Cranston and Co Pty Ltd (in Liquidation) v Cranston No. Scciv-01-1740

CRANSTON AND CO PTY LTD (IN LIQUIDATION) V CRANSTON
[2002] SASC 31

JUDGE BURLEY. By application dated 17 December 2001 the plaintiff seeks an order extending the time for removal of Caveat No 9033545 (the caveat) which has been registered in respect of the land in Certificate of Title Register Book Volume 5181 Folio 998 (the property).
An interim order for the extension of the caveat was made on 18 December 2001. The defendant contends that the caveat should not be extended. The plaintiff’s application for an interlocutory order came on for hearing on 25 January 2002 when Mr Livesey appeared for the plaintiff and Mr Gillam appeared for the defendant.
At the hearing the following affidavits were admitted into evidence:
·Peter Ivan Macks, sworn on 17 December 2001 and the exhibits thereto;
·The affidavit of the defendant’s solicitor sworn on 25 January 2002 and the exhibits thereto;
·The affidavit of Stephen Bradley Williams, the defendant’s solicitor, sworn on 25 January 2002 and the exhibits thereto.
With the consent of the defendant, the plaintiff tendered a copy of a letter dated 24 January 2002 from Westpac to the plaintiff’s solicitors which was marked as Exhibit P1.
Mr Macks is the liquidator of the plaintiff company. The defendant is the owner of the land in respect of which the caveat was lodged. Mr Macks’ affidavit discloses that the defendant was a director of the company from April 1957 to November 1998. The defendant’s husband was also a director of the company until his death in October 1998.
As liquidator of the company, Mr Macks ascertained that certain payments were made by the company to the defendant which were applied to the instalments due to the Westpac Bank in respect of a mortgage held by that Bank over the property. As a result of Mr Macks’ investigations he caused the caveat, the subject of these proceedings, to be lodged in January 2001. The relevant part of the caveat reads:
“THE CAVEATOR CLAIMING an interest in the fee simple described above in some at present indefinable share or shares by virtue of the caveator contributing to mortgage repayments of principal, interest and bank fees in regard to Mortgage Number 8662942 with the assent of the caveatee from 30 September 1999 to 30 October 2000 inclusive for which accounting records and receipts are held.
FORBIDS THE REGISTRATION OF ANY DEALING WITH THE ESTATE OR INTEREST OF THE ABOVENAMED CAVEATEE IN THE SAID LAND *UNLESS SUCH DEALING IS MADE SUBJECT TO THE CLAIM OF THE CAVEATOR.”
Paragraphs 10 and 11 of Mr Macks’ affidavit are as follows:
“10.My investigations as to the interest of the plaintiff has lead to me ascertaining the following:
10.1 The defendant is noted as a creditor of the plaintiff in the plaintiff’s financial records. Now shown to me and exhibited hereto and marked with the letters ‘PIM4’ is a true copy of an extract from the financial records of the plaintiff.
10.2 There is no documentary evidence as to the basis on which she may have become a creditor.
10.3 Payments are detailed in the general ledger records being made by the plaintiff to the defendant without any apparent reason for those payments. Now shown to me and exhibited hereto and marked with the letters ‘PIM5’ is a true copy of the ledger extracts.
10.4 A loan agreement was entered into between the plaintiff and the defendant in September 1999 acknowledging a loan by the defendant to the plaintiff and providing for repayments of a sum of money to the defendant by way of fortnightly payments. Now shown to me and exhibited hereto and marked with the letters ‘PIM6’ is a true copy of the loan agreement.
10.5 I can find no documentary evidence in support of the assertion that the defendant lent money to the plaintiff.
10.6 The general ledger records indicate that the defendant was being paid a sum of money prior to the loan agreement being executed.
10.7 The defendant was paid in excess of the alleged loan amount by the plaintiff. The ledger records are incomplete, so I cannot ascertain the precise sum of money paid by the plaintiff to the defendant.
10.8 A director of the plaintiff at the time of my appointment, Ms Mary O’Connor, has confirmed to me that payments had been made by the plaintiff to the defendant by way of mortgage repayments commencing shortly after the death of Mr Cranston.
11.At the time of the lodgement of the caveat:
11.1 I had insufficient records to enable me to ascertain the precise sum paid to the defendant by the plaintiff.
11.2 I did not have any idea as to the value of the property.
11.3 I did not know what portion of the mortgage was paid by the company.
11.4 I could not perform any kind of reconciliation to ascertain the proportion of the interest the plaintiff had acquired in the property.
