or unpaid by BCPL to Reece. In particular the agreement contained a charging clause charging “…in Reece’s favour with payment of all monies owing to Reece by [BCPL] and/or [the bankrupt’s] estate and interest in any land and/or any other assets… in which [the bankrupt] now [has] any legal title…”.
Additionally BCPL had entered into a Deed of covenant and assurance (the Deed) with the Queensland Building Services Authority (QBSA). By the Deed the bankrupt granted a charge over the property. The provision of the charge was a condition for the issue of a building license by the QBSA to BCPL. By the Deed the bankrupt covenanted that if BCPL was wound up he would pay to BCPL a sum as defined. The Deed was a form of guarantee required by the QBSA to support the solvency of it as an incorporated registered builder as required by the provisions of Part 3 of the Queensland Building Services Authority Act 1991 (Qld) (QBSA Act). The agreement included a charging provision which provided that upon a “written demand by the licensee (BCPL)” all the bankrupt’s property would be subject to a charge with and secure payment of the “Defined Amount”.[4] It is not in contention that upon giving this notice BCPL’s charge crystallised and became a choate charge at this time.
[4] The Defined Amount was provided for in the Deed to mean an amount determined pursuant to the financial requirements for licensing and defined as “the difference between the net tangible assets held by the licensee and the net tangible assets required for the licensee’s allowable annual turnover”. In this instance the Defined Amount was $205,198.00.
On 3 June 2008 BCPL was placed into voluntary administration and on 8 July went into liquidation. On 30 July 2008 its liquidator gave notice of demand for the Defined Amount to the bankrupt. The demand was not satisfied and accordingly the liquidator caused a caveat to be lodged and registered over the title for the Property on 4 September 2008. Compliant with s.126(4) Land Title Act 1994 (Qld) (LTA) BCPL commenced this proceeding on 8 October 2008 and gave notice to the Registrar of Titles of this proceeding such that the caveat lodged by it did not lapse.
BCPL also fell into arrears on its account with Reece and despite demand it failed or refused to discharge those arrears. The bankrupt was liable under its guarantee and accordingly Reece caused a caveat to be lodged and registered on the title to the Property. Registration occurred on 12 December 2007. Reece then commenced proceedings in the Supreme Court of Queensland on 13 February 2008 seeking judgment for moneys owing and for “an order that the equitable mortgage be enforced by sale”. It gave notice of those proceedings to the Registrar of Titles compliant with s.126(4) LTA in February 2008. It subsequently joined in these proceedings to protect its interests.
Prior to lodging their respective caveats the only interest of which each of BCPL and Reece had notice was that of the CBA as mortgagee as each noted in their respective caveats.
The bankrupt filed his debtor’s petition on 9 September 2008 and BCPL commenced this application to assert its charge on 8 October 2008. The matter was first mentioned on 29 October 2008 when orders were made, inter alia,
a)Appointing the Trustees of Sale of the Property;
b)Vesting the Property in the Trustees for Sale; and
c)Determining in relation to the proceeds of sale of the bankrupt’s property the issue of priorities as regards the various charge holders and the Trustee in Bankruptcy.
On 17 November 2008 the Trustees wrote to BWA informing them of these proceedings and providing them with a copy of this court’s orders. In addition the facsimile letter from Mr Peter Dinoris advised that he and Mr Nick Combis had been appointed as statutory trustees to sell the property. The letter noted:
“I understand Bank of Western Australia (BankWest) may have refinanced the mortgage registered in favour of the Commonwealth Bank of Australia (being Lite Home Loan number 123-027429-9). I note from the title search that there is no mortgage in favour of BankWest”.
In response on 26 November 2008, BWA lodged a caveat over the Property. The caveat noted the interest claimed as ‘an equitable share or interest of an estate in fee simple’ and stated grounds as ‘Pursuant to a Loan Agreement dated 13 June 2007 between Kris Halliday and Bank of Western Australia’. As BCPL noted in their submissions the caveat did not mention the transfer of the CBA mortgage or any interest asserted under it.
On 17 December 2008 BWA caused its solicitor to lodge a second caveat over the Property. The interest claimed in the second caveat was ‘an estate in fee simple as equitable mortgagee’ on the grounds of BWA ‘as transferee under the unregistered transfer of registered dealing number 7207560175 between Commonwealth Bank of Australia as transferor and the Bank of Western Australia as transferee’. BWA arranged for a further transfer of the CBA mortgage to be obtained and that transfer was lodged for registration at the Titles Office on 18 December 2008.
Significantly, BCPL contends, BWA did not obtain the consent of the bankrupt to the preparation of this second mortgage transfer instrument. Subsequently the first caveat lodged by BWA lapsed and the second caveat was cancelled by registration of the transfer of the CBA mortgage to BWA.
The appointed Trustees for Sale proceeded to sell the Property in December 2009. BWA did not engage in that process but initially refused to release the transferred CBA mortgage demanding full repayment of the bankrupt’s debt. Ultimately an arrangement was agreed permitting settlement of the sale contract on the Property and providing for the proceeds to hold in escrow pending determination of these proceedings.
In summary, at the commencement of this application the bankrupt remained the registered proprietor of the property. In order of priority on the historical title search, the Property was subject to a mortgage to the CBA registered on 15 March 2004; a caveat registered by Reece on 12 December 2007; and, a caveat registered by BCPL (in liquidation) on 4 September 2008.
Since then and immediately prior to the transfer of the property following its sale by court appointed trustee for sale, the historical title search recorded the priority of dealings as the BWA mortgage registered 18 December 2008; a caveat registered by Reece on 12 December 2007; and, a caveat registered by BCPL (in liquidation) on 4 September 2008.
The original instrument of transfer of the CBA mortgage tendered at settlement on 3 July 2007, which is before the registration of either of the equitable charges noted by registration of the caveats, has never been registered. The original instrument of mortgage granted by the bankrupt to BWA has never been lodged for registration and is not registered.
The equitable chargees do not dispute their respective entitlements inter se. However BWA maintains priority over the equitable charges created by each of BCPL and Reece. It contends it had no notice of any prior equities prior to the creation of its equity on 3 July 2007 and asserts its priority on principle of indefeasibility.
It contends that its interest as transferee of the CBA mortgage is now registered and as such it takes priority over the interests of BCPL and Reece which are not registered. It contends their caveats do not count for this purpose.[5]
[5] A caveat does not create a title or add to the rights of the caveator; Lynch v O’Keefe [1930] St R Qd 74; FNCB v Waltons Finance Ltd v Crest Realty Pty Ltd (1977) 10 NSWLR 621; Re Hitchcock (1900) 17 WN (NSW) 62. On the functions of caveats generally see Butler v Fairclough (1917) 23 CLR 79 at [91]; J & H Just (Holdings) Pty Ltd (1971) 125 CLR at [546], [552], [554], [557] and [558]; and Jedhar Pty Ltd v Grosse [2004] QCA 167 [32].
BCPL and Reece claim their equitable charges have priority ahead of BWA as on their case BWA’s interest is a mere equity. They claim disentitling conduct by BWA means any equity it has should be postponed.
Proceedings to date
Declarations were made on 29 October 2008, inter alia, as to an equitable charge held by each of BCPL and Reece over the property. In addition, orders were made for the appointment of a trustee for sale to sell the property and orders were made for the subsequent distribution of sale proceeds. In particular order 10 provided:
“That the proceeds of sale of the property be applied as follows:
(a) Firstly, payment of the costs of the sale of property including any agents commission, advertising expenses and reasonable legal fees;
(b) Secondly, the discharge of any prior registered mortgage;
(c) Thirdly, the payment of the amount due to the second respondent in discharge of the second respondent’s charge;
(d) Fourthly, the payment of the amount due to the applicant in discharge of the applicant’s charge;
(e) Fifthly, the balance (if any) to be paid to the first respondent.”
The order by its terms acknowledged the respective priorities of the competing equitable interests of each of BCPL and Reece.
Following those orders BWA made application to be included as a respondent to the proceeding and it also sought orders setting aside various declarations concerning each of BCPL and Reece and their holdings of equitable charges over the property and their entitlement to enforce those charges ahead of unsecured creditors. In addition BWA sought orders setting aside the consent orders made in respect of the application of the proceeds of sale following the sale of the property by trustees for sale appointed by those orders.
Upon the hearing of the application BWA’s application for setting aside paragraphs 1, 2, 3, 10, 11, 12 and 13 of orders made on 29 October 2008 concerning those matters resolved into an application:
a)By BCPL for a declaration that paragraph 10(b) of the orders, that is the order directing payment of the proceeds of property to any prior registered mortgage, not include BWA within the meaning of the phrase, “any prior equitable mortgage”; and
b)A cross application by BWA for orders, inter alia, that paragraphs 1, 2, 3, 10, 11, 12 of the orders be aside and that it receive payment of the net surplus proceeds of sale in discharge of its mortgage and in priority to BCPL and Reece.
Formally it sought orders for:
a)A declaration that BWA held a registered legal mortgage over the property;
b)Alternatively that BWA held an equitable mortgage over the property;
c)That if BWA held an equitable mortgage that equitable mortgage had priority over the equitable charges over the property claimed by BCPL and Reece; and
d)A declaration that the bankrupt estate of the bankrupt was subject to BWA’s equitable mortgage and that any proceeds of sale did not form part of the divisible property of the bankrupt estate to the extent necessary to discharge BWA’s mortgage.
BCPL formally opposed BWA’s joinder in the action and its orders sought.
Notwithstanding BCPL’s submissions that BWA had knowledge of BCPL’s claims as equitable mortgagee and of its application it is in my view appropriate that BWA be permitted to be joined as a respondent to the application pursuant to FMC rule 11.01(1) as its participation is necessary for the court to completely and finally determine all matters in dispute between these parties for reasons which are addressed below. Furthermore the orders made on 18 October 2008 ought be open to be set aside or varied as is necessary as they were orders made in the absence of a party; FMC rule 16.05(2)(a). I do not accept that the circumstances give rise to an issue estoppel or res judicata as the rule only applies when the issues sued for persons and parties to the action are the same as in the original action.[6]
[6] Chamberlain v Deputy Commissioner of Taxation (1988) 164 CLR 502.
In the complex factual matrix of this action and in particular because of BWA’s registered interest on the title to the property it is entirely appropriate that BWA be afforded an opportunity to seek declarations concerning the indefeasibility of its interest and to address arguments advanced by BCPL and Reece to defeat its claim.
