Capital Finance Australia Ltd v Struthers

[2008] NSWSC 440

CITATION:	Capital Finance Australia Ltd v Struthers [2008] NSWSC 440
HEARING DATE(S):	8 & 29 April 2008
JUDGMENT DATE :	8 May 2008
JURISDICTION:	Equity
JUDGMENT OF:	Hamilton J
DECISION:	The plaintiff’s equitable interest should be postponed to the wife’s equitable interest. Application by plaintiff to vary property settlement orders refused.
CATCHWORDS:	CONVEYANCING [212] – Land Titles under the Torrens Systems – Mortgages, Charges and Encumbrances – Transfer of Equity of Redemption – Joint tenancy – Guarantee by one tenant secured on property – Transfer of encumbered interest by debtor to other joint tenant – Rights of creditor - EQUITY [29] – General principles – Priority and notice – Priority generally – Competing equitable interests – Earlier equity not to be postponed to later without act or default that makes it inequitable that initial priority be retained – Failure to lodge caveat alone not sufficient to lead to loss of priority – In combination with other circumstances may lead to loss of priority - FAMILY LAW AND CHILD WELFARE [320] – Family Law Act 1975 – Property and maintenance of parties – Orders – Setting aside orders altering property interests – By reason of miscarriage of justice – Failure to disclose relevant information – Exercise of discretion.
LEGISLATION CITED:	Civil Procedure Act 2005 ss 56(1), 60 Family Law Act 1975 (Cth) s 79A Jurisdiction of Courts (Cross Vesting) Act 1987 (Cth) ss 4(1), 5(1)
CATEGORY:	Principal judgment
CASES CITED:	Abigail v Lapin (1934) 51 CLR 58 Black v Garnock (2007) 81 ALJR 1338; 237 ALR 1 Butler v Fairclough (1917) 23 CLR 78 Double Bay Newspapers Pty Ltd v A W Holdings Pty Ltd (1996) 42 NSWLR 409 Guthrie v Australia and New Zealand Banking Group Ltd (1991) 23 NSWLR 672 Heid v Reliance Finance Corporation Pty Ltd (1983) 154 CLR 326 In the Marriage of Prowse (1994) 118 FLR 135 J & H Just (Holdings) Pty Ltd v Bank of NSW (1971) 125 CLR 546 Jones v Daniel (2004) 141 FCR 148 Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265 Lord Abergavenny’s Case (1607) 6 Co Rep 78b; 77 ER 373 Official Trustee in Bankruptcy v B (2005) 196 FLR 88 Official Trustee in Bankruptcy v Donovan [No 2] (1996) 132 FLR 407 Person-to-Person Financial Services Pty Ltd v Sharari [1984] 1 NSWLR 745 Sibbles v Highfern Pty Ltd (1987) 164 CLR 214 Swiss Bank Corporation v Lloyd’s Bank Ltd [1982] AC 584 Westfield Holdings Ltd v Australian Capital Television Pty Ltd (1992) 32 NSWLR 194
TEXTS CITED:	Tyler, Young and Croft, Fisher and Lightwood’s Law of Mortgage (2nd Aust ed, 2005)
PARTIES:	Capital Finance Australia Limited (P) Ian Struthers, Official Trustee of The Estate of Fadi Khalil, a Bankrupt (D1) Mariana Khalil (D2)
FILE NUMBER(S):	SC 3376/07
COUNSEL:	R J Carruthers & J P Knackstredt (P) No appearance (D1) P W Gray SC & F F F Salama (D2)
SOLICITORS:	Bartier Perry (P) No appearance (D1) Fay Rose Legal (D2)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

HAMILTON J

THURSDAY, 8 MAY 2008

3376/07 CAPITAL FINANCE AUSTRALIA LIMITED v IAN STRUTHERS, OFFICIAL TRUSTEE OF THE ESTATE OF FADI KHALIL, A BANKRUPT & ANOR

JUDGMENT

1 HIS HONOUR: The central question in this case is which of two equitable interests has priority over the other. The equitable interests are respectively an equitable mortgage granted by a husband to a financier in a guarantee given by the husband and an equitable interest in his wife created as a result of orders for transfers of property that were made in proceedings between the husband and the wife in the Family Court subsequent to the grant of the mortgage to the financier.

FACTS

2 There was no oral evidence given at the hearing and the facts are not in dispute. The second defendant, Mariana Khalil, is the wife of Fadi Khalil. The first defendant is the husband’s trustee in bankruptcy, who has indicated an intention to take no part in the proceedings. The plaintiff is the financier to whom the equitable mortgage was granted by the husband.