11.5 I could not, accordingly, quantify the plaintiff’s interest in the property.”
The amount of the alleged indebtedness of the company to the defendant disclosed in Exhibit PIM4 is $66,554.84.
Between January 2001 and November 2001 there were negotiations between the parties relating to the plaintiff’s claim. On 29 November 2001 the defendant’s solicitor advised the plaintiff’s solicitors that the property was to be sold by auction on 7 December 2001. Mr Macks subsequently ascertained that the property was sold on that date and that the contract for sale provides for settlement on 4 March 2002. Mr Macks is prepared to allow settlement to proceed provided that appropriate orders are made preserving the proceeds of sale to enable the plaintiff’s alleged interest in the property to be quantified.
The plaintiff by its counsel has given the usual undertaking as to damages.
One of the matters that needs to be considered on this application is the link between the caveat and the relief that has been sought by the plaintiff in these proceedings. If the plaintiff is to succeed it must be established, at least on an arguable basis, that the interest claimed in the caveat gives rise to the relief sought in the summons which commenced these proceedings. In that summons the plaintiff has sought the following relief:
“1.A declaration that the plaintiff has the interest claimed in registered Caveat No 9033545 (‘Caveat’) in respect of the property comprised in Certificate of Title Register Book Volume 5181 Folio 998 (‘Property’).
2.An order extending the time for the removal of the Caveat until final judgment in these proceedings.
3.An order that there be an accounting of the payments made by the plaintiff to the defendant towards a mortgage over the Property given by the defendant to the Westpac Banking Corporation.
4.An order that, upon the settlement of the sale of the Property, the plaintiff is entitled to, and the defendant is to pay to the plaintiff, a portion of the proceeds of sale representing the value of the plaintiff’s interest in the property.”
The defendant relies upon Mr Gillam’s affidavit. Normally the affidavit of the defendant would be required. The plaintiff took no point about the receipt into evidence of Mr Gillam’s affidavit because Mr Gillam gave me an assurance that the defendant’s affidavit, deposing as to the matters referred to by Mr Gillam in his affidavit, would be filed and served at the earliest opportunity.
The relevant parts of Mr Gillam’s affidavit are as follows:
“3.I have been informed by the Defendant and verily believe to be true, the following:-
3.1    In 1969 she lent to JW Cranston & Co Ltd (‘the Company’) the sum of $8,000.00. That money was a distribution to her as a beneficiary of her mother’s estate and derived from the sale of her house. The Company has not repaid any of that sum.
3.2    She is 74 years old, and for the past 8 years or so she has suffered from chronic kidney failure requiring dialysis 3 times per week. This is very debilitating and causes her extreme lethargy and inability to concentrate. She has, during that period, acted entirely on the basis of ‘advice’ from others, in particular, her late husband, her daughter Mary O’Connor, her son David Cranston, and her bank manager, Graham King.
3.3    Up until 1995 she was the Company Secretary. Throughout that period she was paid a salary, though she does not recall ever actually receiving any of it. Rather, her entitlements were credited to her loan account.
3.4    She has had very little involvement with the affairs of the Company.
3.5    In 1995 she ceased to act as secretary of the Company. Her solicitor, Charles Gillam, has informed her that Australian Taxation Office stationery reveals that she was paid a $100,000.00 Eligible Termination Payment with respect to her employment by the company, or cessation of that employment at or around that time. She does not recall that money ever being paid to her. She does not know what has become of it.
3.6    On the 10th day of October 1998 her husband died. Her son, David Cranston, acted as the administrator of her husband’s estate.
3.7    Shortly after her husband’s death, her daughter Mary O’Connor (hereinafter referred to as ‘Ms O’Connor’) and her children moved into the Defendant’s home at 2 Finnis Terrace Burnside. Ms O’Connor later acquired most of the shares in the Company, and acted as its general manager. Ms O’Connor paid her $150.00 per week as a contribution towards food and board and the provision of providing child care or baby sitting for her children.
