Cussen and of Beechworth Land Estates Pty Ltd v Douglas Estate Holdings Pty Ltd

[2019] NSWSC 1129

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

In the matter of Beechworth Land Estates Pty Ltd (admins apptd) and Griffith Estates Pty Ltd (admins apptd);  ; Cussen and of Beechworth Land Estates Pty Ltd v Douglas Estate Holdings Pty Ltd and Others [2019] NSWSC 1129

Hearing dates:

4, 5, 11 and 12 December 2018

Date of orders:

30 August 2019

Decision date:

30 August 2019

Jurisdiction:

Equity - Corporations List

Before:

Parker J

Decision:

See [104].

Catchwords:

CORPORATIONS — Voluntary administration — Administrator — Right to indemnity – whether Administrators’ remuneration and disbursements takes priority over secured and unsecured creditors – Corporations Act 2001 (Cth), ss 443D, 443E(3)(c) – whether Administrators otherwise entitled to equitable lien – no determination sought on quantum.

 

EQUITY — Equitable charges and liens — Lender’s lien – Whether deposit of certificates of title in context of debtor-creditor relationship gives rise to equitable security over mortgagor’s rights – priority between mortgagor’s equitable security interest and earlier grant of security over funds advanced – postponing conduct – later equitable security prevails over earlier legal charge.

  CORPORATIONS — Debentures, charges and mortgages — defectively drafted and incomplete loan documentation – no distinct security interest created where deed drafted “in aid” of separate mortgage instrument.

Legislation Cited:

Corporations Act 2001 (NSW), ss 442C, 443D, 443E
Land Transfer Act 1958 (VIC)
Personal Property Securities Act 2009

Cases Cited:

Bank of New South Wales v O’Connor (1889) 14 App Cas 273
Barry v Heider (1914) 19 CLR 197
Coad v Wellness Pursuit Pty Ltd (In Liq) (2009) 40 WAR 53; (2009) 226 FLR 91; (2009) 71 ACSR 250; [2009] WASCA 68
Hamilton v Donovan Oates Hannaford Mortgage Corp Ltd (2007) 207 FLR 163; (2007) 61 ACSR 82; (2007) 25 ACLC 95; [2007] NSWSC 10
Re Universal Distributing Co Ltd (1933) 48 CLR 171
Theodore v Mitstford (2005) 221 CLR 612; [2005] HCA 45

Texts Cited:

J D Heydon, M J Leeming and P J Turner Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (5th ed, 2015)

Category:

Principal judgment

Parties:

2014/229138
Neil Robert Cussen and Ezio Marco Senatore in their capacity as former Joint and Several Administrators of Beechworth Land Estates Pty Ltd (in Liquidation) (ACN 160 808 631) (Respondent)

 

B.A.D. Nominees (NSW) Pty Ltd (Applicant/Respondent)

 

Maitland Finance and Acquisition Pty Ltd (Applicant/Respondent)

 

Overdean Developments Pty Ltd (Applicant/Respondent)

 

Douglas Estate Holdings Pty Ltd (Applicant/Respondent)

 

2018/99714
Neil Robert Cussen in his capacity as liquidator of Beechworth Land Estates Pty Ltd (In Liquidation) (ACN 160 808 631) (First Plaintiff)

 

Beechworth Land Estates Pty Ltd (In Liquidation) (ACN 160 808 631) (Second Plaintiff)

 

Neil Robert Cussen and Ezio Marco Senatore in their capacity as former Joint and Several Administrators of Beechworth Land Estates Pty Ltd (in Liquidation) (ACN 160 808 631)
(Third Plaintiff)

 

Douglas Estate Holdings Pty Ltd (First Defendant)

 

B.A.D. Nominees (NSW) Pty Ltd (Second Defendant)

 

Maitland Finance and Acquisition Pty Ltd (Third Defendant)

  Overdean Developments Pty Ltd (Fourth Defendant)

Representation:

2014/229138

 

Counsel
B Katekar/M Bersten (for Neil Robert Cussen and Ezio Marco Senatore in their capacity as former Joint and Several Administrators of Beechworth Land Estates Pty Ltd (in Liquidation) (ACN 160 808 631) and Beechworth Land Estates Pty Ltd

 

D Allen (for Maitland Finance and Acquisition Pty Ltd and Overdean Developments Pty Ltd)

 

Solicitors
Russells Law (Neil Robert Cussen in his capacity as liquidator of Beechworth Land Estates Pty Ltd) and Beechworth Land Estates Pty Ltd (in Liquidation) (ACN 160 808 631)

 

Kent Attorneys (for Douglas Estate Holdings Pty Ltd)

 

Leonardus Smits Lawyers (for B.A.D. Nominees (NSW) Pty Ltd)

 

Kekatos Lawyers (for Maitland Finance and Acquisition Pty Ltd and Overdean Developments Pty Ltd)

   

2018/99714

 

Counsel
B Katekar/M Bersten (for Neil Robert Cussen and Ezio Marco Senatore in their capacity as former Joint and Several Administrators of Beechworth Land Estates Pty Ltd (in Liquidation) (ACN 160 808 631); for Neil Robert Cussen in his capacity as liquidator of Beechworth Land Estates Pty Ltd; and for Beechworth Land Estates Pty Ltd (in Liquidation) (ACN 160 808 631)

 

D Allen (for Maitland Finance and Acquisition Pty Ltd and Overdean Developments Pty Ltd)

 

Solicitors
Russells Law (for Neil Robert Cussen and Ezio Marco Senatore in their capacity as former Joint and Several Administrators of Beechworth Land Estates Pty Ltd (in Liquidation) (ACN 160 808 631); for Neil Robert Cussen in his capacity as liquidator of Beechworth Land Estates Pty Ltd (in Liquidation) (ACN 160 808 631); and for Beechworth Land Estates Pty Ltd (in Liquidation) (ACN 160 808 631)

 

Kent Attorneys (for Douglas Estate Holdings Pty Ltd)

 

Leonardus Smits Lawyers (for B.A.D. Nominees (NSW) Pty Ltd)

  Kekatos Lawyers (for Maitland Finance and Acquisition Pty Ltd and Overdean Developments Pty Ltd)

File Number(s):

2014/229138; 2018/99714

Publication restriction:

Nil

Judgment

1. The proceedings before the Court arise out of the collapse of a property investment company called Beechworth Land Estates Pty Ltd (“BLE”). They concern disputes about priority between BLE’s creditors.