3 In 1995 the husband and the wife opened a retail computer shop. In September 1999, Computer Fabricated Systems Pty Ltd (“the company”) was established. Thereafter the business was conducted through the company, which was controlled by the husband. The business was successful over many years.

4 In October 2002, the husband and the wife as joint tenants purchased a house property at 7 Silverleaf Row, Menai (“the house”). In June 2004, a warehouse unit at 800 - 812 Old Illawarra Road, Menai (“the warehouse”) was purchased in the sole name of the husband. In November 2004, four home units in Queensland were purchased in the sole name of the husband. The husband also owned a one hundredth share as tenant in common in a property at 54 Irrigation Road, Merrylands (“the Merrylands property”).

5 On 4 April 2005, Fouadi Khalil lent $150,000 to the husband and the wife secured by second unregistered mortgages over both the house and the warehouse. The $150,000 was put into the company. Fouadi Khalil is a solicitor. The husband is her brother. She acted for the husband in the Family Court proceedings mentioned below, but now acts for the wife in these proceedings.

6 On 1 March 2006, the husband and the wife separated. The husband’s gambling habit played a large part in the breakdown of the marriage. At the time of separation they had two children, but a further set of twins was born to them subsequently, so that there are now four children of the marriage.

7 On 22 March 2006, the husband, unbeknown to the wife, executed in favour of the plaintiff a document entitled Guarantee and Indemnity - Secured (“the guarantee”). The guarantee is of central importance in these proceedings. Material provisions of it are as follows.

8 The guarantee provides that in consideration of the plaintiff entering into the Agreement “at your request, you provide this guarantee of the customer’s obligations and liabilities under the Agreement”. The customer is defined as the company and “the Agreement” is specified by a number. In clause 1 of the guarantee, “money” is defined as meaning “all amounts (including damages) that are owing or payable (whether actually or contingently, separately, jointly or otherwise) by Customer to us on any account, at any time under or in relation to“ the Agreement. By clause 3, the husband unconditionally and irrevocably guarantees to the plaintiff the punctual payment of the money. By clause 4, if the customer does not pay any of the money when due, the husband must pay the whole of the money immediately upon demand. Clause 5 provides as follows:

“5 As security for your obligations, you:

(a) hereby mortgage in our favour all of your right, title and interest in any land that you own or in which you hold an interest as at the date of this Guarantee; and
(b) agree to mortgage in our favour all of your right, title and interest in any other land that you acquire or in which you hold an interest at any future time;
……..
(d) undertake at our request to execute a separate mortgage document or documents in registrable form …”

By clause 7, the guarantee confers on the plaintiff an indemnity in respect of essentially the same liabilities and by clause 9 the husband’s obligation to pay the money is declared to be a primary obligation.

9 The Agreement was not in force when the guarantee was executed. It is entitled and is hereinafter referred to as a “chattel mortgage”. It bears the number specified in the guarantee. It was executed by the husband on behalf of the company on 22 March 2006, but was not accepted by execution by the plaintiff until 12 April 2006. It is stated to be in consideration of an advance of $96,616 for the purchase of new computer equipment. The advance is repayable with interest over 60 months. The payments due under the chattel mortgage were met by the company until 12 November 2006.

10 Between July and October 2006, negotiations proceeded between the husband and the wife for a property settlement. Sid Hawach, solicitor, acted for the wife. He informed her that he had done searches on the house and the warehouse and “there is nothing on the titles that affects you except for the mortgages”, referring to the bank mortgages that were to be paid out. The wife deposed that she “relied on what I was told in this regard.” As appears from what has already been said about the lack of oral evidence, she was not cross examined on that statement.

11 On 4 October 2006, the wife lodged in the Family Court of Australia at Parramatta an application for consent orders for property settlement. The husband and the wife in the application joined in estimating the value of the house at $950,000 with a mortgage liability of $680,000, showing an equity of $270,000. They showed the warehouse as having a value of $650,000 with a mortgage debt of $365,000, showing an equity of $285,000. The company had assigned to it a value of $350,000. The company’s indebtedness to the plaintiff was not mentioned in the application, nor was the husband’s liability under the guarantee or the security given by him over his interests in the house and the warehouse revealed. The wife was still ignorant of those matters.