3.8    Some time during the following year, at a time which she does not presently recall, Ms O’Connor informed her that the Company owed her a sum of approximately $114,000.00, and that her late husband owed the company the sum of approximately $70,000.00. Ms O’Connor said to the Defendant words to the effect that she should accept responsibility for her late husband’s debt and set it off against the amount she was owed by the Company. Ms O’Connor arranged for a loan agreement to be drafted and which at her request the Defendant signed. That loan agreement provided for repayments of the Defendant’s loan account, less the amount of her late husband’s loan account, in the amount of $700.00 per fortnight. The Defendant requested that those payments be made directly into her mortgage account with Westpac Banking Corporation. A total of $10,500.00 was repaid to her by the Company in this manner during the period referred to in the plaintiff’s caveat.
3.9    The Defendant has further been informed by her solicitor that Australian Taxation Office stationery in the possession of the liquidator indicates that she was also an employee of the Company in 1996. The Defendant has some recollection of having received rebate cheques from the Australian Taxation Office, but is unable to presently recall whether any of those cheques were received by her after 1995. She does not recall receiving any salary or wages from the company since 1995 or, as referred to above, before 1995.
3.10 On the 7th day of December 2001 the defendant sold her property at 2 Finnis Terrace, Burnside in the amount of $485,000.
3.11 On the 17th day of December 2001, the defendant signed a contract for the purchase of vacant land at 24A Roslind Street, Kensington Gardens in the amount of $160,000.00, and a building works contract for the construction of residential premises on that land in the amount of $192,000.00.
3.12 If the said caveat remains in place she will suffer embarrassment, loss and damage as a result of being unable to perform on the said purchase and building contract.”
In answer to Mr Macks’ contention that the records of the company do not disclose an indebtedness between the company and the defendant, the defendant contends that she lent the sum of $8,000.00 to the company, that a salary was payable to her up until 1995 in her capacity as company secretary, and that the sum of $100,000.00 was payable to her as an eligible termination payment. She does not recall having received the salary allegedly payable to her or the eligible termination payment.
Mr Gillam has referred to the loan agreement which provided for fortnightly payments of $700.00 and to the fact that the defendant requested those payments be paid directly into her mortgage account with Westpac. It is alleged that a total of $10,500.00 was repaid to her by the company in this manner.
Reference is also made to the contract for the sale of the property on 7 December 2001. The purchase price is $485,000.00 and Exhibit P1 reveals that the amount owing under the mortgage to Westpac is approximately $150,000.00. Of that sum, approximately $58,000.00 represents the amount outstanding to the Bank by the defendant and the estate of her late husband and just over $89,000.00 is the amount owing by the company in respect of a loan which was guaranteed by the defendant, the guarantee being secured by a second mortgage.
It is not clear whether the payments of $700.00 per fortnight, allegedly made under the loan agreement, were made in respect of both of the mortgages or solely in relation to the first mortgage or solely in relation to the second mortgage. If they were made solely in relation to the second mortgage, the balance of which is now approximately $89,000.00, it does not seem to me that it could be argued that any equitable interest arises in favour of the plaintiff because the second mortgage appears to be in relation to an indebtedness of the company to the Bank. However, such evidence as there is, tends to support the contention that the fortnightly payments of $700.00 were, at least in part, applied to a reduction of the loan secured by mortgage to the late Mr Cranston and the defendant.
The position between the parties seems to be that the liquidator is of the view that the company records do not disclose an indebtedness between the company and the defendant which would justify the payments made by the company to the defendant which, on the plaintiff’s case total almost $90,000.00, whereas the defendant contends that the company owed to her nearly $120,000.00 and the fortnightly payments of $700.00 made to her total far less than that sum. Neither party is in a position to provide clear proof of their respective assertions. It seems to me abundantly clear that there should be an accounting between the parties in respect of whatever indebtedness existed at the relevant time between the company and the defendant and the payments made by the company to the defendant. It is therefore likely, in my view, that the Court would order the appropriate inquiry and account to be undertaken between the parties. That by itself is not sufficient to justify the extension of the caveat. The mere right to an account does not of itself create an equitable interest in the property in favour of the plaintiff.
It is convenient at this stage to refer to the principles of law applicable to an application for an extension of a caveat. I had occasion to review the various authorities in Paringawood Nominees Pty Ltd and Others v Baulderstone and Another (1999) 204 LSJS 408 and I need not repeat what I said there. In essence, the plaintiff must establish on this application that there is a serious question to be tried, that irreparable harm would be caused to the plaintiff if the caveat were not extended for which damages would not be an adequate remedy, and that the balance of convenience requires the caveat to be extended.
