DPP v Ing
[2011] VSC 289
•5 July 2011
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
PRACTICE COURT
No. 00740 of 2010
IN THE MATTER of the Confiscation Act 1997
-and-
IN THE MATTER of an application by THE DIRECTOR OF PUBLIC PROSECUTIONS for VICTORIA
BETWEEN:
| The Director of Public Prosecutions for Victoria | Applicant | |
| and | ||
| Adam Ing | First Respondent | |
| and | ||
| Commonwealth Bank of Australia | Second Respondent | |
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JUDGE: | Hollingworth J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 23 May, 9 June 2011 | |
DATE OF PUBLICATION OF REASONS: | 5 July 2011 | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 289 | |
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CONFISCATION – Variation of restraining order – Real property subject to restraining order – Mortgagee seeking to exercise power of sale – DPP seeking to exercise control over the setting of sale price and conditions – Parties’ respective rights and obligations – Confiscation Act 1997 ss 26, 42 – Transfer of Land Act 1958 ss 42, 77
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APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr S O’Bryan SC and Mr S McGregor | Office of Public Prosecutions |
| For the First Respondent | No appearance | |
| For the Second Respondent | Mr B Carew | Gadens Lawyers |
HER HONOUR:
Introduction
This case concerns the respective rights and obligations of the Director of Public Prosecutions and a mortgagee wishing to exercise its power of sale over real property, which is the subject of a restraining order under the Confiscation Act 1997 (“the Act”).
On 24 November 2009, a property in Berwick, Victoria was registered in the name of the first respondent, Mr Ing; the purchase price was $353,000. The Berwick property is subject to a mortgage in favour of the second respondent (“the CBA”), which was registered on the same day as the transfer to Mr Ing.
Mr Ing has been charged with offences under the Drugs, Poisons and Controlled Substances Act 1981 and the Crimes Act 1958, including cultivating and trafficking cannabis in not less than a commercial quantity, and theft. The DPP alleges that Mr Ing and others were members of a large, international drug syndicate.
The DPP alleges that the Berwick property was used in the growing of cannabis plants by hydroponic means.
On 12 February 2010, Williams J made restraining orders over various property, including the Berwick property, under s 18 of the Act. The property was restrained to satisfy:
(a) Any forfeiture order that may be made under Division 1 of Part 3 of the Act;
(b) Any automatic forfeiture of property that may occur under Division 2 of Part 3 of the Act; and
(c) Any pecuniary penalty order that may be made under Part 8 of the Act.
The CBA says that Mr Ing has defaulted in payments under the mortgage. It wishes to sell the Berwick property, pursuant to its power of sale. There was no evidence as to what, if any, amount is likely to be left after payment of the mortgage debt.
The DPP does not object to the Berwick property being sold by the CBA, but sought to have orders to the following effect made:
(a) The property be sold by public auction for its fair market value, or by private treaty at a sale price that has the prior written approval of the Assistant Director of the Assets Confiscation Operations group within the Department of Justice (“the ACO”) (“the proposed sale price order”);
(b) The settlement of any sale of the property pursuant to these orders must be completed within 6 months of the date of the orders (“the proposed time order”); and
(c) The balance of the deposit monies, after deduction of the selling agent’s commission, be paid to the ACO and held in trust until disbursed at settlement (“the proposed deposit order”).
The DPP brought this application under s 26 of the Act, seeking orders varying the restraining order so as to enable a sale to occur, subject to the proposed sale price, time and deposit orders.
The CBA objected to the proposed sale price, time and deposit orders being made. It argued that the interests of the DPP were adequately protected by s 77 of the Transfer of Land Act 1958 (“the TLA”), and there was nothing in the Act which would justify the making of the proposed orders.
Both sides exhibited a range of orders made by judges of this court and the County Court in other cases, some involving the CBA and some involving other mortgagees. Each side sought to persuade me that their own preferred orders reflected the standard or usual type of order made by courts in relation to these matters, particularly in relation to setting the sale price. It was not possible from the evidence before me to conclude that there is, or ever has been, a standard or usual type of order made in such cases. Many of those orders appeared either to have been made by consent, or with little, if any, argument as to the appropriate form of order.