12 Details of the purchase and sale of and the borrowings on the four Queensland units are set out in a schedule based on the evidence as follows:

Property	Purchase date	Sale date	Purchase price	Amount of mortgage	Sale price
a Unit 3/107 Riverhills Road, Eagleby	25.11.04	10.11.06	$115,000	$92,000	$125,000
b Unit 4/107 Riverhills Road, Eagleby	25.11.04	23.10.06	$115,000	$92,000	$125,500
c Unit 5/107 Riverhills Road, Eagleby	25.11.04	14.11.06	$115,000	$92,000	$120,000
d Unit 6/107 Riverhills Road, Eagleby	25.11.04	22.09.06	$115,000	$92,000	$126,000
Total	$460,000	$368,000	$496,500

13 On 6 October 2006 the Family Court made the consent orders that had been lodged with the application (“the orders”). By orders 1 and 2 the husband was to transfer to the wife his half share in the house against a discharge of mortgage by the Macquarie Bank or alternatively a release by the Macquarie Bank of the husband from liability under the mortgage. By orders 3 and 4 the husband was to transfer the warehouse to the wife against a corresponding discharge of mortgage or release of liability by the Commonwealth Bank of Australia. Provision was made for the payment out of the husband and wife’s debt of $150,000 to Fouadi Khalil. Order 9 was as follows:

“9 That the Applicant wife indemnify the Respondent husband and hold him indemnified in relation to any personal or other loans including those owed to Fouadi Khalil, the Respondent husbands [sic] sister in the amount of one hundred and fifty thousand dollars ($150,000).”

14 By order 11 the Court declared the company to be the husband’s sole and exclusive property. By order 13 it made a similar declaration in relation to two of the Queensland units. It would appear that the other two had been sold by then.

15 In October/November 2006 the wife made approaches to refinance the house and the warehouse so as to permit payment out of the existing mortgages. It is to be inferred from the evidence that prospective financiers obtained mortgage valuations as of mid 2007 of $880,000 and $471,500 of the house and the warehouse respectively. On the basis of those valuations, the available equity in the house is reduced to $200,000 and in the warehouse to $106,500. The mortgage valuations are likely to be conservative. But it is probably safer to regard the figures they provide as reflective of the equities available in the respective properties.

16 In mid to late October 2006, the wife received a phone call from the husband, who told her that he had sold the last two units in Queensland and was thinking of going overseas. As the result of a negotiation between the wife’s solicitor and the husband’s solicitor, the husband agreed that he would give the wife signed transfers of the house and the warehouse in return for a written undertaking that she would only use them once she had discharged the mortgages against the properties and that she would not lodge any caveats against the Queensland properties or stop their sale in any way. On 23 October 2006, Sid Hawach wrote to Fouadi Khalil, who was still acting for the husband, confirming that he had been instructed to hold the executed transfers of the house and the warehouse on the following basis:

“1 That our client shall provide to your client with [sic] a discharge of mortgage with respect to the Menai properties.
2 That the transfers will not be registered until such discharge of mortgage is provided by your client.
3 That caveats will not be lodged by her with respect to any of the Queensland properties.”

On that basis, Fouadi Khalil on 25 October 2006 forwarded executed transfers of the house and the warehouse to Sid Hawach. On the same day caveats were lodged on the wife’s behalf over the house and the warehouse to protect the equitable interests created in her favour by the Family Court orders.

17 On 12 November 2006 the company for the first time defaulted under its loan from the plaintiff. On 13 December 2006 the plaintiff issued a notice of intention to repossess the goods the subject of the chattel mortgage. On 2 January 2007 the plaintiff lodged caveats over the house and the warehouse. On 31 January 2007 the company was wound up. On 23 March 2007 the plaintiff issued to the company a notice of termination of the chattel mortgage. On 26 March 2007 the husband was adjudged bankrupt. In April 2007 the wife learnt for the first time of the caveats lodged by the plaintiff and that the husband was bankrupt.

SUBMISSIONS

The plaintiff’s submissions

18 The plaintiff’s submissions are as follows. The plaintiff’s interest under clause 5 of the guarantee was an equitable mortgage of all real property in which the husband had an interest, including the house and the warehouse. The grant of the equitable mortgage did not sever the joint tenancy in the house: Guthrie v Australia and New Zealand Banking Group Ltd (1991) 23 NSWLR 672 at 680. The consent orders made in the Family Court for the husband to transfer to the wife his interest in the house and the warehouse vested in the wife an equitable interest in those properties: Jones v Daniel (2004) 141 FCR 148; Official Trustee in Bankruptcy v B (2005) 196 FLR 88. These propositions are not disputed.

19 So far as the house is concerned, the charge over the husband’s interest in favour of the plaintiff is not extinguished by the merger of the husband’s interest in the whole estate and the chargee is entitled to enforce it against the charged moiety: Lord Abergavenny’s Case (1607) 6 Co Rep 78b; 77 ER 373; Guthrie supra at 677, 680. This proposition is equally undisputed.

20 By reason of the principle in Lord Abergavenny’s Case, it should be held that the wife takes the transfer of the husband’s interest in the matrimonial home subject to the equitable mortgage over the husband’s interest without any question of priorities as between the respective interests of the plaintiff and the wife arising.