2. BLE was incorporated in October 2012 as a special purpose vehicle for acquiring control of a property development in Beechworth, Victoria, from the financier, Suncorp Metway Limited (“Suncorp”). The original developer was a company called Redhill Estate Developments Pty Ltd (“Redhill”). Redhill had mortgaged the land, which consisted of 39 lots, to Suncorp as security for a loan of $1.55 million. Redhill later defaulted. Rather than exercise its power of sale under the mortgage, Suncorp assigned the debt owed to it by Redhill, and the benefit of the mortgage, to BLE.

3. BLE funded the purchase by borrowing up to $2 million from BAD Nominees Pty Ltd (“BAD” or “Nominees”). The loan was recorded in a Deed of Loan and secured under a general security agreement dated 1 February 2013 (“the February 2013 security”).

4. BLE has been insolvent at least since July 2014. In that month it went into voluntary administration. Neil Robert Cussen and Ezio Marco Senatore, of the accounting firm Deloitte (“the Administrators”), were appointed as administrators. The administration was very protracted. BLE remained in administration until February 2018, when Mr Cussen (alone) was appointed as liquidator.

5. At the time of the Administrators’ appointment 28 lots remained unsold. The Administrators realised these lots. The total realised from external sources was about $2.9 million. In addition, nine lots were transferred to BAD at an agreed value of $1 million which was set off against the amount owed to BAD under the February 2013 security.

6. The $2.9 million (plus some other relevantly small amounts from the sale of a motor car and interest earned) is insufficient to meet the costs and expenses of the administration, let alone the further costs of the liquidation and the claims of unsecured creditors. Already, more than $2.7 million has been paid out, made up of legal fees ($1.48 million), other disbursements, including agent commissions, council rates and land tax ($410,000) and remuneration for the Administrators ($820,000).

7. There are two main areas of dispute. The first arises because there is still a debt owing under the February 2013 security. It is alleged that the debt takes priority over the Administrators’ remuneration and disbursements. If this is correct the Administrators may need to repay monies they have already taken out of the administration for remuneration and disbursements. The amount claimed is $2 million.

8. This dispute is complicated by the fact that there is a further dispute about who is now entitled to the benefit of the February 2013 security. The sole director of BAD is, and has since its incorporation been, Brian Dean. BAD was originally incorporated to act as the trustee for his superannuation fund, which is known as the Dean Superfund. BAD was acting as the trustee of the fund when it made the loan to BLE which was the subject of the February 2013 security.

9. But Mr Dean, although he remains the sole director, has now lost control of BAD. This happened because, frustrated with the lack of progress in the administration, Mr Dean in May 2016 entered into an agreement with a company controlled by Peter Shah Mahommed and Leonardus Gerardus Smits, for them to manage BAD’s affairs as “consultants”. For the purposes of this agreement, Mr Dean also executed on behalf of BAD a power of attorney in favour of Mr Mahommed and Mr Smits. Pursuant to the power of attorney Mr Smits (who is a solicitor) acts for BAD in these proceedings. Mr Dean challenged the power of attorney and the retainer but they were upheld by Brereton J (as his Honour then was) in February 2018: In the matter of Beechworth Land Estates Pty Limited [2018] NSWSC 1630.

10. On 10 August 2016 Mr Dean, purporting to act on behalf of BAD, executed an assignment of the BLE debt and the benefit of the February 2013 security to Maitland Finance and Acquisition Pty Ltd. The validity of this assignment was disputed by Mr Mahommed and Mr Smits.

11. In September 2018 Mr Dean executed an instrument purporting to remove BAD as trustee of the Dean Superfund and appoint instead Overdean Developments Pty Ltd, another company of Mr Dean’s. The validity of that appointment was upheld by Black J in November 2018: In the matter of Beechworth Land Estates Pty Ltd and Griffith Estates Pty Ltd [2018] NSWSC 1703. But there continues to be a dispute between BAD (under the control of Mr Mahommed and Mr Smits) and the Dean interests about who is entitled to the benefit of the February 2013 security.

12. Although there is a dispute among themselves, BAD and Maitland (and Overdean) all have the same interest in pursuing the claim that the remaining debt under the February 2013 security has priority over the Administrators’ fees and expenses. For the purposes of dealing with this dispute, I will refer to BAD, Maitland and Overdean as the “secured creditors”.

13. The other area of dispute in these proceedings concerns a second security interest granted, or allegedly granted, by BLE in March 2013. BLE borrowed $198,000 from Douglas Estate Holdings Pty Ltd (“Douglas”). At the time, the certificates of title for two of the lots, numbers 56 and 70, were deposited with Douglas. BLE later repaid about half Douglas’ debt and Douglas surrendered the certificate of title for lot 56. But Douglas continued to retain the certificate of title for lot 70 and when the Administrators were appointed, Douglas claimed that it had security for its loan over lot 70.

14. In September 2015, in order to allow for the realisation of lot 70, consent orders were made by the Court for Douglas to deliver the certificate up in return for a sum of money ($94,000, being the sale price of lot 70 less agreed agency and conveyancing costs) being placed in a controlled monies account. The proceeds were to be held pending agreement of the parties or further order of the Court. The parties have been unable to agree and the Court must now determine the entitlement to the money in question.

Issues for determination

15. The Administrators have statutory rights to recoupment of disbursements and to remuneration. These statutory rights arise under the Corporations Act 2001 (NSW), s 443D, which provides:

The administrator of a company under administration is entitled to be indemnified out of the company's property (other than any PPSA retention of title property subject to a PPSA security interest that is perfected within the meaning of the Personal Property Securities Act 2009) for:

(a)   debts for which the administrator is liable under Subdivision A or a remittance provision as defined in subsection 443BA(2); and

(aa)   any other debts or liabilities incurred, or damages or losses sustained, in good faith and without negligence, by the administrator in the performance or exercise, or purported performance or exercise, of any of his or her functions or powers as administrator; and

(b)   the remuneration to which he or she is entitled under Division 60 of Schedule 2 (external administrator's remuneration).