Summary of issues for determination
The following issues arose for determination:
a)Was it open to BWA to cause a transfer of the CBA mortgage, release and registration of its own mortgage;
b)Can BWA rely upon the indefeasibility of its registered interest;
c)If BWA’s interest is indefeasible is its interest defeated by:
i)A fraud arising from the conduct of BWA; s.184(3)(b) LTA;
ii)Alternatively, if there is no actual fraud then is BWA’s indefeasible interest defeated by an equity arising from an act by it; s.185(1)(a) LTA, either:
(1)By it knowingly participating in a breach of the obligations owed by the bankrupt to his trustee in bankruptcy, appointed trustee for sale of the property, or other equitable chargees (the first limb in Barnes v Addy)[7]; or
(2)It assisting another, that is, by BWA assisting the bankrupt’s advanced interests of BWA ahead of others by aiding BWA to do something that was in breach of the bankrupt’s duty to its trustee in bankruptcy, trustee for sale or other equitable chargees (the second limb in Barnes v Addy (supra));
d)If BWA had no registered interest:
i)Did it have an equitable mortgage;
ii)If so, did it rate ahead of other equitable chargees;
iii)If so, should its interest be postponed because of its conduct in failing to protect its own interests.
[7] (1874) LR 9 Ch App
BCPL was the lead equitable mortgage. Reece’s interest was acknowledged to be inferior to that of BCPL. Whilst Reece was represented at and made submissions on the hearing of the application, its partner was to adopt and rely upon the submissions made by BCPL. Only where appropriate have the submissions by Reece been addressed.
Transfer of the CBA mortgage
The transfer of a registered mortgage is expressly authorised by statute. Section 62 of the LTA addresses the matter. Relevantly it provides:
“(1) On registration of an instrument of transfer for a lot or an interest in a lot, all the rights, powers, privileges and liabilities of the transferor in relation to the lot vest in the transferee.
(2) Without limiting subsection (1), the registered transferee of a registered mortgage is bound by and liable under the mortgage to the same extent as the original mortgagee.
…
(4) In this section rights, in relation to a mortgage or lease, includes the right to sue on the terms of the mortgage or lease and to recover a debt or enforce a liability under the mortgage or lease.”
By operation of the section the registration of a transfer of mortgage assigns not only the mortgage but also the personal covenant in the mortgage for payment of the monies due; Consolidated Trust Co Ltd v Naylor (1936) 55 CLR 423 at 434. It does so notwithstanding any general law impediments to assignments of choses in action; Queensland Premier Mines Pty Ltd v French (2007) 235 CLR 81 [41] – [44].
The CBA memorandum of common provisions addressed the issue. In clause 19.1 it provided:
“[CBA] may assign or otherwise deal with our rights under this mortgage or any secured agreement in any way we consider appropriate.”
BWA observed that BCPL’s arguments proceeded on the assumption that the mortgage could not be transferred because the CBA’s debt had been discharged and that a registered mortgage is void or non-assignable if it secures nothing. In answer to that submission BWA contended:
a)Its advance which paid out the CBA’s debt was itself an advance which was secured by the terms of the first mortgage; and
b)The proprietory interest in a mortgage exists independently of the personal covenant to pay the amount secured. Accordingly, a mortgage can be transferred under Torrens title statues even if there are no monies due and the mortgage is in that sense “empty”; English, Scottish & Australian Bank Ltd v Phillips (1937) 57 CLR 302 at 320-1 & 309-311.[8]
[8] See also Re Hill (1974) 23 FLR 329; an illustration of a court recognising that an “empty” mortgage is preserved for the benefit of a party who has discharged the debt upon contemplation of eventually taking a different security.
It follows that the only way that a registered mortgage can be discharged, even if the debt is paid off, is by registration of a release under s.81 LTA[9]. In this case no release had been registered and the mortgage remained registered until 18 December 2008 when it was transferred to BWA by the transfer lodged on that date.
[9] S.81 LTA provides that on lodgement of an instrument releasing a mortgage the register may register the release to the extent shown in the instrument of release.
BWA also drew upon s.94 of the Property Law Act 1974 (Qld) (PLA) in support of its contention. Section 94 PLA provides:
“94 Obligation to transfer instead of discharging mortgage
(1) Where a mortgagor is entitled to reDeem the mortgagor shall because of this Act, have power to require the mortgagee, instead of discharging, and on the terms on which the mortgagee would be bound to discharge, to transfer the mortgage to any third person as the mortgagor directs, and the mortgagee shall because of this Act be bound to transfer accordingly.
(2) The right of the mortgagor conferred by this section shall belong to and be capable of being enforced by each encumbrancee, or by the mortgagor, despite any intermediate encumbrance, but a requisition of an encumbrancee shall prevail over a requisition of the mortgagor, and as between encumbrancees a requisition of a prior encumbrancee shall prevail over a requisition of a subsequent encumbrancee.
(3) This section shall not apply--
(a) in the case of a mortgagee being or having been in possession; or
(b) in the case of a mortgage which contains a valid and enforceable covenant or condition in favour of the mortgagee in restraint of the trade or business of the mortgagor or any other collateral benefit or advantage in favour of the mortgagee.
(4) This section applies to mortgages whether made before or after the commencement of this Act, and shall have effect despite any stipulation to the contrary.”
As was noted in BWA’s submissions that section was enacted to overrule the general law rule that a mortgagee was bound upon redemption of the mortgage to convey only to the owner of the equity of redemption. Section 94(1) PLA now permits the mortgagee, upon the same terms to which the mortgagee would be bound to discharge, to transfer the mortgage to another person at the direction of the mortgagor. The same applies by reason of ss(2) in the case where there are subsequent encumbrances including mortgages, provided that the mortgage is transferred to the puisne encumbrancee (i.e. next entitled to priority or by their consent). In that regard s.94 is purely procedural and does not touch the priorities in question. I accept BWA’s submissions on this point.
Whether the BWA advance is secured by the first mortgage depends upon the terms of the first mortgage and whether they are wide enough to secure BWA in respect of monies paid to the CBA on 3 July 2007. This is a question of construction turning on the intention of the parties expressed objectively in the CBA mortgage and the transfer; Queensland Premier Mines Pty Ltd v French (supra) at [51] – [58].
BWA contended that the CBA mortgage applied for one of two reasons.
a)First it contended that by taking the transfer and paying the amount that was due to CBA, BWA did not discharge the CBA debt but took an assignment of it, that is to say, purchased the debt.[10] It contended that the form of the transaction was important. Instead of discharging the CBA mortgage BWA took a transfer of it and it did so as security for the monies due under the CBA mortgage. It contended that the registration of the transfer carried with it the right to sue the mortgagor under the terms of the mortgage. Item 4 of the transfer, consideration, noted that the transfer was “in consideration of a request made by the mortgagor made under and by virtue of s.94(1) of the Property Law Act 1974”. BWA contended that this notation was neutral with the parties perhaps having regarded s.94(1) as applicable simply because they had opted to transfer the CBA mortgage rather than to discharge it. I note in particular the introductory words to s.94(1) which provide “where a mortgagor is entitled to reDeem” preceed the rights provided for in ss(1) including the mortgagor directing the mortgagee to transfer the mortgage to a third party at its direction.
b)Secondly, and in the alternative, that even if the mortgage debt was discharged the CBA mortgage was wide enough to encompass BWA’s payment in any event. It contended the language of the mortgage was wide enough to extend it to secure monies which are or might be owed by the mortgagor to all persons who might at any time become mortgagee by assignment of the mortgage. In particular the mortgage secured and contained a covenant on the part of the mortgagor to pay the “amount owing”. The standard terms of the CBA mortgage defined the “amount owing” in clause 30 to mean:
“Amount owing means at any time all money which one or more of you owe us, or will or may owe us in the future, under a secured agreement and this mortgage or either of them.”
[10] English, Scottish & Australian Bank Ltd v Phillips (supra) at 306, 309 – 311, 320-1, 322, 324-5; Queensland Premier Mines Pty Ltd v French (supra) at 57; Re Hill (1974) 23 FLR 329 at 332.
Clause 30 proceeded to define “you” to mean, “the person or persons named in this mortgage as mortgagor. If there are more than one, you means each of them separately and every two or more of them jointly. You includes your executors, administrators and assigns.”[11] The form 2 memorandum incorporates, by reference, the meaning of “amount owing” provided in clause 30 in the standard terms memorandum number 700901021 (the CBA common provisions). The debt due from the bankrupt to BWA under the home loan contract was a sum due “under this mortgage” because of the personal covenant in the mortgage to pay all money which is owing or may in the future become owing by the mortgagor to the mortgagee. Importantly, BWA submitted, there is no indication in the definition of the secured debt that the mortgage is intended to secure only debts due to the CBA or limited advances made at any one point in time. In that regard it was contended the CBA mortgage was no different to any other “all monies” mortgage. BWA contended there was no indication that the personal covenant of the mortgage was limited to monies due or which may become due to the CBA. In fact the contrary was the position. In particular it noted the standard terms document did not identify the mortgagee but only referred to the mortgagee as “us” or “we” with “we” being defined in clause 30 to mean “the person named in this mortgage as mortgagee and its successors and assigns”. Furthermore clause 19.1 of the CBA common provisions provided that “[CBA] may assign or otherwise deal with our rights under this mortgage or any secured agreement in any way we consider appropriate.”
[11] Section 78(1) PLA implies on the part of the mortgagor an obligation that he will pay the principal and interest secured at the times provided in the mortgage without any deduction whatever.
From the terms of the BWA loan contract it is apparent that the commercial object of the transaction was to refinance the debt owed to the CBA secured by the mortgage. Given the provision of fees including a “home loan portability fee (payable upon application to the bank to substitute your existing security with another security)” and “home loan transfer fee (payable on or before the date when your existing loan is transferred to another product type)” it would appear that the purpose of the loan was to substitute BWA’s loan for the CBA loan. It was not a case of collateral borrowings.
Alternatively, BWA claims it is now subrogated to CBA’s rights in that if BWA’s advance is not as a matter of construction covered by the CBA mortgage it was contended in the alternative that BWA is entitled in equity to be treated as it were. BWA contended that it is now settled by authority that where a third person pays off a secured debt at the request of the debtor the third person is subrogated into the rights of the mortgagee and is treated as if he/she/it was entitled to the benefit of the mortgagee’s security to the extent that the monies lent were applied to the discharge of the debtor’s liability to the mortgagee it being presumed (unless the contrary appears) that the third person intended to keep the security alive for his/her/its benefit; H & S Credits Ltd (In Liq Tucker v Roberts [1969] QdR 280 (FC); Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 (6)(90); English, Scottish & Australian Bank Ltd v Phillips (1937) 57 CLR 302, 306, 309 – 311; Re Hill (1974) 23 FLR 329.
In this instance it is plain that the payment by BWA of $560,000.00 to the CBA was to discharge the debt owed by the bankrupt to the CBA. As BWA contended this was not a case of a loan which the debtor could use as he saw fit. The terms of the loan were made plain in the BWA loan contract where the purpose of the loan was defined to be “to refinance of a Commonwealth Bank facility”. The disbursement letter forwarded by BWA to the bankrupt dated 26 July 2007 advised the sum disbursed to CBA in discharge of the balance then due to it. Of the $560,000.00 advanced by BWA to the bankrupt approximately $800.00 was left to be disbursed on account of bank fees, mortgage registration fees, stamp duty and other disbursements. A sum of $35.46 was surplus to the transaction and transferred on settlement to the “credit like direct account 029-005363-5”. BWA’s disbursement letter is consistent with the terms of the loan contract but the loan was for the purpose of refinancing.