21 In the case of the warehouse, the matter is to be determined as a question of the priority of equitable interests as between the plaintiff and the wife in the usual way. The general principle is that the first in time prevails. The question is whether the plaintiff’s interest should be postponed to the wife’s by reason of the plaintiff not lodging a caveat at an earlier time. The onus is on the holder of the later interest to satisfy the Court that her equity ought to be preferred. The failure to caveat does not of itself necessarily operate to postpone the interest. The purpose of a caveat is not to give notice to the world: J & H Just (Holdings) Pty Ltd v Bank of NSW (1971) 125 CLR 546 per Barwick CJ at 552. It is necessary in determining whether there should be a postponement of the earlier interest to consider all the circumstances: Heid v Reliance Finance Corporation Pty Ltd (1983) 154 CLR 326 at 341 - 342; Person-to-Person Financial Services Pty Ltd v Sharari [1984] 1 NSWLR 745; Double Bay Newspapers Pty Ltd v A W Holdings Pty Ltd (1996) 42 NSWLR 409.

22 The plaintiff relied on the following circumstances. Order 9 of the orders showed an intention that the wife would cover all the debts known or unknown of the husband; the husband had an obligation to draw to the attention of the Family Court the existence of the guarantee and it was reasonable for the plaintiff to expect him to do so; and there is no evidence that the wife attempted or intended to give effect to order 9 in so far as the plaintiff’s debt is concerned, whether before or after the husband’s bankruptcy.

23 The plaintiff alternatively claimed that, if the Court were to hold that the wife’s interests have priority over those of the plaintiff, the plaintiff has a right under s 79A of the Family Law Act 1975 (Cth) (“the FLA”) to have the orders varied. The plaintiff has a right to apply under s 79A(1) as a “person affected by an order”. In determining whether or not to exercise its discretion under s 79A the Court will have regard to whether there was “suppression of evidence (including failure to disclose relevant information)”. The fact that there was such suppression amounted to a miscarriage of justice. The Court’s discretion should be exercised to vary the original orders for settlement of property so as to give effect to the plaintiff’s rights under the guarantee over the house and the warehouse. In this case the evident intent of order 9 must be given very significant weight.

24 This application can be dealt with by this Court by virtue of jurisdiction cross vested under s 4(1) of the Jurisdiction of Courts (Cross Vesting) Act 1987 (Cth) (“the JCCVA”). Alternatively this Court could, after determining the general law issues transfer the proceedings to the Family Court under s 5(1) of the JCCVA for the determination by that Court of this application.

The wife’s submissions

25 The wife submitted that, so far as the house is concerned, the operation of the principle in Lord Abergavenny’s Case does not preclude the wife from relying on the ordinary rules as to priorities. The effect of that case is that the charge over the husband’s interest is not extinguished by the order to transfer that interest to the wife. But that merely creates the situation that there are two competing equitable interests operative in relation to the house and priority between them must be determined in the ordinary way.

26 So far as the question of priorities is concerned, the wife submitted that her interest in the property was prior in time to that of the plaintiff. Her interest became effective on the making of the orders on 6 October 2006. The plaintiff’s interest did not become operative on execution of the guarantee on 22 March 2006 as the chattel mortgage had not at that time been entered into. Furthermore, no liability under the guarantee arose in respect of the chattel mortgage before 12 November 2006, when the first default under the chattel mortgage occurred. Up to that time, there was no liability under the guarantee and the mortgage granted by the guarantee was not operative, because nothing was secured by it.

27 If this argument is not acceded to, then the wife’s later interest nevertheless has priority over the plaintiff’s earlier interest as the wife has the better equity: Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265 at 276; Heid at 341.

28 The first in time principle applies only where the claimants’ respective merits are equal and there is no other sufficient ground for preferring one over the other: Butler v Fairclough (1917) 23 CLR 78 at 91 - 92; Abigail v Lapin (1934) 51 CLR 58 at 66 - 67; Latec at 276; Heid at 339 - 343.

29 Here the claimants’ respective merits are not equal. The conduct of the earlier interest holder is such as will postpone the plaintiff’s interest to that of the wife: Butler at 92, 97; Person-to-Person at 746 - 747; Double Bay Newspapers at 420 - 423.

30 What is relied on here is not a mere failure by the plaintiff to caveat. On the facts of this case, the failure to caveat, considered in the light of all the circumstances, led to the wife acquiring her later unregistered interest on the mistaken assumption that interests such as the plaintiff’s earlier interest did not exist. For those reasons the wife’s interest should be given priority over those of the plaintiff.

