Burness (Trustee) v Harding - [2021] FCA 1184

FEDERAL COURT OF AUSTRALIA

Burness (Trustee) v Harding [2021] FCA 1184

File number(s):

VID 859 of 2019

Judgment of:

KERR J

Date of judgment:

1 October 2021

Catchwords:

BANKRUPTCY AND INSOLVENCY – where a loan for the husband’s business is secured against a property which is held in equal shares by the husband and wife – where the husband’s business fails and he is declared bankrupt – where the property is sold to repay the loan for the husband’s business – whether the wife can establish that the equity of exoneration applies such that she is entitled to be exonerated by the husband in respect of those borrowings

Legislation:

Bankruptcy Act 1966 (Cth)

Cases cited:

Parsons v McBain [2001] FCA 376

Day v Shaw [2014] EWHC 36 (Ch)

Bankruptcy v Citibank Savings (1995) NSWLR 116

Farrugia; ex parte Farrugia v Official Receiver (1982) 43 ALR 700; [1982] FCA 55

Armstrong v Onyearu [2018] Ch 137

In Re Kiely (1857) Ir Ch Rep 394, 405

Paget v Paget [1898] 1 Ch 470.

Fisher & Lightwood’s Law of Mortgage (Aust. Ed., 1995)

Division:

General Division

Registry:

Victoria

National Practice Area:

Commercial and Corporations

Sub-area:

General and Personal Insolvency

Number of paragraphs:

177

Date of hearing:

30 June 2021, 1-2 July 2021

Counsel for the Applicant:

Mr Matters

Solicitor for the Applicant:

Sharrock Pitman Legal

Counsel for the First Respondent:

Mr Northrop

Solicitor for the First Respondent:

Scammell Black Mileo

ORDERS

VID 859 of 2019

BETWEEN:

PAUL ANDREW BURNESS IN HIS CAPACITY OF TRUSTEE OF THE BANKRUPT ESTATE OF GARRY MAXWELL HARDING

Applicant

AND:

KATHRYN LEE HARDING

First Respondent

REGISTRAR OF TITLES

Second Respondent

order made by:

KERR J

DATE OF ORDER:

1 October 2021

THE COURT DECLARES THAT:
1. Mrs Kathryn Lee Harding, by consenting to her husband, Mr Garry Maxwell Harding, being permitted to borrow funds secured by a mortgage over their jointly owned residential property for the purpose of him establishing and funding his business is entitled, in the facts found by the Court, to the benefit of the equity of exoneration and accordingly is entitled to be indemnified and exonerated by her husband in respect of those borrowings.

THE COURT ORDERS THAT:

1.        Within 5 days of the publication of these reasons, the First Respondent file and serve written submissions limited to 3 pages regarding any order as to costs of this proceeding.
2.        Within 10 days of the publication of these reasons, the Applicant file and serve written submissions limited to 3 pages in response.
3.        Within 14 days of the publication of these reasons, the First Respondent file and serve written submissions limited to 1 page in reply.
4.        Unless application is made for an oral hearing within 14 days of the publication of these reasons, all issues arising in relation to costs be determined on the papers.
5.        Liberty to apply within 14 days of the date of publication of these reasons for any contingent orders relating to the disposition of the funds currently held…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

Continue reading Burness (Trustee) v Harding

Details

AGLC: Burness (Trustee) v Harding [2021] FCA 1184
Case: [2021] FCA 1184
Decision Date: 1 October 2021

CaseChat Overview and Summary

In the case of Burness (Trustee) v Harding, the dispute involved the application of the equity of exoneration in relation to a charge on property and the distribution of funds held in a trust account. The matter was heard and determined by the Federal Court. The primary issue before the court was whether the equity of exoneration applied to the charge created by the first respondent and, if so, to what extent it could be used to adjust the distribution of funds from the trust account. The court was also required to determine whether there was sufficient evidence to establish that the mortgage funds were applied for the purpose of benefiting the bankrupt.

The court examined the application of the equity of exoneration, which typically arises in situations where a person mortgages their property to secure the debt of another, or where the relationship is treated as one of suretyship. The court considered the three-part test for the application of this equity, as outlined in Re Berry (a Bankrupt), which requires evidence that the charge was for the purpose of raising money to pay the debts of another person or to benefit them, and that the borrowed money was applied for that purpose. The court found that there was insufficient evidence to demonstrate the specific application of the mortgage funds for the benefit of the bankrupt, and thus, the equity of exoneration could only be applied to the extent that such specific application could be proven.