BWA contended and I accept that in those circumstances it is to be presumed that BWA intended to keep the CBA mortgage alive for its benefit. In that respect it noted that the CBA mortgage was not discharged by registration of an instrument of release but that BWA took an actual transfer of the mortgage which contained within it the specific reference to s.94 PLA. It contended that it was not enough to rebut the presumption that BWA contemplated other security such as its own mortgage; Re Hill (1974) 23 FLR 329.
In BWA’s submission it follows that the doctrine of subrogation is invoked not only against the bankrupt but also against BCPL and Reece taking through the bankrupt. It contended that the CBA mortgage was not discharged and BWA has been able to register a transfer of the CBA mortgage and therefore can avail itself of the statutory priority enjoyed by the CBA mortgage over each of BCPL and Reece. On that basis it contended that BWA is entitled to stand in the shoes of CBA and assert the statutory priority by reason of the registration of the CBA mortgage because it is the CBA’s mortgage under which the BWA comes in. In that regard it drew upon the observations of Cohen J in State Bank of NSW v G Port Developments Pty Ltd [12] where his Honour observed:
“Thus the security is kept alive by subrogation. Equity does not create a fresh right against the debtor or mortgagor, but against the creditor or mortgagee. In that way a first mortgage, when paid out by a person who is subrogated, remains in priority to a subsequent encumbrance, even though that later encumbrance came into being, whether at law or in equity, at an earlier time that (sic) the payment.”
[12] Unreported SCNSW, Cohen J, 4579/1990, 13 May 1991 (BC9102004)
BWA contended that even if the applicable rule of priority had fallen to be governed by the general law rather than by s.184 LTA, BWA would still have enjoyed priority over BCPL and Reece because BCPL and Reece had notice of the CBA mortgage albeit only Deemed notice of it.
Further, it contended BCPL took its charge with actual notice of the CBA mortgage because the bankrupt had signed the CBA mortgage on 21 October 2003; the purpose of the bankrupt seeking the loan from BWA was to specifically refinance a CBA loan for $560,000.00 which was disbursed directly to the CBA; the bankrupt requested a transfer of the CBA mortgage to BWA; BCPL gave a guarantee and indemnity to BWA as collateral security for the refinancing of the loan from BWA to the bankrupt which guarantee and indemnity and a related “irrevocable authority” was signed on behalf of BCPL by the bankrupt on 18 June 2007 and on 7 and 10 December 2007 BCPL faxed to its accountant a letter from BWA to the bankrupt concerning the amount due under the refinanced home loan together with a valuation of the secured property in support of the BCPL’s application for a building licence.
As BWA noted the bankrupt was the sole director and the sole shareholder of BCPL and accordingly was the “directing mind” of the company with his knowledge being the knowledge of BCPL. He was not merely an agent of BCPL, his knowledge was the company’s knowledge. On that basis it submits in particular that BCPL had notice of the CBA mortgage.
For all the reasons advanced by BWA I accept that the doctrine of subrogation is invoked not only against the bankrupt but also against BCPL.
The case against the second respondent Reece is less compelling. The evidence does not demonstrate that Reece had actual notice of the CBA mortgage but only Deemed notice of it as the mortgage is and was registered at all material times; Butler v Fairclough (1973) 23 CLR 78 at 91; J & H Just (Holdings) v Bank of New South Wales (1971) 125 CLR 546 at 552, 554, 557 and 558; Jedhar Pty Ltd v Groose (supra_ at [32].However I am satisfied that is sufficient in this instance.
Finally for BWA it was submitted and I accept that in any event under the general law each of BCPL and Reece took their interests by claim from the bankrupt and thus they could only take what the bankrupt had left to grant after fully satisfying the CBA mortgage. At the time they took their equitable charges the identity of the prior claimant for the sum of $560,000.00 was “a matter of indifference” to them; Bofinger v Kingsway Group Ltd (supra) at [9] and [10].
In summary, notwithstanding that the debt secured by the CBA mortgage had been repaid it was open to the CBA to transfer the mortgage to BWA particularly as BWA had advanced the funds used to repay the debt secured by the CBA mortgage. Furthermore given the terms and nature of the mortgage security it was open to transfer the mortgage rather than discharge it as occurred in this instance.
Priority by registration
BWA contend that s.178(1) and s.184(1) and (2) of the LTA address the situation. Section 178(1) relevantly provides:
“178 Priority of registered instruments
(1)Registered instruments have priority according to when each of them was lodged and not according to when each of them was executed.”
Section 184(1) relevantly provides:
“184 Quality of registered instruments
(1) A registered proprietor of an interest in a lot holds the interest subject to registered interests affecting the lot but free from all other interests.
(2) In particular, the registered proprietor –
(a)is not affected by actual or constructive notice of an unregistered interest affecting the lot; and
(b)is liable to a proceeding for possession of the lot or an interest in the lot only if the proceeding is brought by the registered proprietor of an interest affecting the lot.”
In BWA’s submission an interest as a registered mortgagee, which by reason of s.74[13] operates as a statutory charge over the land, is an interest to which s.184(1) and (2) applies; Tessmann v Costello [1987] 1 Qd R 283.
[13] S.74 provides: A registered mortgage of a lot or an interest in a lot operates only as a charge on the lot or interest for the debt or liability secured by the mortgage.
It contends that by force of those provisions it is irrelevant that when it lodged the form 1 transfer of mortgage on 18 December 2008 it was aware of the claims of BCPL and Reece. In particular it contends that it necessarily follows from s.124(2)(d)[14] when read with s.178 and s.184 that the interest of a registered mortgagee can be transferred to another in priority to intermediate equitable encumbrances of which the transferee acquired notice prior to the registration of the transfer that is subject always to s.184(3) and s.185 LTA. So much appears consistent with the LTA.
[14] S.124(2)(d) provides that lodgement of a caveat does not prevent registration of an instrument of transfer of mortgage executed by a mortgagee whose interest was registered before the lodgement of the caveat.
BCPL accepts BWA’s outline of principles of indefeasibility but in response to BWA’s reliance upon the registration of its mortgage BCPL says its interest is infected by fraud or other equities.
Contrary to the express submissions of BCPL, BWA contends there was no “fraud” involved in the registration of its interest or that any exception under s.185 applies. In particular it contends that such allegations would be impossible to sustain in this case given that BWA had no notice of the charges by BCPL and/or Reece when it made its initial advance on 3 July 2007. Further it was contended for BWA that, notwithstanding the subsequent registration of the form 1 transfer, it could not be seen as improving its position as holder of an equitable mortgage as it could not be guilty of fraud because under the general law doctrine of tabula in naufragio it is notice at the time of payment that is of significance, not notice acquired afterwards before getting in the legal title.[15] Furthermore, BWA contended that knowledge of a mere “claim” on the part of BCPL and Reece does not amount to fraud; Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 398, 409. I accept BWA’s claims in this regard. In my view it is entitled to rely upon the indefeasibility of its registered title subject only to the exception provided under the LTA.
[15] See generally Fisher & Lifewoods Law of Mortgages, 2nd Aust. Ed. 2005 at p 618 [25.4], pp 623-4 [25.11] Duncan & Van Property Law and Practice at [82.4].
Specifically BCPL contended BWA’s indefeasibility was impeached because either:
a)The fraud exception applies; or
b)The in personam exception applies.
Fraud exception
Section 184(3)(b) provides fraud is an exception to indefeasibility gained on registration. However the conduct which constitutes fraud is not defined in the LTA. Fraud has been held by the High Court to mean “actual fraud, moral turpitude”; Farah Constructions Pty Ltd v Say-Dee Pty Ltd.[16] The fraud referred to is the fraud committed by the registered proprietor of the subject interest whether or not there has been fraud “by a person from or through whom the registered proprietor has derived the registered interest”.[17] In this case that includes BWA’s solicitors drawing or lodging documents on the bank’s behalf. [18] BCPL accepted that while notice of the interest sought to be defeated needed to exist, the mere knowledge only of an interest that would be defeated by registration of a transfer does not of itself constitute fraud; Freidman v Barrett, Ex parte Freidman [1962] Qd R 498 at 512; Bahr v Nicolay (No.2) (1988) 164 CLR 604 at 613, 630, 652-653. It contended however that conduct which misleads the holders of unregistered interests or which causes unregistered interests to be defeated can constitute fraud; Loke Yew v Port Swettenham Rubber Co Ltd [1913] AC 491. Further it contended that assistance in the characterisation of fraud in the circumstances of this case was provided by the High Court where, when considering fraud, it stated:
“As a matter of ordinary understanding, and as reflected in the criminal law in Australia a person may have acted dishonestly, judged by the standards of ordinary, decent people without appreciating that the act in question was dishonest by those standards.”.[19]
[16] (2007) 230 CLR 89 at [192].
[17] Section 184(3) LTA
[18] Conlan as Liquidator of Oakleigh Acquisitions Pty Ltd v Registrar of Titles [2001] WASC 201 at [238] and [240]
[19] Farah Constructions Pty Ltd v Say-Dee Pty Ltd (supra) at [173]
BCPL contended that in this case BWA had been overzealous in its attempt to correct its initial lapse in losing its BWA mortgage and CBA transfer and its failure to register those instruments. Accordingly its actions in correcting that matter fell within this characterisation of fraud.
It contended that in this case prior to the execution of the transfer of the BWA mortgage BWA had actual notice of:
a)The interest of BCPL in the property;
b)The interest of Reece in the property;
c)The interest of the Trustee in Bankruptcy in the property;
d)The interest of the statutory trustee in the property; and
e)The orders of this court made 29 October 2007 and by that fact these proceedings;
and that its moral culpability should be measured against those facts.
It submitted that the following when considered cumulatively brought the matter within the fraud exception of s.184(3)(b):
a)The creation then lodgement of the transfer document itself being a document prepared and executed by BWA based on a purported request of the bankrupt;
b)Misleading conduct of BWA in firstly lodging the caveat asserting the BWA mortgage which brought with it an obligation to issue proceedings to declare their interests but then proceeding without notice to the trustees for sale, trustee in bankruptcy and charge holders to obtain and then register the transfer of the CBA mortgage;
c)Knowingly participating in the mortgagor’s breach of duty to the trustee in bankruptcy, trustees for sale and/or charge holders by virtue of the request to transfer the mortgage; and
d)Knowingly attempting to subvert the orders of the court of 29 October 2008 directed particularly to the order vesting the Property in the hands of the trustee for sale.