16. Of itself, s 443D only makes the Administrators’ unsecured creditors of BLE. For priority over the other parties to these proceedings, the Administrators rely on Corporations Act, s 443E(1) which provides:

Right of indemnity has priority over other debts

General rule

(1) Subject to section 556, a right of indemnity under section 443D has priority over:

(a)   all the company's unsecured debts; and

(b) any debts of the company secured by a PPSA security interest in property of the company if, when the administration of the company begins, the security interest is vested in the company because of the operation of any of the following provisions:

(i)   section 267 or 267A of the Personal Property Securities Act 2009 (property subject to unperfected security interests);

(ii)   section 588FL of this Act (collateral not registered within time); and

(c)   subject otherwise to this section--debts of the company secured by a circulating security interest in property of the company.

Debts secured by circulating security interests--receiver appointed before the beginning of administration etc.

17. The Administrators accept that BLE’s debt under the February 2013 security was not fully discharged by the $1 million credit attributable to the transfer of the nine units. The Administrators, however, do not accept that the debt is $2 million as claimed; they concede an amount of only $300,000. But in any event they claim priority over the debt, whatever its amount, under s 443E.

18. As a second line of defence, the Administrators rely on an equitable lien. Equity recognises that where a person realises assets for the benefit of creditors or other parties entitled to benefit from the realisation of those assets, expenses incurred in realising the asset are a first charge on the amount realised, prevailing even over secured creditors: Re Universal Distributing Co Ltd (1933) 48 CLR 171 at 174-175 per Dixon J. The Administrators claim that all, or at least a substantial share, of their expenses and remuneration were sufficiently related to the realisation of assets to fall under such a lien.

19. The proceedings before the Court were complicated. There were two separate matters and, in total, five separate claims.

20. The first matter, number 2014/229138, was originally commenced for the purpose of a challenge to the validity of the Administrators’ appointment. That challenge was unsuccessful and was disposed of some years ago. But the file was subsequently used for other applications concerning the conduct of the administration. I will refer to the matter as the “Administration Proceedings”.

21. When BAD and Maitland wished to bring proceedings raising the claim of priority of the February 2013 security over the Administrators’ disbursements and remuneration, the proceedings were brought by way of Interlocutory Process in the Administration Proceedings. I was informed by counsel that this mode of procedure was sanctioned by the Court.

22. Maitland’s Interlocutory Process seeks a declaration that the money held by Mr Cussen and the Administrators “is charged for the payment of” the sum due under the February 2013 security, which was claimed to be $2,031,826. A consequential order was sought that the Administrators pay this sum to Maitland.

23. The relief sought in BAD’s Interlocutory Process is similar in effect. BAD seeks declarations as to priority and an order for an enquiry so as to determine the amount due under the February 2013 security.

24. Overdean has also brought proceedings by way of interlocutory process in the Administration Proceedings. Those proceedings were in part dealt with by Black J in deciding that Overdean had validly been appointed as trustee of the Dean Superfund (see [11] above). The Interlocutory Process does not appear to have been fully disposed of and was included in the Court Book. But as events have transpired, none of the remaining relief is relevant for the purposes of this judgment.

25. The relief sought by the secured creditors was substantive in nature. One of the defects in the procedure adopted (that is, proceeding by way of Interlocutory Process) was that the claims did not proceed in the way an ordinary substantive claim would be made, with pleadings (including cross-claims) to define the issues. At the hearing I sought to meet this problem by directing the parties to file points of claim, and this was done. But that proved to be an incomplete solution. Points of defence were not filed in response and accordingly there was no joinder of issue. In retrospect the directions can be seen to have been too little and too late to define the issues properly.

26. The second matter, number 2018/99714, was commenced by way of Originating Process in March 2018 for the purpose of determining the entitlement of the $94,000 the subject of the disputed security claim by Douglas. I will refer to these as the “2018 Proceedings”.

27. The first plaintiff is Mr Cussen, as liquidator. The second is BLE. Initially Douglas was the only defendant. The plaintiffs sought a declaration that Douglas had no valid security over the assets of BLE and an order that the $94,000 be paid out to the Administrators. Alternatively, a declaration was sought that any security held by Douglas was postponed to the Administrators’ equitable lien.

28. Initially Douglas simply resisted the orders sought by BLE concerning the $94,000. But later, recognising that at least potentially there were issues to be resolved between Douglas, the Administrators and the secured creditors, Douglas brought its own Interlocutory Process in the Administration Proceedings seeking declaratory relief with respect to the monies in the controlled monies account.

29. Subsequently BAD, Maitland and Overdean were joined as additional defendants in the 2018 Proceedings and the Originating Process was amended so as to claim a declaration that the Administrators’ right of indemnity takes priority over the February 2013 security. Alternatively, a declaration was sought that the secured creditors’ interest is postponed to the Administrators’ equitable lien.

30. The 2018 Proceedings suffered from the same difficulties as the Administration Proceedings so far as the definition of the issues was concerned. There were no pleadings and the points of claim which I directed came too late to define the issues properly.

31. The evidence at the hearing canvassed not only the question of entitlement to priority but also quantum. There was extensive evidence about the course of the administration and the work done by the Administrators in case the Administrators were thrown back on their equitable lien and the particular expenses had to be identified. But in the course of the hearing, the parties accepted that it would not be practicable for the Court to determine this matter. It is one which will require an account to be taken, or some similar procedure.

32. The parties also accepted that, for similar reasons, the Court could not be expected to determine the dispute about how much is owned under the February 2013 security, or the dispute between BAD (under the control of Mr Mahommed and Mr Smits) and the Dean interests concerning entitlement to the benefit of the February 2013 security. These questions involve the resolution of disputed issues of fact as well, no doubt, as extensive argument.

33. As a result, the parties invited the Court to determine only the question of priority between the Administrators and the secured creditors under the Act. The contemplation was that if this issue was decided against the Administrators, the quantum of their equitable lien would be determined by an accounting-type process afterwards.

17. On behalf of BLE, the Administrators denied, and Mr Cussen as liquidator continues to deny, that Douglas has any security interest in lot 70 or any entitlement to its proceeds. Alternatively, the Administrators claimed priority over any such interest. They also rely on an equitable lien by way of further alternative. The amounts claimed under the equitable lien greatly exceed the agreed sale costs: I was told at trial that the amount claimed is approximately $78,000.