By paragraph 1 of the summons, the plaintiff seeks a declaration that the plaintiff has the interest claimed in the caveat. In order to succeed the plaintiff must establish on this application that the serious question to be tried is whether or not the plaintiff has the interest in the property referred to in the caveat. The plaintiff claims to have “an interest in the fee simple” of the subject property by virtue of contributions to mortgage repayments.
Mr Livesey argued that the interest in the fee simple arose because the mortgage payments made by the company amounted to a contribution to the purchase price. I accept that if a contribution is made to the purchase price of a property by a person who does not subsequently become registered as the proprietor or one of the proprietors of the property, a resulting trust arises whereby the person making the contribution holds an interest in equity in the fee simple to the extent of the contribution: Calverley v Green (1984) 155 CLR 242. However, in my view, payment of mortgage payments does not constitute a contribution to the purchase price. At best, the proceeds of the loan constitute the purchase price or part of it and that loan is in turn secured by a mortgage. Repayment of the loan does not constitute a contribution to the purchase price because the obligation to pay the purchase price under the contract for the purchase of the property has already been discharged by the application of the proceeds of the loan for that purpose. Repayment of the mortgage only discharges pro tanto liabilities which arise under the mortgage, including the payment of interest, which has nothing to do with the purchase price. For those reasons I do not consider that the plaintiff has established a triable issue based on the contention that a repayment of monies due under a mortgage constitutes a contribution to the purchase price.
Mr Livesey further submitted that the use of company funds in the circumstances contended for by the plaintiff gives rise to a constructive trust in favour of the company because it would be unconscionable to deny the company’s interest. Reliance was placed on Muschinski v Dodds (1985) 160 CLR 583 and Baumgartner v Baumgartner (1987) 164 CLR 137. In my view, those cases may be distinguished from the case at Bar because payments for the improvement of a property are to be distinguished from payments which discharge a liability under a mortgage. The reasoning applied by me in rejecting the first contention of Mr Livesey applies with equal force to this second contention. If the plaintiff’s contention were correct, it would mean that the payment by the company in reduction of the indebtedness under the loan agreement which has been secured by the mortgage would somehow create an interest in equity in the fee simple in the property. No authority has been cited to support such a proposition. In principle I do not think it is correct. In my view, the reduction of the liability to repay the loan which has been secured by the mortgage by payment from company funds cannot be said to give rise to an interest in the fee simple in the property.
I mention that it was argued by Mr Livesey that if an interest in the fee simple did not arise, then at least an equitable charge would arise to secure a repayment of the monies advanced by the company in reduction of the mortgage debt. I do not think it is open to advance such an argument to support the interest claimed in the caveat. There is no mention of an equitable charge in the caveat. It is not open to a plaintiff to argue that, if one type of equitable interest arises, it supports a caveat which makes a claim in respect of an entirely different equitable interest.
Mr Livesey next contended that under Section 232(6) of the Corporations Law (which is the equivalent of Section 182 of the Corporations Act), a director (the defendant) cannot obtain a personal benefit with company funds. I accept that as a correct proposition of law but, in my view, it does not assist the plaintiff in establishing that there is a serious question to be tried in relation to whether or not the equitable interest referred to in the caveat has arisen.
The plaintiff also has relied upon equitable notions of tracing. It was submitted that when the company advanced funds to the defendant, the fortnightly payments of $700.00, if it is assumed that there was no real indebtedness between the company and the defendant, the defendant became the constructive trustee for the company in relation to those payments. As such, the payments could be traced from the hands of the constructive trustee into any property acquired by such monies. To state the argument in that form is to disclose its weakness. There is no property acquired by the trustee by the application of the payments to reduce the mortgage debt. Funds were used to reduce, pro tanto, the liability in respect of the loan secured by the mortgage. In those circumstances, there can be no property into which the fortnightly payments may be traced. Reliance was placed on the decision of the Full Court in Addstead Pty Ltd (In liq) and Others v Liddan Pty Ltd and Others (1997) 70 SASR 21. That case may be distinguished because the funds advanced were used to acquire, among other things, real property into which the relevant funds could be traced.

For the above reasons, I do not consider that the plaintiff has established that there is a serious question to be tried in relation to the contention that the plaintiff has an equitable interest in the fee simple which, if established, would give rise to the declaration sought in paragraph 1 of the summons. There is no other serious question to be tried which relates to whether or not the caveat ought to be extended. It is therefore unnecessary for me to consider the other elements of an application for extension of caveat. The plaintiff’s application will be dismissed.

[2002] SASC 31

6 February 2002