BCPL conceded that the innocent lodgement of a transfer not known to be defective would usually not amount to fraud. It contended however that when the document was produced in circumstances which would lead to the discovery by an honest person to a line of enquiry that would reveal the truth, and they proceeded notwithstanding; such circumstances constitute a fraud. BCPL contended that was this case. In support of this contention BCPL referred to the decisions of Efstratiou, Glantschnig & Petrovic v Glantschnig [1972] NZLR 594 and Pyramid Building Society (in liq) v Scorpion Hotels Pty Ltd (1996) 136 ALR 166. However both are readily distinguishable upon their facts. They do however serve to restate the approach to be taken as was outlined in submissions and explained by the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (supra).
In Efstratiou (supra) a finding of equitable fraud was premised upon the circumstances surrounding the transaction in particular because of the low purchase price, speed of the transaction and the unusual nature of the transaction itself.
The facts of Pyramid Building Society (supra) presented a more useful analogy. There the fraud was one in the nature of misrepresentation. In Pyramid the minute signed by the purported director was a representation as to her authority which in turn represented the regularity of the instrument attested to by the company relevant to a loan application. In Pyramid the court had regard to a similar case of Australian Guarantee Corporation (AGC) Ltd v De Jager [1984] VR 483. There the wife’s forged signature on a mortgage was not duly attested. The court found that AGC’s presentation of the mortgage for registration knowing that the wife’s signature had not been attested in proper form amounted to fraud despite it having no knowledge that the signature itself was in fact a forgery. In effect the court found that the subsequent presentation of the mortgage constituted a representation that it had been regularly completed. That was not the case as AGC had been informed that the mortgage had in fact not been regularly completed. As Nathan J in Pyramid v Scorpion Hotels noted at page 193:
“Good faith involves a faithful adherence to the belief that the instruments proffered for registration are in fact registrable.”
The difficulties that arose in those instances do not trouble this case. Here BWA itself by its agents engaged in the conduct complained of. In this case there is no scope for intrigue. Its conduct was either fraudulent in the equitable sense or it was not (there being no allegation of actual fraud). I do not think BWA’s conduct did amount to fraud. BCPL contends that it did amount to fraud because its conduct in proceeding to register the CBA transfer and the BWA mortgage:
a)Demonstrated an absence of good faith accompanied by a degree of blame worthiness induced by recklessness or indifference which resulted in the proffering of the impugned instrument for registration;
b)It acted in wilful breach of trust; and
c)It purposefully remained ignorant when the circumstances demanded that its ignorance be dispelled as regards the situation of the bankrupt. BCPL contended that it proffered the instrument for registration in circumstances where the mortgagee needed to have an actual belief that the documents had a proper basis.
In my view in dealing with each of these allegations it is essential to have regard to the underlying documents in support of the transaction. BWA in proceeding to register the CBA transfer and its mortgage acted in a manner perfectly consistent with its rights under the BWA loan contract and the CBA mortgage as is discussed below. No action on the part of BWA can be identified as constituting a misrepresentation of its position or its rights. For reasons which follow I do not accept that the CBA transfer and the BWA mortgage were impugned instruments presented for registration. The only matter that can be advanced by BCPL is in respect of the degree of blameworthiness that may be attributable to BWA’s delay in presenting these documents for registration. However I do not see how the delay can give rise to blameworthiness. The CBA mortgage remained registered and by operation of the various instruments BWA had the benefit of that security in respect of its advance to the bankrupt. Any subsequent mortgagee, as BCPL and Reece are in this case, ought always be postponed to the registered interest.
In the absence of any express enquiries concerning the status of the effect of the registered interest there was no operative representation which, as a matter of fairness, could have been responsible for the subsequent chargees to be misled. In the absence of any offending conduct on the part of BWA no basis for fraud arises simply by reason of its delay in having registered the CBA transfer and its mortgage.
Finally it was contended that BWA had remained purposefully ignorant when circumstances demanded the ignorance concerning the situation with the bankrupt be dispelled. In my view whether that be correct or otherwise is immaterial. For reasons explained herein BWA’s interest had priority and was enforceable in respect of the property. Mr Halliday’s status as a bankrupt or otherwise was immaterial to those matters. Even if BWA failed to make enquiries of or regarding Mr Halliday and his status as a bankrupt, or otherwise, that matter was immaterial to BWA’s interest in the property. To be efficacious there must be some causal link between the alleged misconduct and the interest sought to be advanced for that conduct to be relevant.[20] In my view there was none here.
[20] Unic v Quartermain Holdings Pty Ltd [2001] QSC 403
In summary, I am not satisfied that BCPL and/or Reece have demonstrated any fraud on the part of BWA entitling it to impeach BWA’s indefeasible title pursuant to s.184(3) LTA.
In personam
Further, or alternatively, BCPL contends that it has an equity arising from an in personam right against BWA based upon the principles set out in Barnes v Addy (supra) entitling impeachment of BWA’s indefeasible interest: s.185(1)(a) LTA. It contends that BWA knowingly participated in a breach of the obligations of the bankrupt (as mortgagor) to the sale trustees, the bankrupt’s trustee in bankruptcy and the charge holders by transferring away or otherwise attempting to dilute the value of the property by its preparation of the transfer, the execution of it and its subsequent lodgement for registration, that conduct being said to unlawfully permit it to assert its priority of payment. It contends that BWA was aware of the trust for sale created by orders of the court and as such it has received that property in trust knowing of the trust and the obligations of the sale trustees to hold it for, among others, the benefit of BCPL. In addition it contends that BWA was aware of the intervention of the bankruptcy and the obligations that arose there from, in particular the obligations owed by the bankrupt to his trustee. Finally BCPL contends that the facts also give rise to an entitlement for relief based upon the second limb in Barnes v Addy by its creation of the transfer documents and undertaking the transaction culminating in the transfer and its ultimate registration. It contends that the relevant conduct involved an express request by the mortgagor/bankrupt on dealing with the interest in the Property adverse to BCPL, Reece and BWA’s conduct in facilitating those matters. It had the effect of assisting the bankrupt in his breach of duty.
BCPL summarised the position as, conduct involving a dishonest and fraudulent design being the transfer of the CBA mortgage on dubious grounds in order to circumvent the orders of the court for the appointment of trustees for sale: these events having occurred with the actual knowledge by BWA of the court orders and the rights and obligations of the sale trustee and the other equitable interest holders.
It is now well settled that the holder of indefeasible title will not be affected by knowledge or notice of other unregistered interests. As was observed by Mason CJ and Dawson J in Bahr v Nicolay(No.2):[21]
“There is no fraud on the part of a registered proprietor in merely acquiring title with notice of an existing and registered interest or in taking a transfer with knowledge that its registration will defeat such an interest”.
[21] (1987-1988) 164 CLR 604 at 613.
Something more than mere notice is required to enliven an equity in the registered proprietor of an interest in land to defeat that holders indefeasible title. In Tara Shire Council v Garner [2002] QCA 232 Davies JA observed:
“[32] … It must be the dishonest nature of the act, generally the repudiation of an acknowledgement or agreement to honour a prior equitable interest, not the nature of the prior unregistered interest asserted, which will give rise to an "equity" of the kind referred to in s185(1)(a). …
[33] There is no authority, binding or persuasive, for the proposition that the interest of a purchaser of land who becomes registered as owner with knowledge that the transfer to it was in breach of trust by the vendor, let alone that of such a purchaser who becomes registered after the making of no more than an unsubstantiated assertion that an unregistered person is the owner of part of the land, is defeasible. Nor is there any basis in principle, for the purpose of the application of s185(1)(a), for distinguishing an assertion of equitable ownership in an unregistered person from an assertion in such person of some lesser equitable interest. If it were otherwise, the fundamental proposition that the interest of a registered proprietor is not affected by his or her prior knowledge of unregistered interests - 24#24 would need to be modified to accommodate different results depending on the nature of the prior unregistered interest.”
His Honour’s remarks were made in his dissenting judgment. However that view was itself the subject of approval by the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (supra) at 194 where the Court accepted Davies JA’s remarks as following the majority in Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd[22] (Tadgell JA and Winneke P concurring) where Tadgell JA held:
“If … the registration is not achieved by fraud the Act provides, subject to its terms, for an indefeasible interest. Those terms allow, it is true, a claim in personam founded in equity against the holder of a registered interest to be invoked to defeat the interest; and a claim in personam founded in equity and no doubt include a claim to enforce what is called a constructive trust…”
[22] [1998] 3 VR 133 at 185
The authorities instancing debate on this issue generally evolved into an analysis of not merely knowledge but whether the party claiming the benefit of indefeasible title had by its conduct given rise to a claim in equity against it. For instance in Macquarie Bank Ltd v Sixty-Four Throne Pty Ltd (supra) whilst the third party debtor procured the guarantee and mortgage by forgery the mortgagee was found not to have knowledge of these matters despite the recklessness of its solicitors in the preparation of mortgage documents particularly pertaining to the affixing of signatures to the mortgage instrument.
In Tara Shire Council v Garner (supra) the purchasers of land acquired and registered their interest with knowledge that the vendor had subdivided and sold part of the subject land to the respondent Council. That knowledge did not give rise to an equity capable of defeating the indefeasibility of its registered title.[23] In FarahConstructions one of a pair of joint venture parties despite being offered an opportunity by his joint venture partner to participate in acquiring an adjoining allotment to joint venture land to render the joint venture holding of a developable size rejected such invitation. The other joint venture party caused the adjoining properties to be acquired by its associated interests. It then sought to have a trustee appointed for sale of the joint venture land with a view to acquiring the non-participating joint venturer’s interest. The court held that the joint venture partner owed the other joint venture partner a fiduciary duty. However in the absence of any breach of duty under the joint venture by the act of the active joint venture party, that party held no equity for the non participating joint venture party. The court held those who acquired interests through involvement with the active joint venture party were not caught by the rule in Barnes v Addy in the absence of any proof that they had notice of any breach of fiduciary duty at the time of acquisition of their interest. The court considered there were none evident in that instance.
[23] This was the finding of the dissenting judgment of Davies JA which judgment was cited with approval by the High Court in Farah Constructions.
In Bahr v Nicolay (supra), to raise funds to develop land the registered proprietor sold it to another and leased it back to him for three years. The contract provided that upon the expiration of the lease the vendor would enter into a contract to repurchase the land by a payment of a deposit with the balance payable thirty days thereafter. The land was sold by the purchaser to a third party with notice of the buy back agreement which included an acknowledgement by the third party of the repurchase provision in the first contract. The subsequent third party purchaser told the original vendor that he recognised the repurchase clause. He subsequently refused to honour the agreement. There the court found the subsequent purchaser was subject to an equity as a constructive trustee in favour of the original purchaser that would defeat indefeasibility. The court held that as he took his interest subject to an agreement he remained bound and liable for repudiation of it. It was a repudiation of the third party’s rights to purchase and thus equity imposed a constructive trust. Accordingly he held his title on trust for the third party to the extent of the third party’s interest thus impeaching his claim for indefeasibility.