18. As with the equitable lien dispute which arises between the Administrators and the secured creditor under the February 2013 security, the parties accepted that, should it be necessary to consider the Administrators’ claim to an equitable lien, it would not be possible to determine the quantum of costs and remuneration (if any) for which the Administrators might have priority over Douglas. Accordingly, the Court was asked to determine only issues of principle as to the existence of the security and the availability of the equitable lien.

Priority Dispute between Administrators and Secured Creditors

36. In answer to the claim against them under the February 2013 security, the Administrators relied on Corporations Act, s 443E(3)(c). That provides that the Administrators’ right of indemnity for disbursements and remuneration under s 443D has priority over “debts of the company secured by a circulating security interest in property of the company”.

37. By ss 51 and 51C, a “circulating security interest” is an interest which:

(1) is a PPSA security interest (meaning a security interest within the meaning of the Personal Property Securities Act 2009 (“PPSA”) and to which that Act applies); and

(2) has attached to “circulating asset” within the meaning of PPSA.

38. Initially the Administrators’ argument focused on the nature of the charge created by the February 2013 security. This was a charge over BLE’s security interest over the 19 lots (strictly speaking, over the single mortgage interest which covered all 19 lots). The Administrators argued that the security was over personal property (a chose in action) and relied on provisions of the PPSA which, so they contended, made it a “circulating security interest” for the purposes of the definition.

39. In reply, counsel for Maitland (who carried the argument on this point) contended that the nature of the secured property meant that the PPSA did not apply. Counsel relied on PPSA, ss 12, 10 and 8(1)(c) which provide:

section 12

(1)   A security interest means an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).

section 10

personal property means property (including a licence) other than:

(a)   land

….

land includes all estates and interests in land, whether freehold, leasehold or chattel, but does not include fixtures.

section 8

(1)   This Act does not apply to any of the following interests …:

(f)   an interest provided for by any of the following transactions:

(i) the creation or transfer of an interest in land

40. There were two aspects to counsel’s submissions. First, counsel argued that the security interest fell entirely outside the PPSA because its subject matter was a mortgage and that which fell within the definition of “land” in s 10 as an “estate or interest in land”. Alternatively, counsel argued that the February 2013 security provided for the “creation or transfer of interest in land” (that is, a security interest in a mortgage, which counsel contended was itself an interest in land), which was taken out of the PPSA by s 8(1)(f).

41. This led, on the fourth and final day of the hearing, to the Administrators’ case on this point being completely recast. Counsel for the Administrators accepted that, at the time the February 2013 security was granted, it fell outside the PPSA. But counsel argued that the property had now been realised and turned into cash. Counsel submitted that the cash was clearly personal property and a “circulating asset”.

42. In the course of submissions counsel referred to the circumstances of the sale. The sale was effected under Corporations Act, s 442C, which relevantly provides:

When administrator may dispose of encumbered property

(1)   The administrator of a company under administration or of a deed of company arrangement must not dispose of:

(a)   property of the company that is subject to a security interest; or

(b) property (other than PPSA retention of title property) that is used or occupied by, or is in the possession of, the company but of which someone else is the owner or lessor.

Note: PPSA retention of title property is subject to a PPSA security interest, and so is covered by paragraph (a) (see definition of PPSA retention of title property in section 51F).

(2)   Subsection (1) does not prevent a disposal:

(a)   in the ordinary course of the company's business; or

(b)   with the written consent of the secured party, owner or lessor, as the case may be; or

(c)   with the leave of the Court.

(3)   The Court may only give leave under paragraph (2)(c) if satisfied that arrangements have been made to protect adequately the interests of the secured party, owner or lessor, as the case may be.

…

(7)   If:

(a)   a company is under administration or is subject to a deed of company arrangement; and

(b)   property of the company is subject to a security interest; and

(c)   the administrator disposes of the property;

the disposal extinguishes the security interest.

43. Counsel for the Administrators relied on s 442(7) as having extinguished the relevant security interest. Counsel for the Administrators also stated that consent had been given by Mr Dean on behalf of BAD under s 442C(b) and relied on a document to this effect. Although referred to in argument, this document had not been put into evidence.

44. This change of tack provoked a corresponding realignment in the secured creditors’ case. Counsel for Maitland accepted that, once realised, the proceeds of sale were a circulating asset. But counsel submitted that, in equity, there was claim against the Administrators for disposing of the property the subject of the security interest when they knew, or ought to have known, of that security interest. Counsel also foreshadowed a claim based on assurances allegedly given to Mr Dean that the secured interest would be protected. This was foreshadowed to give rise to some sort of claim for breach of s 442C (or, perhaps, estoppel).

45. The realignment changed the nature of the contest (or foreshadowed contest). In particular it raised new issues of disputed, or potentially disputed, fact. Counsel for Maitland sought to read three further affidavits which were prepared during the trial. I was not prepared to permit this. Counsel for the Administrators initially submitted that it was too late to raise these issues but I considered that given the Administrators’ own change of position this had little weight.

46. Counsel for Maitland faintly suggested that the proceedings be adjourned but I thought it was clear that fresh proceedings should be brought. This would allow the claims and issues to be properly defined with pleadings. Any further pursuit of the claim would effectively be a new case and I thought there was nothing to be gained from maintaining the present structure of Interlocutory Processes brought in the Administration Proceedings. Counsel for the Administrators was prepared to undertake not to take any Anshun point as a result of bringing fresh proceedings (whether they involve personal or proprietary claims).

47. This left nothing substantive to be resolved on the first dispute in the current proceedings. Counsel for the Administrators, however, pressed for a declaration. Counsel pointed out that the parties had been in dispute for a long time.

48. With some hesitation, I have decided to make the declaration sought. It will at least prevent the secured parties’ original arguments from being repeated. The secured parties will be protected by the Administrators’ Anshun undertaking should they wish to pursue the foreshadowed claims against the Administrators.

49. The Administrators should bring in short minutes of order formulating a declaration, and the Anshun undertaking, in appropriate terms. The short minutes should also provide for the Interlocutory Processes in the Administration Proceedings (apart from that of Douglas) to be disposed of.

50. Substantial costs will have been incurred. If the parties cannot reach agreement on what is to happen, I will hear argument on the question.

Security claim by Douglas

51. Douglas is controlled by Jeffrey Douglas Dawson. It acts as trustee of a family superannuation fund. The transaction which resulted in Douglas’ claim resulted from dealings between Mr Dawson and Greg Huxley. Mr Dawson and Mr Huxley were long-standing friends. From time to time Mr Dawson and his companies had lent money to Mr Huxley, members of Mr Huxley’s family and associated companies.