The court concluded that the applicant was entitled to an order for the payment of $240,052.12 from the funds held in the trust account, after applying the doctrine of exoneration. The court also ordered that the first respondent provide written submissions on the costs of the proceeding and set out a timetable for the submission and consideration of these costs, as well as any contingent orders relating to the disposition of the trust funds.

These orders reflect the court's determination of the legal issues and the distribution of funds in accordance with the applicable equitable principles.

Orders

Orders of the court

1. Within 5 days of the publication of these reasons, the First Respondent file and serve written submissions limited to 3 pages regarding any order as to costs of this proceeding.

2. Within 10 days of the publication of these reasons, the Applicant file and serve written submissions limited to 3 pages in response.

3. Within 14 days of the publication of these reasons, the First Respondent file and serve written submissions limited to 1 page in reply.

4. Unless application is made for an oral hearing within 14 days of the publication of these reasons, all issues arising in relation to costs be determined on the papers.

5. Liberty to apply within 14 days of the date of publication of these reasons for any contingent orders relating to the disposition of the funds currently held by the Applicant’s lawyers in trust as may be sought.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

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Evidence

Evidence Before The Court

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Decision

Reasons for decision

Much of what is contained in the Trustee’s written submissions relates to matters that did not remain for determination by the Court, so I will not set those out. Those passages relevant to the application of the equity of exoneration were as follows:32. Finally , Even if the doctrine of exoneration did apply and the charge created is not postponed to the Applicant’s charge under section 139ZR, the doctrine only applies to the extent that the mortgage moneys advanced by BOQ were used solely for the benefit of the bankrupt (Farrugia). Insofar as the First Respondent is unable to prove the specific application of any part of the BOQ loan funds, then those funds are to be apportioned such that the doctrine only applies to the balance of the funds.CONCLUSION33. Accordingly…the Applicant is entitled to an order that the First Respondent pay to the Applicant, from the moneys held in the Applicant’s lawyers trust account, the sum of $240,052.12 (valuation as at 12 September 2018 ($1,100,000.00) less half of the mortgage ($480,104.45), divided by 2). In his written reply submissions, the Trustee said further:7. …The Applicant’s only involvement in the process [of selling the Camberwell Property] was to lodge a caveat on 20 January 2021 and withdraw same at settlement on 30 April 2021.…9. …the caveat lodged by the Applicant was removed on the basis that the residue proceeds were paid into the Applicant’s lawyers trust account, pending written agreement of both parties or order of the Court, so the Applicant is still entitled to trace its entitlement to a half-share in the property into the residue, subject to any adjustment pursuant to the doctrine of exoneration (the applicability of which is disputed by the Applicant)… In his oral submissions, counsel for the Trustee, Mr Matters, referred to the following passage in Parsons and submitted that it sets out what there needs to be for the equity to exist:20 The equity of exoneration is an incident of the relationship between surety and principal debtor. It usually arises where a person has mortgaged his property to secure the debt of another, whether or not that other has covenanted to pay the debt. However, it will also arise in a case where, although not an actual suretyship, the relationship is treated as one of suretyship. This is Lord Selbourne’s third class of suretyship mentioned in Duncan, Fox & Co v North and South Wales Bank (1880) 6 App Cas 1 at 10. For the doctrine to apply in this class, the following facts will usually exist. First, a person must charge his property. Where the person is the beneficial owner of the property it will be sufficient if the charge is by his trustee. Secondly, the charge must be for the purpose of raising money to pay the debts of another person or to otherwise benefit that other person. Thirdly, the money so borrowed must be applied for that purpose. See generally Re Berry (a Bankrupt) [1978] 2 NZLR 373. Relying on that three part test, Mr Matters submitted that there was insufficient evidence as regards the purpose of obtaining the BOQ Loan, and whether the money was applied for the purpose for which it was obtained. The evidence needed to be at a greater level of specificity for the equity of exoneration to arise, and Mrs Harding has an evidentiary burden to show that the moneys were applied for the benefit of the business.

Ratio Decidendi

Legal Principle Established

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