In this case, BCPL’s claims are made under each limb in Barnes v Addy. First, it is alleged BWA participated in a breach of the obligations of the bankrupt mortgagor to the trustees for sale, the bankruptcy trustee and charge holders in transferring away the value of the property by its preparing, executing and lodging its transfer in December 2009. BCPL contends that BWA was aware of the trust created by orders of the court and thus in breach of the first limb of the rule in Barnes v Addy BWA received the trust property knowing of the trust and the obligations of the sale trustee to hold it for the benefit of BCPL.
However the property was always subject to BWA’s equitable interest and contractual right to register its transfer of mortgage and enjoy the rights attached thereto. In that sense this case is similar to that before the court in Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd.[24] That case is distinguishable because there the court found the registered mortgagee by its agents acted recklessly in accepting and registering instruments the particulars of which included forged instruments. However in considering the claims impersonam advanced by the mortgagor in that instance Tadgell JA with whom Winneke P concurred stated at 146:
“…I refer without elaboration to the leading modern references to the availability, in an appropriate case, of a claim in personam founded at law or in equity to defeat a title acquired by registration under the Torrens system: Frazer v Walker [1967] 1 A.C. 569 at 585; Breskvar v Wall (1971) 126 C.L.R. 376 at 384-5; Bahr v Nicolay (No. 2) (1988) 164 C.L.R. 604 at 637-8, 652-3. Along with these authorities it is useful to consider, for contemporary illustration of the application of the principle of defeasibility on which the Torrens system of title is built: Vassos v State Bank of South Australia [1993] 2 V.R. 316 (Hayne J.); Story v Advance Bank Australia Ltd. (1993) 31 N.S.W.L.R. 722 at 735-7 per Gleeson C.J., and Pyramid Building Society (in liq.) v Scorpion Hotels Pty. Ltd. 1998- 1 V.R. 188. In the last of these this court at 196, proceeded on an assumption, because of a concession by counsel, that “… the expressions “personal equity” and “right in personam” encompass only known legal causes of action or equitable causes of action …”: Grgic v Australia and New Zealand Banking Group Ltd. (1994) 33 N.S.W.L.R. 202 at 222-3, per Powell J.A. In Garfano v Reliance Finance Corporation Ltd. (1992) N.S.W. Conv. R. ¶55-640; Meagher J.A., with whom Priestley J.A. agreed, had expressed a similar view: speaking of a so-called “personal equity” of the kind referred to in Frazer v Walker, he said “I cannot see what that expression is meant to cover except known legal causes of action (for example, deceit) and known equitable causes of action (for example, undue influence).” I respectfully share that sentiment. …”
[24] [1998] 3 V.R. 133
The argument in Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd was premised upon grounds of unconscionable conduct. While BCPL did not advance that ground in this instance it seems, accepting the terms of the loan agreement prevail, grounds of unconscionability would be the only grounds that could be advanced by BCPL as enlivening an equity that BWA had to respect. If I accept the loan agreement as enforceable in full the evidence does not demonstrate that BCPL had any equity or equitable right or other right in personam to which BWA’s right would or ought be postponed. The same applies if BWA’s entitlement was only to an equitable mortgage. It seems to me that it is only if BWA’s interest was a mere equity that its conduct in registering the mortgage can be evinced as giving rise to an in personam claim. For reasons addressed below I do not consider BWA’s interest to be a mere equity in this instance.
It is asserted further that liability under the second limb of the rule in Barnes v Addy (the assistance limb) enlivened in an impersonam right of action because BWA created the transfer documents and undertook the transaction and in doing so stated they were at the mortgagor’s request. It was submitted that in doing this it caused the mortgagor as bankrupt to knowingly breach his duty to his trustee.
Here for BWA to be liable it would have to “assist a trustee or fiduciary with knowledge of a dishonest and fraudulent design on the part of the trustee or fiduciary”.[25] That is to say BWA would have to assist the bankrupt in the advancement of BWA’s interests by having, causing or aiding the bankrupt to do something for BWA which was in breach of his duty to the trustee for sale and/or the trustee in bankruptcy. As BCPL submitted that “fraud” or “dishonest” conduct would be judged by the standards of ordinary decent people.[26] In Farah the court proceeded to analyse the requirement of knowledge in the second limb of Barnes v Addy by reference to the decision in Baden Delvaux & Lecuit v Société Générale pour Favoriser le Dévelopment du Commerce et de l’Industrie en France SA[27] and concluded:
“The relevant passages in Consul Development establish for Australia that “dishonest and fraudulent designs” can include not only breaches of trust but also breaches of fiduciary duty; but any breach of trust or breach of fiduciary duty relied on must be dishonest and fraudulent.”
[25] Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [160].
[26] Farah Constructions at para 173.
[27] [1993] 1 WLR 509 at 575-6, 582; [1992] 4 All ER 161 at 235, 242-3
In this case for reasons stated below I do not consider the conduct of BWA in proceeding to enforce the terms of its agreement in either equity or law as constituting either a breach of trust or a breach of any fiduciary duty. Even if I were wrong in my construction of the loan contract and securities, in my view, the circumstances here do not demonstrate that by reference to the appropriate standard, BWA in bona fide seeking to enforce its legal rights could be judged to have acted in a manner which would be determined to be “dishonest” or “fraudulent”. Putting aside BWA’s subjective state of mind I consider that by reference to the standards of ordinary decent people, BWA in seeking to enforce its contractual rights, even if ultimately proved to be erroneous, would not lead to a conclusion of dishonesty in circumstances where BWA did so knowing of the competing claims but in all other respects was acting bona fide.
Such conduct is consistent with enforcement by secured creditors pursuant to rights provided for in s.58(5) of the Bankruptcy Act 1966 (Cth) which provides that despite the property of a bankrupt vesting forthwith in the trustee in bankruptcy upon bankruptcy that matter does not affect the rights of a secured creditor to realise or otherwise deal with his security; s.58(5).
On this point BCPL contended that BWA had no enforceable rights. It alleged consideration for the transfer of the mortgage could not as a matter of law have existed when the new transfer was signed on 18 December 2008. It was observed that the consideration noted in the CBA mortgage was expressly stated to be “In consideration of a request made by the mortgagor made under and by virtue of s.94(1) of the Property Law Act 1974 (Qld)”. Given the instrument came into being after the bankrupt’s sequestration and his trustee was neither consulted or authorised the transfer means the consideration did not in fact exist.
For BCPL it was contended that the CBA mortgage was paid out and a release was tendered to the BWA on settlement on 3 July 2007 for the registration of that release. It was submitted that there was no money owing under that mortgage and contended that as the transferred mortgage had no debt and did not form part of the bankrupt’s loan agreement with BWA it secured nothing. It contended the loan debt was secured only by the lost BWA mortgage and guarantees. In support of its submission it relied on the authorities in Queensland Premier Mines v French (supra) and Olympic Holdings v Windslow Corporation Pty Ltd (In Liq) (supra). It followed that by seeking to have the CBA transfer effected it either participated in or assisted in the breach of obligations of the transferor/bankrupt to the Sale Trustees.
Before addressing those arguments it is necessary to set out in full the relevant parts of the various instruments. In addition it is important to note that despite BCPL’s submissions to the contrary no release of the CBA mortgage was ever tendered at settlement. No release appears to have been contemplated at settlement but rather only a transfer of the mortgage. For reasons I address I consider none was necessary to be tendered at settlement.
The BWA loan contract provided the bank’s offer was on the terms set out, inter alia, in the “schedule” and “financial table”. The financial table noted the security in respect of the debt to be a “mortgage” over the property and a guarantee by BCPL. The particulars of those instruments were not included as an annexure to the loan agreement. In the result BWA’s standard form mortgage was provided and was accepted by the bankrupt. The same applied in respect of the guarantee. The purpose of the loan was expressed to be “refinance of Commonwealth Bank facility”. It is apparent from the disbursement instructions that the agreement was for the funds drawn on the facility to be paid to discharge the “unpaid balance of the [CBA] loan account”.
Plainly the CBA loan was to be discharged. The agreement however was equivocal concerning the status of the extant CBA mortgage. Within the financial table references were made to Government charges which included allowances for “mortgage registration”, and “discharge of pre-existing mortgage registration”, i.e. a release. In addition a stamp duty allowance provided for “mortgage stamp duty” and “transfer stamp duty”. The material appears to have contemplated both a transfer of the existing security as well as a later release. CBA had a general provisions instrument in the Queensland Land Registry in accordance with local practice. Relevantly its terms provided:
“Clause 1.3 Where there is no Amount Owing we will release The Property from the mortgage when you ask us to do so.
Clause 19.1 We may assign or otherwise deal with our rights under the mortgage or any Secured Agreement in any way we consider appropriate.
Clause 30 Meaning of words. Amount Owing – means at any time, or money which one or more of you owes us, or will or may owe us in the future, under a Secured Agreement and this mortgage or either of them
We – means the Person named in this mortgage as mortgagee and its successors and assigns.
You – means the Person or Persons named in this mortgage as mortgagor. … You includes your executors, administrators and assigns.
Secured Agreement means:
(a) an agreement between one or more of you and us … whenever signed, under which you undertake to pay or repay us money and which all of you acknowledge in writing to be an agreement to which this mortgage extends.”
The formal BWA home loan terms and conditions which formed part of the lending agreement included the following relevant parts:
“Part A – General terms and conditions.
A.1 Definitions
“Security” means any security (including any guarantee) stated in the Schedule (or any security substituted for it with the bank’s consent).
A.12 Security
A.12.1 The Schedule specifies the Security which must be given to the bank …
A.12.4 If the Security is in existence at the date of the Contract, by signing the Contract you acknowledge that the Security extends to cover your obligations under the Contract.
A.23 Conditions Precedent
A.23.1 This Condition Precedent applies to all Bank West home loan products.
The bank need not provide any part of the Amount of Credit until:
(a) (…)
(e) You give the Bank settlement and disbursement instructions in respect of the loan.”
The financial table provided for in the BWA loan contract stated that the security to include “a mortgage will be taken”. However there was at the time already a mortgage in existence which appears to have been subject to transfer. The bank’s advance instructions noted that at settlement the only document to be collected was a “transfer of mortgage” “Form 1” document reference “707560175”. Documents to be later lodged at the Land Title Registry included the transfer of mortgage, the release of mortgage and the BWA mortgage. I assume they were to be lodged for registration in that order.
The reason for acquiring a transfer and not merely a release was not expressed in any of the material. BCPL suggested in submissions that the purpose of the arrangement was to save on stamp duty. No basis for that submission was provided. However the utility of that approach perhaps anticipated the very problems confronting BWA in this instance; that is, the acknowledged relinquishment of rights under a mortgage before relevant instruments for subsequent security are presented for registration.