31 So far as the claim for a variation of the orders is concerned, the application to reopen and vary the orders should be denied for basically the same reasons. Those reasons include the delay by the plaintiff to take any steps to protect its unregistered interest; the injustice of promoting the plaintiff’s interest over the wife’s in circumstances where under the general law the plaintiff’s interest would be postponed to that of the wife’s by reason of the plaintiff’s conduct; the responsibilities borne by the wife of meeting all financial obligations in respect of herself and her four children (including obligations under the mortgages on both the house and the warehouse) with no assistance from the husband or elsewhere; the impossibility of putting the wife back in the same position she would have been in had the orders not been made, bearing in mind the wife’s forbearance to lodge caveats over any of the Queensland properties, the loss to the wife of the net proceeds of those properties and the collapse of the financial affairs of the company and the husband.

ISSUES

32 The issues for determination in these proceedings are as follows:

(1) Is the plaintiff’s mortgage binding on the husband’s interest in the matrimonial home by reason of the principle in Lord Abergavenny’s Case without consideration of any question of priorities as between the respective interests of the plaintiff and the wife?
(2) Is the plaintiff’s interest prior in time to the wife’s interest, bearing in mind the wife’s submission that the plaintiff’s interest did not arise until liability under the guarantee first arose on 12 November 2006?
(3) If the plaintiff’s interest is prior to the wife’s interest, is it to be postponed to the wife’s interest in the circumstances of this case?
(4) If the plaintiff’s interest is postponed to the wife’s interest, should the plaintiff’s application to have the orders varied so as to reverse that situation be dealt with in this Court or transferred to the Family Court?
(5) If the application is dealt with in this Court, should the orders be varied so as to reverse the general law position?

CONCLUSIONS

(1) Whether the principle in Lord Abergavenny’s Case precludes the question of priorities arising as between the plaintiff and the wife in the case of the plaintiff’s charge over the husband’s half interest in the house

33 The plaintiff relied upon Lord Abergavenny’s Case as applied by the Court of Appeal in Guthrie. The facts of Guthrie had a general similarity to the present case. They were stated as follows by Priestley JA at 675:

“Husband (H) and wife (W) were the registered proprietors as joint tenants of land under the Real Property Act 1900. H guaranteed a debt owing by X Pty Ltd to a Bank. Immediately afterwards H and W mortgaged the land to the Bank. W understood the mortgage would secure an amount to be advanced by the Bank to H and herself. The terms of the mortgage also made the land security for H’s liability under his guarantee. W did not know about the guarantee. This and other circumstances concerning her execution of the mortgage were such that it was later held by Cohen J in the Equity Division that she was not bound by the mortgage in so far as it secured H’s liability under the guarantee; her interest in the land was charged only to the extent of money advanced by the Bank directly to H and W; H’s interest secured both this amount and his liability under the guarantee.

Well before this was decided by Cohen J, however, the marriage between H and W had been dissolved by order of the Family Court of Australia. In those proceedings an order had been made that H ‘transfer to the Wife all of his right title and interest in and to the property … the same being subject to [the] mortgage … and that she indemnify the Husband in respect of such indebtedness’. By the time this order was made W knew of the Bank’s claim to be secured in respect of the guarantee by the mortgage but disputed the extent of any charge over her interest in the land. H executed a transfer to W of his interest in the land. The transfer showed no encumbrances. It was not registered. The Bank would not agree to the registration of the transfer unless its claim was paid in full.”

34 Cohen J held that, although the wife’s interest in the property was not bound by the mortgage for the reasons he had found, the husband’s interest in the land remained subject to the husband’s guarantee liability. Cohen J’s conclusions in both regards were upheld by the Court of Appeal. Priestley JA said at 676:

“Cohen J’s second finding, concerning W’s position qua the guarantee debt in light of the Family Court order, is supported, in my opinion, by the particular aspect of the law relating to joint tenancy to which the rule in Lord Abergavenny’s Case (1607) 6 Co Rep 78b; 77 ER 373 applies. The more general aspects of that law are described in Meagher JA’s reasons and in Carmody v Delehunt [1984] 1 NSWLR 667 at 675-677.”

Meagher JA said at 680 - 681:


“The effect of the transfer inter vivos by one joint tenant of his mortgaged share to a co-tenant was decided as long ago as 1607 in Lord Abergavenny’s Case (1607) 6 Co Rep 78b; 77 ER 373. That case has been constantly followed and never (so far as I know) been doubted. The legal proposition for which it is authority is that where judgment is given against one of two joint tenants and afterwards that one releases to the other before execution such release shall not bar the creditor’s execution, whereas if the releasing joint tenant had died before execution the survivor holds the land discharged of any execution. The reason for the distinction is that in the former case the releasee derives title from the release not from the ius accrescendi.