52. In these proceedings, evidence was given on behalf of Douglas by way of affidavits from Mr Dawson, Mr Huxley and his son, Adam Peter Huxley. Mr Dawson was briefly cross-examined. Neither Mr Greg Huxley nor Mr Adam Huxley was required for cross-examination.

53. As well as providing loans from time to time, Mr Dawson acted as a director of Vangory Holdings Pty Limited, which was a Huxley family company. The other director was Mr Greg Huxley’s wife. For some reason Mr Huxley himself was not a director but acted for the company as a “consultant”.

54. It was Mr Huxley who identified the opportunity of purchasing Suncorp’s interest in the Beechworth development and arranged for the incorporation of BLE. Mr Huxley also recruited James Edward (Ed) Spencer, a real estate agent, to be involved in the venture. Mr Spencer was appointed as the sole director of BLE. He also held 5% of BLE’s shares. The other 95% was held by a company called Rockcliffe Limited, but on trust for Vangory. Rockcliffe Limited was a company controlled by Leon Stephan, another associate of Mr Huxley.

55. In March 2013, Mr Huxley approached Mr Dawson for a loan. He said that working capital was required for the Beechworth project and asked for a short-term loan of $180,000. Mr Huxley proposed that the loan amount would be $198,000 with an $18,000 establishment fee payable on settlement of the loan. Interest would be 5% per month and security would be provided over two of the Beechworth lots.

56. Mr Dawson thought about the proposal for a day or so. He was concerned that the financial modelling which he had done with Mr Huxley for the project was based on a sale price of $90,000 per lot (although it was hoped that higher prices would be achieved). The loan to security ratio would effectively be 100%. Mr Dawson rang Mr Huxley and mentioned these concerns. Mr Huxley offered guarantees from Mr Spencer, Mr Stephan and also from a company associated with another project being carried out by Mr Huxley at Gladstone in Queensland. This was acceptable to Mr Dawson.

57. It was agreed that the documentation for the loan would be done by Dib Lawyers. The principal of that firm was Ghassan (known as “Gus”) Dib. Mr Adam Huxley was legally qualified and was working in one of the firm’s offices. Mr Dib had previously acted for BLE in its purchase of Suncorp’s interest in the Beechworth project.

58. In Mr Huxley’s affidavit, Mr Huxley said that, in discussing the mortgage, he and Mr Dawson had an exchange in words to the following effect:

Huxley:   It will be a first mortgage which would be provided by a release of charge over the lots being granted to your company as security. In Victoria, there is no such security as a mortgage on a mortgage like in NSW. You will be given the mortgage document, a caveat and you will hold the title deeds. I will get Adam to get the documents done.

Dawson:   You know that is all I need. I just need my documentation done properly. Title deeds are not worth anything to me on their own, are they?

59. The loan documents were then prepared by Dib Lawyers. Two main documents were prepared. One took the form of a deed of loan. The other was a purported mortgage.

60. On 18 March Mr Huxley telephoned Mr Dawson and arranged to meet at Mr Huxley’s house at St Ives. Mr Huxley presented the documents to Mr Dawson. The documents had been signed by Mr Spencer on behalf of BLE. Mr Dawson scanned the documents, but not in any detail. All he looked at was the schedule of the Deed of Loan which specified the amount of the loan and the interest rate. These reflected the discussions with Mr Huxley. Mr Dawson also noted the signatures of Mr Spencer on behalf of BLE on the Deed of Loan and the purported mortgage. Mr Dawson then signed the documents on behalf of Douglas and handed them back to Mr Huxley.

61. Mr Huxley said he would collect “the title deeds” and deliver them and the signed documents to Mr Dib. Mr Huxley suggested that Mr Dawson transfer the loan funds to Dib Lawyers’ trust account and tell Mr Dib to transfer the funds from trust on receipt of the loan documents. This proposal was taken up by Mr Dawson who wrote a letter to Mr Dib which relevantly stated:

I have sent by EFT to your trust account today the net amount of $180,000.00.

I note that the gross loan is secured at $198,000.00 with an establishment fee to be deducted and confirmed by drawdown notice in the amount of $18,000.00.

I am advised that the following executed documents will be delivered to your office today. Upon their receipt, you may disburse the loan proceeds from Trust as per the signed Draw Down notice. This includes payment of your fees and agency costs.

62. The letter then listed the various documents which had been signed, including the Deed of Loan and the purported mortgage, which was described as “executed mortgage over lots 56 and 70 (Victorian Registration)”.

63. The letter concluded:

As the title is being cleared to lots 56 and 70, please hold them in order to send to me these title deeds.

64. On the following day, Mr Dawson was travelling in central western New South Wales. He received a telephone call from Mr Huxley advising him that the title deeds had been collected and delivered to Mr Dib. Mr Dawson thereupon transferred $180,000 to the Dib Lawyers trust account. A day or so later he received by email a copy of the draw-down notice. In response he emailed confirmation that the monies could be released from the trust account.

65. A few days later Mr Dib made arrangements for Mr Dawson to collect the certificates of title for the two lots from Mr Huxley’s house at St Ives. They were delivered there by Mr Adam Huxley at Mr Dib’s request.

66. In his affidavit, Mr Dawson said that he would not have lent Douglas’ money to BLE without security and that he believed at all times that Douglas was receiving security from BLE for its loan. This evidence was not challenged in cross-examination.

67. About five and a half months later, in late August or early September, Mr Huxley told Mr Dawson that one of the Beechworth lots had been sold, and as a result 50% of the loan could be paid out. Mr Huxley said that on repayment of the loan, Mr Dawson would have to give back one of the titles. He said it did not matter which one was given back as they were worth the same. Soon afterwards, payment of approximately $101,000 was received by Douglas. Mr Dawson handed over to Mr Huxley the certificate for lot 56.

68. The remaining part of the loan was not repaid and Mr Dawson, on behalf of Douglas, continued to hold the certificate of title for lot 70.

69. Following their appointment the Administrators considered that they needed the certificate of title to effect the sale of lot 70, along with the other unsold lots. They made an application which resulted in orders being made by Robb J on 2 September 2015. The orders relevantly provided:

5.   Order the Second Respondent to deliver the original certificate of title for [lot 70] (the DEH Certificate of Title) to the Applicants by delivering same to the Applicants’ solicitors, Russells within 1 business day of the making of these orders.