Arguably a request for production at settlement of a mortgage release constitutes communication of acceptance of the release of the mortgage from the time of settlement. In this instance the release was a document completed internally and its completion was a fact never communicated to either of the bankrupt as mortgagor or the CBA.[28]
[28] This matter was not traversed in evidence but arises as a reasonable inference from the facts open to be found.
In his capacity as the assignee of the CBA mortgage a duly authorised officer of BWA acted within his power in executing the release albeit that the original instrument was lost and a fresh release had to be prepared. If there had been a communication of the release and action upon it then BCPL may in that event have had a basis for submission for relief pursuant to s.185(1)(a) as contended in respect of other aspects of this application. However that is not the case.
Here the loan contract, an agreement in writing, was made between BWA and the bankrupt. The agreement was for the purpose of refinancing the CBA loan, a “Secured Agreement” as defined by the mortgage. The issue to resolve was whether there was any acknowledgment in writing that the loan contract was a contract to which the mortgage was to extend.
In the factual context of this case that issue is addressed by resolving whether by the BWA loan agreement BWA was taking a transfer of the CBA mortgage or whether the agreement provided for an immediate discharge of the CBA mortgage with fresh security being granted, but not the CBA mortgage.
In my view a transfer prior to release was agreed. Although at face value the BWA home loan contract appears equivocal on that point the subsequent performance was entirely consistent with a construction of the BWA home loan agreement favouring a transfer of the mortgage prior to its release for registration of the BWA mortgage.
Accordingly in my view the BWA home loan agreement was a “Secured Agreement” as defined in the CBA mortgage and the advance made under it was secured by it.
BCPL submitted the CBA mortgage did not as a matter of fact convey with it any debt. So much is correct as a matter of fact. However the question is not whether the mortgage conveyed any debt, but rather whether it secured a later debt. For reasons given above I think the answer to that question is that it did. For this reason I do not consider the authorities referred to by BCPL assist me. In Queensland Premier Mines (supra) Kiefel J, with whom the balance of the court agreed, noted the question for resolution was “whether the registration of a transfer of a Torrens title mortgage effects an assignment of the right to recover the monies owed under a separate agreement for loan, that obligation being secured by the bill of mortgage.”[29]
[29] At page 92 [23].
In answering that question her Honour noted the decision of the Victorian Supreme Court on appeal and the observations of Maxwell P of:
“The independence, conceptually and contractually of the mortgage security and the obligation to pay contained within it. In [the case under appeal] there were two separate and distinct covenants to pay; that contained in the loan agreement, which is free standing and enforceable in its terms, and that under the mortgage. The covenant under the mortgage merely contained a further promise to pay in accordance with the terms of the loan agreement.”[30]
[30] Queensland Premier Mines Pty Ltd v French (supra) at p 95 [35].
As her Honour concluded at page 101 [57]:
“The circumstances of this case are not usual. More commonly when a mortgage is transferred, the debt arising from a separate loan agreement would be transferred with it. As Calloway J observed, that is a consequence of the agreement, expressly implied, between the parties, not of the operation of s 62 (PLA).”
For reasons expressed above I consider this case instances the more common situation postulated by her Honour and her remarks there are apposite to the case here. The question for resolution here is in my view entirely distinguishable from the issue for decision in Queensland Premier Mines relied upon by BCPL.
In Olympic the mortgagor had granted to its bank, HSBC, security in respect of a loan. The mortgagor had at that time significant indebtedness to Olympic in respect of a running account. For consideration Olympic took an assignment of the HSBC loan and security. It relied upon an all monies provision to secure the funds due by the mortgagor to Olympic under the running account. Ultimately Olympic sought to secure the funds owed on the running account to the security acquired upon the assignment. The question for resolution concerned the proper construction of the “all monies provision” in the mortgage security.
In rejecting Olympic’s claims for a declaration the judge at first instance, upon his construction of the mortgage instruments, determined that the term “the bank” when considered in the context of the definition of the term “secure money” could be construed to include “any assignee of the bank”. Accordingly he concluded the security the subject of the assignment did not extend to the debts payable to a third party such as were in issue in that case.[31]
[31] Olympic Holdings Pty Ltd v Windslow Corporation Pty Ltd (In Liq) supra at [17] – [20].
In examining the correct approach to construction of such instruments the West Australian Court of Appeal endorsed the objective contract theory approach restated by the High Court in Toll (FGCT) Pty Ltd v Alpharpharm Pty Ltd[32] and Pacific Carriers Ltd v BNP Paribis .[33]
[32] (2004) 219 CLR 165
[33] (2004) 218 CLR 451
In support of its contentions much was made by BCPL of the remarks of Brooking J in Re Clark’s Refrigerated Transport Pty Ltd (In Liq)[34] where at 995 his Honour stated:
“In the first place, considering the matter generally and without regard to the detailed provisions of the particular instruments here in question, I cannot help thinking that when a person gives an “all obligations” mortgage or debenture he does not ordinarily contemplate that the property the subject of security will secure not only his present and future obligations to the mortgagee or debenture holder but also any debt or liability of his which may be assigned by a third party to the secured creditor. It does seem strange that a man may lock up his counting-house and go home for the night, in the comfortable knowledge that his only secured creditor is his banker, to whom he owes a trifling sum secured by usual boundless bank instrument, and unlock the door in the morning to find that, by virtue of assignments of the large but unsecured debts owed by him to his fellow merchants, and inDeed to the butcher, baker and candlestick maker, all his unsecured debts have gone to feed his banker’s insatiable security, so that everyone of his debts is now secured.”
[34] [1982] VR 989
However the facts in Re Clark’s and those in Olympic Holdings are distinguishable in this important respect; in each of those instances, assignees of security were seeking to extend the operation of the security to other pre-existing debts. The approach to be adopted was expressed by the Full Court at [43] as:
“The ambit of reach of an “all monies” clause in an instrument of security is to be determined according to ordinary principles of contractual construction (including those applicable to the resolution of an ambiguity); in particular, by reference to the language of the clause and the context of the express and implied terms of the instrument as a whole, the surrounding circumstances known to the parties, when the instrument was executed, and the apparent purpose and object of the transaction. The task of construing an “all monies” clause is not to be approached with a “predisposition” as to its intended ambit or reach. So, there is no “predisposition” that an instrument of security is not intended to secure pre-assignment unsecured indebtedness of a mortgagor to an assignee of the original mortgagee, and is not intended to secure an unsecured indebtedness of a mortgagor to a third party which is assigned by the third party to a mortgagee after the execution of the instrument. In any case, whether or not indebtedness of the kind I just mentioned is secured by an “all monies” clause depends on the language of the clause, construed in the context of the instrument of security as a whole, any admissible evidence as to the surrounding circumstances, and the apparent purpose and object of the transaction.”
In Olympic, objectively viewed, the instruments under examination did not intend that outcome and were read down accordingly.[35]
[35] See Olympic at paragraphs [55] – [65]
However, here, as was submitted by BWA the arrangement was a refinancing arrangement. The CBA advance was to discharge the BWA mortgage. Albeit momentarily, the parties appear to have contemplated that the CBA mortgage would provide security for the BWA advance from the moment of the advance. Unlike Olympic, this is a case where the parties by their arrangement sought to extend the umbrella of security to protect the mortgagor’s indebtedness to BWA upon the discharge of the CBA indebtedness.
It follows in my view that the loan documents on their face when considered against the conduct of the parties contemplated the CBA mortgage would extend to provide security for the BWA advance until such time as the BWA mortgage was registered.
BCPL submits the subsequent transfer by BWA of the CBA mortgage to it was not valid because it purports to have been made “at the request of the mortgagor” because “the rights of the mortgagor had vested in his trustee in bankruptcy by this time”. Respectfully this submission ignores that at the time the consideration passed the mortgagor had not been subject to a sequestration order and it was within his power to enter into such an agreement. The event of his subsequent bankruptcy does not annul the fact of consideration. InDeed it is well accepted:
“The broader general principle is, that the trustee in a bankruptcy takes only the property of the bankrupt, and takes it subject to all the liabilities and equities which effect it in the bankrupt’s hands….”[36]
[36] In Re Clarke: Ex parte Beardmore [1894] 2 QB 393 at 410 cited with approval in Sonenco (No.77) Pty Ltd v Silva (1989) 89 ALR 437 at 445
At 445 his Honour Beaumont J continued:
“The settled rule that equitable interests of third parties stand outside the bankruptcy was stated by Madden CJ in Whyte v Williams (1903) 29 VLR 69 at 81 as follows:
‘If [a third party] had an equitable interest, the law would protect it without an injunction. The property would still pass to the official assignee, because he is the person who takes all the insolvent’s property; but it would be clogged with all the equitable conditions attached to it’.
In Ex parte Holthausen; Re Scheibler (1874) LR 9 Ch App 722 Sir W.M. James LJ said at 726:
‘…with certain exceptions, the trustee in bankruptcy is bound by all the equities which effect a bankrupt or a liquidating debtor; that is to say, if a bankrupt or a liquidating debtor, under the circumstances which are not impeachable under any particular provision connected with its bankruptcy or insolvency, enters into a contract with respect to his real estate for a valuable consideration, that contracts binds his trustee in bankruptcy as much as it binds himself.’”
In this instance given my views concerning the effect of the loan agreement, whilst the property formally passed into the hands of the trustee in bankruptcy, the trustee’s interest was clogged with BWA’s equitable claim. The request by the mortgagor for the transfer of the mortgage was a right which predated the date of sequestration and right in respect of which there was an entitlement to BWA for a specific performance. The fact of latter sequestration does not impact the underlying equity of either CBA or BWA.
It follows in my view that BWA holds enforceable rights. In purporting to exercise those rights it did not assist the bankrupt as mortgagor in breach of its duty to either his trustee or the court application transfer for sale enlivening a right to impeach BWA’s indefeasible title pursuant to s.185(1)(a) LTA.
BWA as equitable mortgagee
Notwithstanding my findings concerning BWA’s entitlement to rely upon the CBA mortgage and its subsequent registration of its mortgage, BWA contends in the alternative it has a prior equitable mortgage. BWA contends it acquired an equitable mortgage upon making an advance of $560,000.00 either by receipt and possession of the form 2 mortgage instrument dated 19 June 2007 (which instrument was lost) or alternatively by reason of the home loan contract made on 18 June 2007 which was a contract to grant a mortgage over the property.
The home loan contract was an agreement for valuable consideration to grant a mortgage in proper legal form of which specific performance would be ordered. Accordingly, BWA contends, as a result of the maxim “equity regards as done that which ought to have been done” BWA obtained an equitable mortgage at least from the making of the advance on 3 July 2007. It contends the mortgage was an equitable mortgage because it was not registered.[37]
[37] Section 181 Land Title Act provides an instrument does not transfer or create an interest in a lot at law until it is registered.