However, it seems that variation orders often include a requirement that the mortgagee do the following things:
(a) Provide a copy of the signed contract of sale to the ACO within 5 days of execution;
(b) Notify the ACO of the time and place of settlement at least 5 days prior to the date of settlement;
(c) Provide the ACO with a copy of the statement of adjustments and settlement statement at least 5 business days prior to the date of settlement; and
(d) Provide the ACO with an itemised schedule of costs, charges and expenses incurred in the sale of the property, but not including any costs, charges or expenses associated with any proceeding or order under the Act:
(i) at least 5 days prior to the settlement; and
(ii) on the date of settlement,
(“the information orders”).
The CBA agreed that it would be appropriate to make the information orders here.
On 9 June 2011, I made orders varying the restraining order, to permit the CBA to sell the Berwick property. But I declined to make orders in terms of the proposed sale price, time or deposit orders.
An application to vary a restraining order may be made under s 26 of the Act by various specified persons, including the person to whose property the restraining order relates, or a person “who has an interest in that property” (s 26(2)(c)). That latter expression would include a mortgagee such as the CBA. In practice, the DPP tends to make such applications, but there is no reason in principle why a mortgagee could not make the application itself.
The court’s power under s 26 to vary a restraining order is a broad, discretionary one, being a power to make such orders in relation to restrained property “as it considers just”. The question of whether it is appropriate to make any of the proposed sale price, time or deposit orders, or any similar order, must therefore be decided according to what is just in each individual case.
That said, the issues that arose in this case frequently arise between the DPP and institutional lenders, such as the CBA. And, although the matter came on for hearing in the Practice Court, it was fully argued by experienced and well-prepared counsel. In the circumstances, the parties requested that I provide written reasons, setting out the relevant legal principles, to provide some guidance for future cases, particularly between these parties.
Why the DPP wanted the proposed orders to be made
The most contentious part of the proposed sale price order related to whether the CBA should be able to sell the property by private contract, without first obtaining the approval of the ACO as to the sale price. The DPP argued that the proposed sale price order was necessary to provide “prior independent scrutiny of any proposed [sale] price which has not been arrived at by a market mechanism, such as a public auction.” Otherwise, it was said, there was a “possibility of preferential transactions being engineered to circumvent effective forfeiture of criminal assets.” The DPP was particularly concerned about the possibility of a family member or criminal associate of an alleged offender being able to purchase restrained property at an undervalue. Because of the DPP’s involvement in the relevant criminal and confiscation proceedings, it was argued that “the DPP has peculiar knowledge and powers beyond those of a mortgagee, and so needs to retain an opportunity for prior independent scrutiny … lest that knowledge and power be rendered nugatory.”
There was no evidence to suggest that any such preferential transaction was likely to be entered into in this particular case, but the DPP sought to argue the matter as a point of general principle.
The proposed time and deposit orders were also sought in order to give the ACO an additional degree of oversight and control of any sale.
The legislative regime
Organised crime, including illicit drug activity, has a significant economic impact and social cost in Australia. “Unsurprisingly, an enduring feature of organised crime is that it is primarily motivated by financial gain.”[1]
[1]August 2009 report of the Parliamentary Joint Committee on the Australian Crime Commission “Inquiry into the legislative arrangements to outlaw serious and organised crime groups” at [2.6].
The DPP’s written submissions contained an interesting examination of the history behind the development of confiscation legislation, in this and other jurisdictions. However, at the end of the day, the court’s task is to construe the legislation as it exists (albeit with the benefit of any relevant extrinsic materials).
The Act was introduced by parliament “to ensure that crime does not pay.”[2] The purposes of the Act include forfeiture of the proceeds of crime (s 1(a)), of property that is suspected of being tainted property (s 1(c)), or of property used in connection with crime (s 1(d)), and the preservation of assets for the purpose of restitution or compensation to victims of crime (s 1(h)).
[2]Second Reading Speech, 13 November 1997, Hansard p 1146.