……..

Lord Abergavenny’s Case is authority for the proposition that the transferred moiety remains subject to the mortgage after transfer. It is not authority for the proposition that the entirety of the land becomes subject to the mortgage after transfer: that point did not arise. Where, as here, the transferee’s equity to hold the moiety unaffected by the mortgage arises out of the combined conduct of the mortgagee and the transferor, it would seem inequitable to hold that her liability became enlarged by the transfer, and no existing authority compels that conclusion.”

35 The proposition for which Guthrie is authority is correctly stated in the headnote:

”Where a joint tenant of land under Torrens title transfers an encumbered interest to the other tenant pursuant to a court order, the charge is not extinguished by the merger in the whole estate and there is no bar to the right of the creditor to execute against the charged moiety.”

36 The effect of Guthrie is that an equitable charge on the transferred moiety survives the transfer. It is not authority for the proposition that that charge is in all circumstances to prevail over any other charge that affects the moiety, without any adversion to the usual rules as to priorities and the possibility of the postponement in equity in appropriate circumstances of one interest to another. The question of priorities was not considered in Guthrie. The good reason for this is that, although the wife in Guthrie was ignorant of the guarantee at the time she executed the mortgage, so that her half of the property was relieved of liability for the guarantee, she did learn of the guarantee and the liability under it before the making of the Family Court orders and was aware of those matters at the time the orders were made. In those circumstances she did not (and could not) claim that the Bank’s interest should be postponed to her own beneficial entitlement to the husband’s moiety.

37 It is apparent from what Meagher JA said in Guthrie concerning Lord Abergavenny’s Case that the relevant principle must be confined within its proper limits. The effect of Lord Abergavenny’s Case as applied in Guthrie is to preserve the charge as continuing to bind the moiety on which it was imposed. There is nothing in the principle that permits or causes the charge to extend to the whole of the property in the transferee’s hands. Equally, there is nothing implicit in the principle that excludes the general law as to priorities where the charge that survives coexists over the land with another equitable interest, in circumstances where the principles as to the priority of interests could ordinarily be invoked. In the present circumstances, after the principle in Lord Abergavenny’s Case is applied, there are two competing interests in respect of the husband’s moiety in the house ordered to be transferred to the wife. There is no reason why the priority as between those two interests should not be determined in the ordinary way. No authority to the contrary of this proposition was cited to me.

2 Whether the plaintiff’s interest or the wife’s interest is prior in time

38 The fallacy of the argument on behalf of the wife is that a security interest cannot exist unless there is some present obligation secured by it. Whether or not an equitable mortgage has been created is stated as follows in Tyler, Young and Croft, Fisher and Lightwood’s Law of Mortgage (2nd Aust ed, 2005):

“1.33 Equitable mortgages of the property of legal owners are created by some instrument or Act which is insufficient to confer a legal estate or title, but which, being founded on valuable consideration, shows the intention of the parties to create a present security (see Williams v Burlington Investments Ltd (1977) 121 Sol Jo 424 (HL)), or in other words, evidences a contract to do so.”

39 This proposition as stated in earlier English editions of Fisher and Lightwood was approved as correct by Buckley LJ in the Court of Appeal in Swiss Bank Corporation v Lloyd’s Bank Ltd [1982] AC 584 at 595 and by Young J (as his Honour then was) in this Court in Westfield Holdings Ltd v Australian Capital Television Pty Ltd (1992) 32 NSWLR 194 at 200.

40 In this case by clause 5(a) of the guarantee, the husband “hereby mortgage[s] in our favour” all his right, title and interest in any land he owned. The intention is clearly the immediate creation of a mortgage interest. There is no more reason that that mortgage interest should not be taken to have come into existence upon the execution of the document than there is for saying that the charge created by a registered real property mortgage should be taken not to exist because nothing is presently owing under it.

41 However, distinction has been made between the existence and the operation of a charge: see Sibbles v Highfern Pty Ltd (1987) 164 CLR 214 especially at 222 - 223. Although the charge existed as between the plaintiff and the husband from the time of execution of the guarantee, it may be that it would not take priority over another equitable interest in the husband’s land that was created prior to the charge becoming operative. However, the charge clearly became operative no later than 12 April 2006, when the advance of $96,616 was made by the plaintiff to the company. From that date the guarantee operated to secure the payment of that debt to the plaintiff by the husband.

42 In my opinion the mortgage interest was created by the husband upon execution of the guarantee on 22 March 2006 and was operative no later than 12 April 2006. It is therefore prior in time to the wife’s interest created under the orders of the Family Court on 6 October 2006.