BCPL contends however that the lost BWA mortgage does not give rise to an equitable mortgage that has priority over its interest because:
a)The mortgage document itself does not create a mortgage in registrable form in favour of BWA on its face; and
b)Even if it did, the interest ought to be postponed to the interest of BCPL because of BWA’s failure to take adequate and timely steps to protect that interest.
Although the original BWA mortgage and the CBA transfer have been lost copies of the original stamped documents were retained by BWA. It is not in contest that the practice of the Queensland Land Title Registry is not to accept copies of transfers for the purposes of registration. It was for this reason a further transfer was executed.
The original BWA mortgage notes the mortgagor as “Bank of Western Australia Ltd ABN 22050494454” and the mortgagee as “Kris Halliday”. The description of mortgagor and mortgagee in the body of the BWA mortgage is clearly in error. So much is evident by the signatures fixed in the section in the form providing for execution. The box providing for the “mortgagor’s signature” identifies the mortgagor as “Kris Halliday” and appears to have been executed by him in the presence of a witnessing officer. Likewise the part providing for the “mortgagee’s or solicitor’s signature” indicates it was executed by Tracey Nairn, Manager Operations Team on behalf of “Bank of Western Australia Ltd”.
BCPL contends that as the mortgage document on its face lists the mortgagee as the bankrupt and not BWA and lists the mortgagor as BWA and not the bankrupt it is therefore not capable of immediate registration in its current form. It contended that an equitable mortgage will only be created when the legal owner of the property constituting the security enters into an arrangement sufficient to confer a legal estate or entitlement in the property upon the mortgagee and demonstrates a binding intention to create a security in favour of the mortgagee. It is contended that as the application by BWA specifically relies upon the lost BWA mortgage document as giving rise to an equitable mortgage equity would usually treat the contract constituted by that instrument as an actual mortgage. It was submitted this followed an application of the equitable maxim “equity looks on that as done which ought to be done” and on the basis that it would give the party claiming the benefit of the contract all the rights that that person would have had if the mortgage instrument had been properly completed as against that party. In that sense it contended that the principal in Walsh v Lonsdale[38] would operate subject to the limitation in its operation to situations in which what ought to be done can be done, that is, the instrument or contract being relied upon is capable of specific performance.
[38] (1882) 21 Ch D 9
BCPL submitted that in this case BWA had not applied for rectification of the mortgage. It submitted it can only create an equitable mortgage if the lost mortgage instrument is capable of specific performance. It contends that would not be so because the instrument is in any event not capable of immediate registration. Beyond the fact only a copy of the instrument is available. It also contends that prior to being specifically performed the instrument itself needs to be rectified in a fundamental manner as the estate being granted in the covenanted terms are not minor matters of no moment to the parties. In this regard it contends that BWA has failed to prove the common intention of the parties in relation to the mistake. In particular it asserted that BWA has not sought to provide any evidence from the bankrupt on this matter and any such consideration leads back to the loan agreement and the order for that agreement to be given effect to and not the lost mortgage instrument itself. It contended that the onus was a heavy one.[39]
[39] Earl v Hector Whaling Ltd [1961] 1 Lloyd’s Rep 459 at 468
Whilst BCPL accepted it may be argued that intention is able to be inferred it contended that in the circumstances the evidence in this instance was incomplete. In particular BCPL relied upon the observations of Bryson J in Double Bay Newspapers Pty Ltd v AW Holdings Pty Ltd[40] where his Honour held:
“If the parties agree or appear to agree that land should be mortgaged but do not agree about what obligation is to be charged on it, their agreement is illusory.”[41]
[40] (1996) 42 NSWLR 409
[41] At 419.
Specifically BCPL submitted that the mortgage cannot be specifically performed in its present form as:
a)There is no original instrument apart from being lost, that is capable of immediate registration;
b)The instrument is confusing in a fundamental manner on its face because of the mis-description of the mortgagor and mortgagee;
c)Is not capable of specific performance in its own right; and
d)The order needed to cure the defective instrument to give effect to the parties’ intent needs to involve the specific performance of the loan agreement whereby it was agreed to provide an instrument in registrable form.
It is principally because of these difficulties that BCPL contends that these circumstances are similar to the circumstances considered by the Court in Double Bay Newspapers (supra). On that basis it is contended that the arrangement between the bankrupt and BWA constitutes a “…equity which requires the assistance of the court if it is to be established at all…” and therefore “does not enter into a competition of priorities with an equitable interest which was obtained for value and without notice of it”.[42] In other words as a mere equity it is postponed to other equitable charges over the Property.
[42] Double Bay Newspapers supra at 425.
However the facts of Double Bay Newspapers are distinguishable on a critical fact. In Double Bay the agreement to advance credit subject to mortgage security over real property was an oral agreement where the chargor spoke to the prospective chargee and said:
“I can give you a second mortgage over my house….”[43]
[43] Double Bay Newspapers supra at 413F
It was this oral agreement that was subsequently reduced to the mortgage instrument the chargee, Double Bay Newspapers sought to enforce. In that context the court noted the particular terms of the mortgage and its deficiencies leading to a conclusion that “the mortgage taken by the plaintiff does not identify what debt or other obligation is charged upon the land and does not set out what agreement was made for the time of payment. In my opinion the mortgage is defective in that it does not comply with the statutory provisions which require that interests in land be created or evidenced in writing”. In the absence of any earlier agreement it seems plain that in the context of Double Bay Newspapers the court was considering the mortgage as the instrument recording the terms of the credit agreement between the parties and in turn it was that instrument which had to be relied upon to satisfy the Statute of Frauds considerations. As the court determined it did not satisfy those matters and “the effect is that an equitable interest in land including an unregistered mortgage or charge is not created effectively and is not enforceable unless it is created or evidenced by a written instrument which sets out its
terms.” [44] That finding led in turn to the court’s conclusion that whilst the form did not confer an enforceable charge on the plaintiffs they could “put the document into a form which could be enforced” by an order for rectification.[45] Alternatively the court observed that it could be shown that the plaintiff was entitled to an order for specific performance of the agreement to add a mortgage to it. This was particularly because there had been part performance which led the court to observe that the plaintiff “ought obtain an order for specific performance fairly readily, notwithstanding the difficulties exposed in Australia & New Zealand Banking Group Ltd v Widin (1990) 26 FCR 21 at 33 – 37.” It was that logic that led the court to conclude:“However what the plaintiffs bring into competition of priorities with two other written equitable mortgagees is a defective document and a claim, on its face, a strong claim, for equitable relief under which the document would be perfected.”[46]
[44] At 418F
[45] Double Bay Newspapers at 419B
[46] Double Bay Newspapers at 419C
In the absence of the loan agreement I would accept the decision in Double Bay Newspapers as providing a persuasive authority on the approach to the issue before me. InDeed counsel for BWA conceded that if the lost BWA mortgage instrument solely was to found its claim it did constitute a mere equity because of its need for rectification. However unlike Double Bay Newspapers in the case before me there is on foot a loan agreement which charges the property as security for the debt. In my view the loan agreement is sufficiently plain in its expression to create an equitable charge in a manner similar to the charges created by the Deed and the credit agreement relied upon by each of BCPL and Reece respectively. The mortgage instrument defectively purported to manifest the obligation under the Loan Agreement to provide mortgage security. However the mortgage instrument itself was only in aid of the charge granted by the Loan Agreement and not the source of the charge in its own right. For this reason I conclude BWA has on this basis an equitable charge over the Property which should only be postponed if a superior entitlement in law or equity can be established.
Priorities
BWA contends that on the basis that as all equities are equal where there is competition between equitable claimants the usual rule is that claims rank in order of temporal priority. As Kitto J stated in Latec Investments Ltd v Hotel Terrigal Pty Ltd(In Liq):[47]
“In all cases where a claim to enforce an equitable interest in property is opposed on the ground that after the interest is said to have arisen a third party innocently acquired an equitable interest in the same property, the problem…is to determine where the better equity lies. If the merits are equal, priority and time of creation is considered to give the better equity.”
[47] (1965) 113 CLR 265 at 276; see also J&H Just (Holdings ) Pty ltd v Bank of New South Wales (1971) 125 CLR 546 at 554-5
BWA contends for priority of its equitable charge as it says the charges of each of BCPL and Reece arose later in time.
In the case of BCPL, BWA contends that its equitable charge over the assets of the bankrupt arose on 30 July 2008 when a written demand was made on the bankrupt by the liquidator of BCPL as required by the terms of the Deed (between the QBSA, BCPL and the bankrupt dated 12 December 2007). Clause 2(a) of the Deed provided that BCPL as covenantor covenanted:
“That, upon demand under sub clause (a) hereof being made upon it, its Subject Property should be charged with, and secure, payment of the capital Defined Amount;”
A demand was made of the bankrupt on 30 July 2008 pursuant to cl.2(a) of the Deed in respect of the Defined Amount of $205,198.00. A charge conditional on the giving of a demand only arises when the demand is made; Ashburners Principles of Equity (2nd edition) 1983 at 259.2 citing Williams v Lucas (1789) 2 Cox Eq Cas 160; (1789) 30 ER 73 and Shaw v Foster (1872) LR 5 HL 321 at 334, 341. Accordingly BWA’s equitable charge predated and takes priority to BCPL’s charge.
Concerning Reece in the application for credit account dated 28 May 2007 BCPL agreed that by clause 5 the bankrupt agreed to “charge in Reece’s favour with payment of all monies owing to Reece by [BCPL] and/or any of us or our estate and interest in any land…in which we now have the legal and/or beneficial interest…”.
As at 3 July 2007, the date of completion for the Loan Agreement, there was no indebtedness by BCPL in favour of Reece. The evidence demonstrates that credit was extended pursuant to the agreement in or from August 2007 when Reece sold and delivered products and materials to BCPL at its request pursuant to the credit agreement on a running account basis. During August 2007 credit totalling $4,396.62 was run up and remained payable as at 31 October 2007. Reece seeks to enforce its rights arising from those transactions. For BWA it is contended that the equitable charge in favour of Reece over the bankrupt’s assets arose between 1 and 21 September 2007 being thirty days after building materials were supplied to the applicant by Reece under a 30 day credit account.[48]
[48] The 30 day credit terms are apparent from the terms included in Reece’s statements.
BWA contends that in the circumstances a charge did not arise until Reece was in default according to the terms of the credit account following the supply of goods and lapse of the time limited for payment prescribed by the invoices. On that basis default only occurred in September 2007. Notwithstanding the charging clause contained in the agreement dated 28 May 2007 a charge cannot arise until an advance has been made for which the charge secures payment and monies are due from the charge or to the chargee.[49] An agreement to give a mortgage no more equity before the moneys are advanced because equity will not decree specific performance of a loan agreement to lend or borrow moneys before any advances are made even though the agreement be enforceable by damages.[50] Accordingly BWA’s equitable charge predates Reece’s charge.