…

8.   Direct the Applicants, on settlement of the extant exchanged sale of the land to which the DEH Certificate of Title relates, to deposit the sum of $93,717 (being the net proceeds of the sale of the land to which the DEH Certificate of Title relates after deduction of any land tax, council and water rates and lodgement fees) into a controlled money account held jointly by the solicitors for the Applicants and the solicitors for the Second Respondent, such sum to be held until further order of the Court or the agreement of the Applicant and the Second Respondent.

9. Order, pursuant to section 442C(2)(c) of the Corporations Act 2001, that the Applicants are permitted to sell the land to which … the … DEH Certificate of Title relate[s].

10.   The parties consent to the making of these orders without making any admissions and on the basis that none of these orders, of themselves, affect any rights each of them already has or had in respect of any charge, equitable charge, possessory lien or other security interest in the … DEH Certificate of Title as may have arisen by operation of law and prior to the making of these orders, and the parties agree that each of the Respondents’ respective rights might only be affected by agreement or upon further application by the Applicants or any other administrator, liquidator or receiver thereof.

70. Robb J’s orders were made in contemplation of a sale which was expected to complete relatively soon afterwards. That sale did not proceed. Lot 70 was later sold by the Administrators in January 2018. Counsel for the Administrators made it clear that no point was taken about this. It is common ground that entitlement to the sum of $94,000 will depend upon the rights which Douglas had at the point when the order was made.

71. The documents prepared by Dib Lawyers were amateurish. It appears that they were based on earlier loan security documents which were then tailored to the Douglas transaction. But the process of tailoring the documents was left, in the case of the purported mortgage, hopelessly incomplete.

72. The Land Transfer Act 1958 (Vic) provides a form for a mortgage which consists of a first page, no doubt similar in form to an RPA form used in this State, and an annexure page for signature. The purported mortgage consisted of the annexure page only (signed by Mr Spencer for Beechworth and Mr Dawson for Douglas) and an attachment described as annexure A. The annexure appears to be based on some other transaction involving another company called Valencia Grove Pty Ltd. It was quite inapplicable to the Beechworth project. Mr Orlizki, the solicitor for Douglas who conducted the hearing on its behalf, accepted that the document could not have any contractual force.

73. Mr Orlizki, however, relied upon the Deed of Loan as containing provisions which effectively created a security interest. Alternatively, he relied upon the deposit of the certificate of title to lot 70 as itself giving rise to an equitable security.

Security created by Deed of Loan

74. The parties to the Deed of Loan were Douglas (defined as “the lender”); BLE (defined as “the borrower”); and Mr Spencer, Mr Stephan and a company called Gladstone Mortgagee No 1 Pty Ltd (each of which was defined as “the guarantor”).

75. The recitals stated:

A.   The lender has agreed, at the request of the borrower, and the guarantor, to provide a loan facility to the borrower, the principal amount of which is not to exceed two million dollars ($198,000.00).

B.   The lender the borrower and the guarantor have agreed that notwithstanding the principal amount will not exceed One Hundred and Ninety Eight Thousand Australian Dollars ($198,000.00) this agreement places no obligation on the lender to make any advance.

C.   The lender the borrower and the guarantor have agreed to enter into this agreement to set out the terms and conditions of the loan facility.

76. The reference to the sum of $2 million in recital A is obviously one of the hangovers from the earlier loan documentation on which the Deed of Loan was based.

77. Clause 1 dealt with definitions and clause 2 with conditions precedent to the lender’s obligation to provide the advance. Clause 3 dealt with the provision of the advance, clause 4 the interest, clause 5 the establishment fee and other cost and expenses, clause 6 with repayment, clause 7 with the method of payment. Clause 8 contained representations and warranties from the borrower. Clause 9 contained further undertakings from the borrower. Clause 10 dealt with default and termination. The remaining clauses dealt with mechanical matters common in a deed of loan of this type.

78. None of the operative provisions contained any express obligation to provide security, although there are a number of clauses which referred to the grant of security. In clause 2 one of the conditions precedent to the making of the loan was:

execution of security: the lender having received evidence satisfactory to the lender that the borrower has validly entered into, and become bound by, the terms of the security and (if appropriate) that the security is stamped and is registered or in registrable form;

79. One of the undertakings given by the borrower in clause 9 related to further assurances. It provided:

further assurances: to execute and do, or cause to be executed and done by the borrower or any other person, at the expense of the borrower, all assurances and other things as are reasonably required or requested at any time and from time to time by the lender for giving effect to, and the full benefit of, the covenants contained or implied in this agreement and the security in favour of the lender or to protect the lender’s rights, powers and remedies under this agreement or the security;

80. Clause 1 had a definition of “Security” (not “security” which was the term used in the operative provisions) which provided as follows:

‘Security’ means:

(a)   a registered mortgage [Lot 56] and [Lot 70] and all security documents collateral to the registered mortgage;

(b)   The lender is aware that the Borrower has received expression of interests deposits for the above referred Lots in paragraphs (a), (b) and (c) and that if any or both of either lots if formally exchanged and proceed to settlement, then the Borrower pledges and charges the sum of $99,000.00 for each Lot to be paid to the Lender as a bank cheque at Settlement of both or either lots.

(c)   In addition to paragraph (b) above, the Borrower further pledges and charges any surplus funds to be received by the Borrower from the proceeds of sales of the 11 Lots known as Lots

(d)   a registered second ranking charge over all of the assets and undertakings of the borrower; and

(e)   any mortgage, pledge, lien, hypothecation, security interest or other encumbrance or charge now or in the future given by the borrower in favour of the lender to secure the obligations of the borrower under this agreement.

81. Mr Orlizki acknowledged the defective drafting of the Deed of Loan. But he submitted that the intent of the parties was to confer security over lots 56 and 70, or at least over BLE’s rights over those lots.

82. I agree that, looking at the transaction as a whole, the parties’ intent was that Douglas was to have such a security. But the intent was that the security would be created by a separate instrument, namely the purported mortgage. This is not the same thing as saying it was implicit in the Deed of Loan itself that it contained a grant of security.