3 Whether the plaintiff’s interest is to be postponed to the wife’s interest in the circumstances of this case

43 Classic statements of the law in this regard were made in Butler. Griffith CJ said at 91 - 92:

“In the case of a contest between two equitable claimants the first in time, all other things being equal, is entitled to priority. But all other things must be equal, and the claimant who is first in time may lose his priority by any act or omission which had or might have had the effect of inducing a claimant later in time to act to his prejudice.”

And Isaacs J said at 97:

“In my opinion, in the absence of some clear explanation justifying or excusing this failure it is one which, at all events in so simple a case as an equitable mortgage, postpones the mortgagee to the person bona fide misled by the result of a search as in the present case. The protection given by the Act to an unregistered and, perhaps, unregisterable transaction is coupled with the price of diligence in guarding others against loss arising through ignorance of the transaction.”

Similarly Kitto J said in Latec at 276:

“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, if the facts relied upon as having given rise to the interests be established, is to determine where the better equity lies. If the merits are equal, priority in time of creation is considered to give the better equity. This is the true meaning of the maxim qui prior est tempore potior est jure : Rice v Rice (1853) 2 Drew 73, at p 78 [61 ER 646, at p 648]. But where the merits are unequal, as for instance where conduct on the part of the owner of the earlier interest has led the other to acquire his interest on the supposition that the earlier did not exist, the maxim may be displaced and priority accorded to the later interest.”

44 There has been recent judicial comment on the statement of Barwick CJ in J & H Just (Holdings) that the purpose of a caveat is not to give notice to the whole world. In Black v Garnock (2007) 81 ALJR 1338; 237 ALR 1 Gleeson CJ at [7] referred to the statement with apparent approval, but Callinan J at [76] – [80] expressly disapproved Barwick CJ’s view. The other three judges did not advert to J & H Just (Holdings). Although in my view there is considerable force in what Callinan J said, Barwick CJ’s statement, which has long been accepted, should still be regarded as the law. However, it does not derogate from the principles laid down in Butler and Latec. As stated by Mason and Deane JJ in Heid at 341 - 342, the correct principle is that preference should be given to what is the better equity on an examination of the relevant circumstances. The failure to lodge a caveat in respect of the prior interest is just one of the circumstances to be considered in determining whether it is inequitable that the prior equitable owner retain that priority. Judges of this Court have subsequently held that, where there was a failure to caveat, evidence of search on behalf of the person with the subsequent interest and reliance by that person in acquiring his or her interest on the result of the search, those facts in the context of the overall circumstances of a case may lead to the postponement of the prior interest to the subsequent interest: see the decisions of McLelland J in Person-to-Person and of Bryson J in Double Bay Newspapers.

45 I also reach that conclusion in this case. The wife had to decide what property to accept in her property settlement with the husband and what property to leave to him. She was prepared to accept the transfer of his half share in the house and the transfer of the warehouse against onerous obligations to raise finance to pay out his share of the mortgages on those properties. She was prepared to leave him the company and the Queensland units, in which there was some equity. The company and those units were declared by the orders to be exclusively his. Furthermore, upon the suggestion that he was intending to leave the country before the transfers to her of the house and the warehouse were effected, she was prepared, against delivery to her of executed transfers, to undertake not to lodge caveats against the remaining Queensland units, which he was in the course of selling. In proceeding in this fashion, it is in my view established that (as was likely) she relied upon the absence of other encumbrances on his interests to be transferred to her. Those interests were acquired by her in the context of the settlement of the husband’s and the wife’s property affairs in the faith of that lack of encumbrances. The plaintiff had had the benefit of its mortgage of those interests for many months without lodging caveats, which it did only after default by the company. I do not regard it as significant, as alleged on behalf of the plaintiff, that by order 9 the wife indemnified the husband against debts. She had no idea of the contingent debt to the plaintiff undertaken by him shortly after the separation between them. In these circumstances, I reach the conclusion that the plaintiff’s interest under its equitable mortgage should be postponed to the wife’s interest under the transfers of the properties and that she should take the husband’s moiety of the house and the husband’s interest in the warehouse free of the plaintiff’s charge.

4 Whether the plaintiff’s application to have the orders varied should be dealt with in this Court or be transferred to the Family Court

46 This is a case in which the comparatively small and perhaps shrinking equity in the house and the warehouse is the subject of the issues so far tried and determined in this Court and of the costs incurred. This is a case in which in my view, as appears below, the considerations determinative of the application under the FLA are similar to those which have been agitated in relation to the priority issue already determined. The parties have not pressed me to transfer the matter to the Family Court, either before or after the determination of the issues already determined, but have drawn to my attention the possibility of that course. In all the circumstances of this case and particularly bearing in mind the injunction upon me to ensure the just, quick and cheap disposal of the proceedings and the resolution of the issues between the parties in such a way that the cost is proportionate to the importance and complexity of the subject matter (Civil Procedure Act 2005 ss 56(1) and 60), I propose to determine this application in this Court.