[49] Perpetual Trustees Victoria Ltd v Tsai [2004] NSWSC 745 (5 August 2004); Northern Star Agriculture v Morgan & Banks Developments Pty Ltd [2007] NSWSC 98 [43] – [86]; Sigma Constructions (Vic) Pty Ltd v Maryvell Investments Pty Ltd [2004] VSCA 242 [27]; Sibbles v Highfern Pty Ltd (1987) 164 CLR 214 at 222 – 223.
[50] Kama v Wong (No.1) [2005] NSWSC 427; Corpers (No.664) Pty Ltd v NZI Securities Australia Ltd [1989] ASC 55-714; West v Williams [1899] 1 Ch 132, 143-4.
Postponement
In this case BCPL contend that as a later charge holder they were entitled to assume the nonexistence of the BWA mortgage in circumstances where BWA had not acted to protect its interests. In particular BCPL contended that despite the BWA mortgage being obtained at settlement on or about 2 July 2007 it failed to lodge the release of the CBA mortgage despite charging the borrower and undertaking to do so as part of the loan term. Notwithstanding the BWA mortgage being defective on its face BCPL contends that it still constituted an equity enlivening a right to a caveatable interest which could have been lodged to protect its interest. It complains that BWA having become aware of the failure to lodge the original transfer and mortgage on 22 August 2008 did nothing. In contrast BCPL sought to protect its interests by lodging a caveat which it did not allow to lapse. It did so without notice of BWA’s claims. It contends further that BWA did not cause its caveat to be lodged claiming an equitable mortgage promptly after learning of the loss of the BWA mortgage document and inDeed allowed its first caveat to lapse.
The onus rests on the holder of the latter equitable interest to demonstrate why the ordinary rule should be displaced and that that interest prevail over the earlier one.[51]
[51] Meagher Gummow & Lehane’s Equity Doctrines and Remedies 4th Ed, Butterworths Lexus Nexus 2002 at [8 – 015] p 309.
As the authors of Meagher Gummow and Lehane noted:
“The rule is exemplified by the many cases which have held that, prima facie, successive equitable charges over property granted by its owner or ranked in order of their creation.”[52]
[52] Meagher Gummow & Lehane at [8] – [020].
However the authors noted that the rule does not always apply if it can be demonstrated that the rule ought be displaced because of unequal merit. The onus of establishing a right to postponement because of unequal merit falls upon the subsequent equitable claimant. In J & H Just (Holdings) Pty Ltd v Bank of New South Wales (supra) at 555 the Court said:
“The act or default of the prior equitable owner must be such as to make it inequitable as between him and the subsequent equitable owner that he should retain his initial priority. This in effect means that his act or default must in some way have contributed to the assumption upon which the subsequent legal owner acted when acquiring his equity.”
Putting aside questions of knowledge of BCPL concerning BWA’s interest in the property which matter I have addressed earlier, these circumstances fall within the third exception provided for in Meagher, Gummow and Lehane at [8 – 405] where the authors stated:
“The third exception calls with so called negligence cases. These are said to establish the proposition that if the person with the prior equity is guilty of some negligence which has led the holder the latter equity to assume that the prior equity is nonexistent, the prior equity is deferred to the latter.”
BCPL relied in part on the observations made by Mason and Deane J.J. in Heid v Reliance Finance Corp Pty Ltd[53]. Whilst their Honour’s remarks are helpful they do not expressly assist in this instance. For instance in Heid (supra) the claimant mortgagee who was first in time armed the facilitator of the transaction with documentation including acknowledgements of discharge of debt thereby permitting that person to engage, by fraud, in the granting of a second mortgage. In that case, as with other cases mentioned by members of the court in Heid, the equities were postponed because of the conduct of the chargees in empowering others to “go into the world as the absolute owner of the lands and thus execute transfers or mortgages of the lands to other persons”.[54] In particular they quoted with approval Lord Wright who delivered the judgment of The Judicial Committee in Lapin vAbigail where his Lordship said:
“It is true that in cases of conflicting equities the decision is often expressed to turn on representations made by the party postponed as, for instance, in King v King. But it is seldom that the conduct of the person whose equity is postponed takes or can take the form of a direct representation to the person whose equity is preferred; the actual representation is, in general, as in the present case, by the third party, who has been placed by the conduct of the party postponed in a position to make the representation, most often as here because that party has vested in him a legal estate or has given the indicia of a legal estate in excess of the interest which he was entitled in fact to have, so that he has in consequence been enabled to enter into the transaction with the third party on the faith of his possessing the larger estate”.[55]
[53] (1983) 154 CLR 326 at 333 and 339
[54] Per Gibbs CJ at 334 citing with approval Lapin v Abigail (1930) 44 CLR 166 at 198
[55] Lapin v Abigail (1934) 51 CLR 58 at 68-69
Clearly that is not the case here. BCPL did not undertake any title search before entering into the Deed. While it is correct that BCPL may have not been alert to BWA’s interest until after commencing these proceedings, nothing that BWA has done or omitted to do has materially impacted upon BCPL’s interest except for BWA’s failure to register its interest.
In this context it is significant to note BCPL does not seek to postpone the priority which ought in the ordinary course be afforded to Reece because of its failure to lodge a caveat to inform the world of its equity once its right to charge was enlivened in October 2007. It is necessary to demonstrate a failure of duty as Gibbs CJ noted. [56] In this case no breach of duty is established nor is any causal link to any such breach demonstrated, if inDeed there was a breach. In my view it follows that BWA’s interest should not be postponed to that of BCPL.
[56] Heid at 338
BWA contends that in this case neither BCPL nor Reece have or can discharge the onus reposed in them. BWA contends that neither BCPL or Reece have led evidence to show that they detrimentally relied on the failure of BWA to register its mortgage. BWA contended that inDeed, particularly in respect of BCPL, it acquired its charge with actual notice of the mortgage for reasons that were noted earlier. That is pursuant to the title then evident. Upon that basis it contended that “generally, inDeed almost universally, [the] claim to priority of “the holder of the later equity” must fail”.[57]
[57] Platzer v Commonwealth Bank of AustraliaLtd [1997] 1 Qd R 266 at 273 per Davies J.A.
Concerning BCPL BWA contended that because of the bankrupt’s involvement, BCPL did not and could not have relied upon the state of the Land Title Register. Furthermore as it was informed by its director, the bankrupt, it must have known by clause 6.8 of the Common Provisions that it could not grant a charge over the property as that clause provides that the bankrupt not mortgage or grant an interest in the property unless BWA agree in writing. There was no such agreement.
Furthermore BWA contends that by setting up an entitlement to priority to the property BCPL is derogating from the covenants contained in the guarantee and indemnity given by it on 18 June 2007 which provided by clause 2.1 that BCPL unconditionally and irrevocably guaranteed payment to BWA of the guaranteed money if the bankrupt did not pay the guaranteed money on time and in accordance with the loan. Additionally by clause 3.1 BCPL likewise unconditionally and irrevocably indemnified BWA against such loss. In particular clause 8.1 of the Deed of guarantee and indemnity protected BWA notwithstanding that: it might “release, lose the benefit of or do not obtain any security: clause 8.1(d); not register any security which could be registered: clause 8.1(e); and insolvency: clause 8.1(i)”. BCPL also agreed that so long as the guaranteed money remained unpaid it would not, without BWA’s consent, claim an amount from the debtor: clause 9(c), or an amount in the insolvency of the debtor: clause 9(d).
In support of its contention BCPL relied upon the decision in Bofinger v Kingsway Group Ltd (2009) 239 CLR 269. In answer to BCPL’s contention BWA submitted Bofinger’s (supra) case is distinguishable. I accept that is the case. In Bofinger’s case the guarantee in question related to a debt due to a subsequent mortgagee. There the provisions in the guarantee were not to prevent the surety subrogating into the rights of a prior mortgagee whose debt the surety had also guaranteed and discharged. In this case BCPL has granted a guarantee and indemnity in respect of the very debt which it now seeks to undermine.
Reece does not contend that BWA’s interest should be postponed. It relies upon the proposition that its interest arose on 28 May 2007 being prior in time to that of BWA. For reasons which I have addressed above I do not accept Reece’s charge arose on 28 May 2007. But even if it did so BWA contends that Reece’s interest would be postponed to BWA because Reece did not lodge a caveat until well after BWA had created its interest. That is because on the settlement of the refinancing on 3 July 2007 BWA caused a check title search to be undertaken which revealed that the title was clear apart from the CBA mortgage. BWA contends this outcome arises by reason of the third exception to the general principle expressed in Meagher Gummow and Lehane involving the so called “negligence cases”[58] as I have observed earlier:
“Thus, in Butler v Fairclough (1917) 23 CLR 78 an unregistered equitable mortgagee of land under the Torrens system lost his priority because of his “negligence” in failing to lodge a caveat to protect his interest, since this led a subsequent purchaser to conclude that there were no outstanding equities.”
[58] Meagher Gummow & Lehane para 8 – 045; see also Double Bay Newspapers v AW Holdings (supra) at 423 and 425.
The observation applies with equal force in this instance and accordingly it would be just and equitable to postpone Reece’s priority if indeed it did as a matter of law exist.
It follows that if BWA’s interest is as an equitable mortgagee I do not consider its interest should be postponed to the interests of either BCPL or Reece.
Conclusion
In conclusion I am of the view that:
a)notwithstanding that the debt secured by the CBA mortgage had been repaid it was open to the CBA to transfer the mortgage to BWA particularly as BWA had advanced the funds used to repay the debt secured by the CBA mortgage. Furthermore given the terms and nature of the mortgage security it was open to transfer the mortgage rather than discharge it;
b)BCPL and/or Reece have not demonstrated any fraud on the part of BWA entitling it to impeach BWA’s indefeasible title pursuant to s.184(3) LTA;
c)In purporting to exercise its contractual rights held pursuant to its Loan Agreement BWA did not assist the bankrupt as mortgagor in breach of its duty to either his trustees thereby enlivening a right to impeach BWA’s indefeasible title pursuant to s.185(1)(a) LTA;.
d)In the event BWA has no registered mortgage the loan agreement is sufficiently plain in its expression to create an equitable charge. The mortgage instrument defectively purported to manifest the obligation under the Loan Agreement to provide mortgage security. However the mortgage instrument itself was only in aid of the charge granted by the Loan Agreement and not the source of the charge in its own right. Accordingly BWA would have on this basis an equitable charge over the Property; and
e)If BWA’s interest is as an equitable mortgagee its interest should not be postponed to the interests of either BCPL or Reece.
Orders
The parties submit a minute of order to give effect to these reasons by 4.00pm on 19 August 2011.
Liberty to apply.
Costs reserved.
I certify that the preceding one hundred and sixty (160) paragraphs are a true copy of the reasons for judgment of Burnett FM
Date: 10 August 2011
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