83. In my view, no such implication arises from the Deed of Loan. The document was drafted on the assumption that the grant of security would take place separately. It dealt only with the loan part of the transaction. The condition which I have quoted makes that clear. It meant that BLE had no obligation to make the loan unless security was provided, but it did not itself contain an obligation to do so.

84. It is true that paragraphs (b) and (c) of the definition of security, quoted at [80] above, contain (anomalously for a definition provision) express words of hypothecation (“the borrower pledges and charges”). But this language relates to the proceeds of realisation of the two lots. Even if read operatively, the provisions did not purport to create any security interest in the lots, or the rights to the lots, before realisation. In view of the conclusions which I have reached below, it is not necessary to consider whether those provisions created some sort of future security interest in the proceeds.

85. The further assurances undertaking in cl 9(d) does not assist Douglas. It only operated in aid of the company covenants contained or implied in “this agreement and the security”. As I have concluded that there was no provision in “this agreement” which created any obligation to give security, that part of the clause could not help. And the other part of the clause was in aid of “the security”, meaning the separate security agreement contemplated by the Deed of Loan. As no such security was effectually granted, there was nothing for the clause to operate in aid of.

Security interest arising from the deposit of title deeds

86. In Bank of New South Wales v O’Connor (1889) 14 App Cas 273 Lord Macnaghten said at (282-283):

It is a well established rule of equity that a deposit of a document of title without either writing or word of mouth will create in equity a charge upon the property to which the document relates to the extent of the interest of the person who makes the deposit. In the absence of consent that charge can only be displaced by actual payment of the amount secured. Before the fusion of law and equity a Court of Equity would undoubtedly have restrained the legal owner of the property from recovering his title deeds at law so long as the charge continued, and now when law and equity are both administered by the same Court if there be any conflict the rules of equity must prevail.

87. In Theodore v Mistford Pty Ltd (2005) 221 CLR 612, the High Court had to consider a claimed equitable security arising from the deposit of a certificate of title under the Queensland Torrens system. The High Court noted that Lord Macnaghten’s statement provides “formidable support” for the proposition that the delivery of title deeds and a relationship of debtor and creditor is sufficient to create a presumed intention to create a security, rebuttable only by proof that the deposit was made for other purposes. But on the facts of that case the intention of the owner of the property was to create a security. It was not necessary to decide whether the law goes so far as to create a rebuttable presumption in every case where title deeds are deposited.

88. Counsel for the Administrators expressly abandoned the contention that the delivery of the certificates of title for lots 56 and 70 took place without the authority of BLE. But counsel argued that the intention to deliver the certificates was a limited and conditional one. Counsel emphasised the reference in Lord Macnaghten’s formulation of the principle to the words “without writing”. Counsel argued that when the circumstances were looked at in the context of the Deed of Loan and purported mortgage, BLE’s intent had been to provide the certificate of title in support of that purported mortgage. Counsel submitted that, in these circumstances, the deposit of the certificates of title did not “rise any higher than the validity of the mortgage”.

89. In my view this is to look at the matter in too narrow a way. The exchange between Mr Huxley and Mr Dawson recorded in Mr Huxley’s affidavit (quoted at [58] above) can hardly be regarded as definitive. Mr Huxley at least appears to have appreciated that there was an issue arising from the fact that BLE did not itself own the lots, and only held an assignment of Suncorp’s mortgage over them. Even so, he referred to caveats being provided, which never actually happened. It is not clear what Mr Dawson meant by saying that the deposit of the certificates of title was no use “on its own”. No doubt he expected to receive a signed mortgage document of some type as well as the certificates. But it was not suggested to him that he was only promised the certificates, and only expected to receive them, conditional in some way on the validity on the mortgage that was provided. It would be unrealistic to suppose that that contingency was in the contemplation of either party.

90. In my view, the proper characterisation of what happened is that the parties agreed that there would be a security over BLE’s rights concerning lots 56 and 70, and that this would be accompanied by delivery of the certificates of title, but that the form of the security would be determined by Mr Dib. To my mind, the circumstances reinforce the conclusion that the deposit of the title deeds was by way of security. After all, what other purpose would there have been, in the context, in providing the certificates? In my finding they were provided as part of a security transaction and the fact that the written documents ultimately failed to provide for the grant of the security does not make any difference.

91. Counsel for the Administrators pointed out that the present case was not the usual one of the registered proprietor of property depositing its certificate of title in connection with a loan to itself (the usual case) or to a third party (as in Theodore v Mitstford). The registered proprietor in the present case was Redhill, not BLE. The subject matter of the security putatively granted by BLE to Douglas would have been a security over its rights over lots 56 and 70 deriving from its ownership of the mortgage, not the underlying ownership of lots 56 and 70 which remained registered to Redhill.

92. In his dealings with Mr Huxley, Mr Dawson seems to have treated BLE as the owner of lots 56 and 70 rather than the assignee of a mortgagee of those lots. The parties also seem to have failed to appreciate that BLE had one mortgage covering a multiplicity of lots. The conveyancing required to achieve the parties’ commercial objective of granting security limited to two of the lots would have been complicated and there is no sign that anyone gave any thought to this.

93. But the principle stated by Lord Macnaghten is not limited to title deeds or (in the Torrens system) to a certificates of title. It applies to any document of title. In the present case, the certificates of title for lots 56 and 70 would have been provided by Redhill to Suncorp when Redhill mortgaged the land to Suncorp, and would have been passed on by Suncorp to BLE when the mortgage was assigned. In ordinary practice, the certificate of title would have been required in order for BLE to complete the sale of the lots pursuant to its power of sale under the mortgage. In my view they are properly seen as documents of title for the purposes of the application of Lord Macnaghten’s principle. The parties would have contemplated that, by BLE handing the certificates of title over to Douglas, Douglas was receiving protection against BLE dealing with the lots without Douglas’ consent. It is no different in principle from the ordinary case where the borrower owns the property and deposits the certificate of title with the lender.

94. In the last sentence of the quoted passage from Bank of New South Wales v O’Connor Lord Macnaghten spoke of equity intervening so as to restrain the legal owner of the property from recovering his title deeds at law (presumably by an action in detinue). That is a less extensive form of equitable relief than is available in a case where there is a specifically enforceable agreement to grant a security. In such a case, equity would order the person who had promised to grant a security to do so, and the agreement would give rise to an equitable mortgage on the basis of the application of the maxim that equity regards as done that which ought to have been done. But it is not necessary in the present case to consider whether the deposit of the certificates of title created an equitable mortgage in that sense and if so, what it was that was being mortgaged. It is enough to say that equity would have prevented BLE from bringing an action to recover the certificates of title from Douglas unless the monies due under the Deed of Loan were first repaid.