5 Whether the orders should be varied under the Family Law Act so as to reverse the general law position as to priorities

47 Section 79A of the FLA relevantly provides as follows:

“79A Setting aside of orders altering property interests

(1) Where, on application by a person affected by an order made by a court under section 79 in property settlement proceedings, the court is satisfied that:

(a) there has been a miscarriage of justice by reason of fraud, duress, suppression of evidence (including failure to disclose relevant information), the giving of false evidence or any other circumstance…


the court may, in its discretion, vary the order or set the order aside and, if it considers appropriate, make another order under section 79 in substitution for the order so set aside.

…….

(2) In the exercise of its powers under subsection (1), (1A) or (1C), a court shall have regard to the interests of, and shall make any order proper for the protection of, a bona fide purchaser or other person interested.

…….

(4) For the purposes of this section, a creditor of a party to the proceedings in which the order under section 79 was made is taken to be a person whose interests are affected by the order if the creditor may not be able to recover his or her debt because the order has been made.”

48 It is clear from subs (4) that the plaintiff as a creditor of the husband is a person “affected by” the orders and therefore entitled to apply under s 79A. Furthermore it is clear that there was a suppression of evidence or a failure to disclose relevant evidence when the application for the orders was dealt with by the Family Court, since the husband had omitted to reveal that he had given the plaintiff security over the principal properties of the husband and the wife. By reason of this omission on his part, any possibility of the plaintiff being informed of the s 79 proceedings affecting the house and the warehouse was lost. There is no reason to think that the wife, had she known of the plaintiff’s interest, would not have informed the plaintiff of the application, had she chosen to continue with it. There has in my opinion been a miscarriage of justice by reason of the husband’s omission.

49 That does not mean that the application must be allowed. What it does is enliven the exercise of discretion which must be made if the preconditions of s 79A(1)(a) are met. The law is that an applicant is entitled to apply under 79A to have an original order set aside or varied and bears the onus of satisfying the court that there has been a miscarriage of justice and also satisfying the court that exercise of the discretion in the applicant’s favour is appropriate: see the decisions of the Full Court of the Family Court in In the Marriage of Prowse (1994) 118 FLR 135 and Official Trustee in Bankruptcy v Donovan [No 2] (1996) 132 FLR 407. In Prowse the Court (Baker, Lindenmeyer and Rowlands JJ) said at 146:

“However, we do not think it would be correct to say that there is even a prima facie entitlement to have the consent orders set aside once a miscarriage of justice has been established, because to do so would be to limit the discretion of the Court and to place an onus upon the respondent to show circumstances why the order should not be made. The better view, in our opinion, is that an applicant for an order under s 79A(1) bears the onus of satisfying the Court that the original orders should be set aside or varied, and that includes the onus of satisfying the Court not just that there has been a ‘miscarriage of justice’ but also that the appropriate exercise of the discretion is to so order.”

Their Honours further said at 152:

“All of the circumstances surrounding the making of the consent orders, and the circumstances of the parties since that time need to be considered in order to determine whether the justice of the case calls for an exercise of discretion in favour of or against the granting of an extension of time.”

For a recent example of the exercise of the discretion under these principles see the decision in the Family Court of Young J in Official Trustee in Bankruptcy v B .

50 Although, as I have said, the miscarriage of justice is established, in my view the plaintiff has not established that the Court should exercise its discretion to set aside or vary the orders. As I have also already said, very much the same considerations apply to the exercise of this discretion as were taken into account in determining the priorities as between the plaintiff’s and the wife’s equitable interests. Had the plaintiff lodged caveats in a timely fashion the wife would have known of its interest and, on the probabilities, the s 79 application would not have proceeded in the absence of the plaintiff as an interested party. The plaintiff’s own omission led to the miscarriage of justice of which it complains. It would not be just to the wife to disturb the orders in her favour that have stood for well over a year. While that ground is of itself sufficient to conclude the exercise of discretion in the plaintiff’s favour, the heavy financial burdens borne by the wife would, if necessary, add to the case against setting aside or varying the order. The plaintiff’s application under s 79A of the FLA is refused.

51 The parties are agreed that the relief sought by the plaintiff in respect of the husband’s small share in the Merrylands property should be granted. Short minutes should be brought in incorporating that order and giving effect to my decisions in this case. Any contested question of costs can be raised at that time.

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