95. It might have been open to the Administrators to use some other method of obtaining the certificate of title which they required to complete the sale of lot 70. For instance it might have been possible to obtain a duplicate certificate or to make some sort of application to complete the transfer without the necessity of producing the certificate. This, however, does not need to be considered further. The Administrators chose to approach this Court and seek an order compelling Douglas to surrender the certificate of title to lot 70. The application of Lord Macnaghten’s principle gave Douglas, at the least, an equitable lien over the certificate of title, considered as a chattel, which entitled it to payment of the amount secured.

Does the February 2013 security take priority over Douglas’ security?

96. Counsel for the Administrators argued that if Douglas had any security interest, it was postponed to the earlier grant of the February 2013 security interest. Counsel relied on the general security agreement executed by BLE in favour of BAD. Clause 3 relevantly provided:

(a)   Charging provision

To secure the due and punctual payment or repayment of the secured moneys, the grantor charges in favour of the secured party all its right title and interest in, to, under or derived from the secured property.

…

(c)   Circulating and non-circulating collateral

This charge operates as a charge over:

(i)   All the grantor’s right, title and interest legal or equitable both present and future in or derived from non-circulating and real property; and

(ii)   The circulating collateral and real property.

(d)   Licence to deal with circulating collateral

The grantor may, in the ordinary course of its usual business, dispose of or deal with circulating collateral and real property and is licensed by the secured party to do so.

97. Counsel argued that BLE’s rights over lot 70, and also the certificate of title, considered as a chattel, was subject to this charge. Counsel acknowledged there was a licence to deal with the “circulating collateral and real property”, but that the raising of further funds was not “in the ordinary course of [BLE’s] usual business”. Counsel relied on this regard on sub-clause 3(e)(vii) which relevantly provided:

(e)   The licence conferred for the grantor to dispose of or deal with the circulating property is withdrawn, automatically and immediately:

…

(vii)   If the grantor creates any security over the collateral or agrees or attempts to do so without the secured party’s prior written consent.

98. In propounding these arguments, counsel for the Administrators was seeking to establish that another party, namely one or other of the secured creditors, had priority over Douglas. This was somewhat curious because the secured creditors themselves did not contend for any such priority. But as we will see, it is not necessary to determine whether it is open to the Administrators to rely on a ius tertii in this way.

99. The Administrators’ contention resulted in an argument about the breach of the clause and the scope of the licence to deal. But I do not find it necessary to resolve that debate. I will assume for the sake of argument that clause 3 created a legal charge on BLE’s assets. Ordinarily such a charge would prevail over a security created at a later date. But there are recognised exceptions to this. One of them is stated in J D Heydon, M J Leeming and P J Turner Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (5th ed, 2015) at 8-220 as a case “where the legal owner has given to another authority to deal with a third party, and such authority has been exceeded”. In support of that proposition the learned authors refer to the High Court decision in Barry v Heider (1914) 19 CLR 197 where, under the influence of a fraudulent representation, the owner of property executed a memorandum of transfer was used to give an equitable mortgage over land to a lender. The lender’s equity prevailed.

100. In my view the present case is directly governed, or is governed a fortiori, by this principle. Even if the dealings between BLE and Douglas were contrary to the terms of the general security agreement, Douglas did not know this, and had no reason to know it. BAD, as the security holder, had left the certificates of title with BLE. Clearly BAD contemplated that BLE could exercise its mortgage rights, and deal with the certificate, for the purpose of realising lot 70. If BLE did exceed its authority in handing those certificates over to Douglas, BAD could not complain.

Equitable lien

101. As I have noted, the parties agreed that if it was necessary to consider the quantum of the equitable lien by some sort of accounting process then that should be done at a later stage. But Mr Orlizki did argue that there was no equitable lien available at all. In support of this argument, he relied on the decision of Barrett J (as his Honour then was) in Hamilton v Donovan Oates Hannaford Mortgage Corp Ltd [2007] NSWSC 10. His Honour held in that case that the statutory lien created by s 443E subsumed and displaced any equitable lien which would otherwise exist.

102. As Mr Orlizki acknowledged, Barrett J’s decision was considered and its reasoning rejected by the Western Australian Court of Appeal in Coad vWellness Pursuit Pty Ltd (In Liq) [2009] WASCA 68 at [97] per Buss JA (Wheeler and Pullin JJA agreeing). Mr Orlizki invited me to conclude that the Court of Appeal was “clearly wrong” and to adhere to Barrett J’s decision. But the Western Australian Court expressly considered his Honour’s decision and it would be quite inappropriate for me, sitting at first instance, to proclaim what the Court of Appeal said to be “clearly wrong”. In saying this I am not, of course, expressing any view on the subject at all. If the point is to be taken, it will need to be taken on appeal.

Conclusions

103. For these reasons, I have concluded that Douglas is entitled to succeed on its contention. It is entitled to be treated as equitable chargee of the proceeds of the sale of lot 70 which are held in the controlled monies account. This is subject to any contention the Administrators may make that they have some further entitlement secured by an equitable lien which takes priority over Douglas’ rights. At this stage, all I will do is direct that Douglas bring in Short Minutes of Order to give effect to my conclusions on this point. Those short minutes should provide for a declaration if that is considered necessary. They should also provide for such further directions as may be required to resolve any further issues in the case.

Orders

104. The order of the Court in the Administration Proceedings (2014/229138) is:

1.   Direct that Neil Robert Cussen and Ezio Marco Senatore, in their capacity as former administrators of Beechworth Land Estates Pty Ltd (in liquidation) bring in Short Minutes of Order to give effect to this decision.

105. The order of the Court in the 2018 Proceedings (2018/99714) is:

1.   Direct that the first defendant, Douglas Estate Holdings Pty Ltd bring in Short Minutes of Order to give effect to this judgment.

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Amendments

02 September 2019 - minor typographical amendment

05 September 2019 - minor typographic amendments

20 November 2019 - minor typographical amendments

21 November 2019 - change date in [10]

Decision last updated: 21 November 2019