The DPP said that a significant mischief which the Act was intended to cure was “the possibility of preferential transactions being engineered to circumvent effective forfeiture of criminal assets.” No doubt, that is why the Act has a number of features designed to ensure that apparently legitimate transactions are not used as vehicles to avoid forfeiture. For example, the so-called “claw-back provisions” enable a court to restrain and confiscate tainted property that has been transferred (usually to a family member or associate) for less than full value. These provisions include:
(a) The definition of “sufficient consideration” in s 3, which excludes factors external to the market value;[3] and
(b) The concept of “effective control” of property in s 9, which can expose property to forfeiture, despite valid legal structures separating the offender from the owner.[4]
[3]Factors such as transfers between family members, transfers by way of gift or for consideration “arising from love and affection”.
[4]For example, in determining questions of “effective control”, regard may be had to “family, domestic, business or other relationships between persons having an interest in the property” (s9(2)(c)).
Likewise, s 42(1) of the Act permits a mortgage or charge to be set aside in certain specified circumstances:
If the Supreme Court or the County Court is satisfied, on application by –
(a) in the case of property forfeited under a civil forfeiture order, a prescribed person or a person belonging to a prescribed class of persons; or
(b) in any case, the DPP –
that a mortgage or charge to which the property is subject was created to limit the effect of a forfeiture order or a civil forfeiture order or automatic forfeiture, it may discharge that mortgage or charge.
But the Act otherwise does not purport to interfere with the principle of indefeasibility of title, which is fundamental to the TLA. Section 42 of the TLA provides that the registered proprietor of land (which includes a mortgagee, by reason of the definition of “land” in s 4 of the TLA) shall, except in the case of fraud, hold its interest subject to encumbrances recorded on title, but “absolutely free from all other encumbrances whatsoever”, save in respect of the exceptions noted by the provision. The Act is not referred to in any of the exceptions.
Section 77 of the TLA deals with the power of sale under a mortgage or charge. Section 77(1) relevantly provides that if a mortgagor does not comply within the relevant period with a notice or demand, then:
[T]he mortgagee … may, in good faith and having regard to the interests of the mortgagor … or other persons, sell or concur with any other person in selling the mortgaged … land or any part thereof, together or in lots, by public auction or by private contract, at one or several times, and for a sum payable in one amount or by instalments, subject to such terms and conditions as the mortgagee … thinks fit, with power to vary any contract for sale and to buy in at any auction and rescind any contract for sale and to resell without being answerable for any loss occasioned thereby … and may … do any such acts and things as are necessary for effectuating any such sale.
Section 77(3) sets out how the purchase money arising from such a sale is to be applied.
The statutory power of sale granted to a mortgagee is very broad. Nevertheless, it must be exercised “in good faith and having regard to the interests of the mortgagor … or other persons.”
In its recent decision in MBF Investments Pty Ltd v Nolan, the Court of Appeal held that s 77(1) of the TLA determines the nature of a mortgagee’s duty when exercising a power of sale.[5] The court recognised that, for years, there had been a controversy as to whether s 77(1) extended the duty to something other than the “equitable obligation to act in good faith.” The court said that the controversy had been settled by recent cases, which it examined in detail, before summarising the position in respect of a mortgagee’s duties in these terms:
[5][2011] VSCA 114 at [73].
(a) a mortgagee is not a trustee of the power of sale, which is given to the mortgagee to enable the realisation of the security interest;
(b) a mortgagee must act in good faith, that is conscionably, and cannot sell for a purpose other than that for which the power of sale is conferred;
(c) a mortgagee is not required to place the interests of the mortgagor above the mortgagee’s interests in recovering the debt. For example, the mortgagee can sell the property at a time of the mortgagee’s choice, even though the property might realise a higher price if the sale were postponed;
(d) the mortgagee cannot disregard the interests of the mortgagor by simply selling for a price which will cover the amount of the loan. The mortgagee must take reasonable steps to obtain the best price consistently with its right to enforce its security interest. This requires the mortgagee to consider how the property should be advertised and to allow an appropriate time between the advertisement and the sale;
(e) the mortgagee must also have regard to the interests of subsequent security holders; and
(f) if there is no doubt that the sale of the lots preferred by the mortgagor would be sufficient to discharge the debt owed to the relevant mortgagee and of any other security holders whose interest the mortgagee is required to consider, a failure to sell the preferred lots may breach the mortgagee’s duty to sell in good faith.[6]
[6]At [100]; footnote references to other cases not included here.
There was no dispute that, in respect of property the subject of a restraining order, the DPP falls within the category of “other persons” for the purposes of s 77 of the TLA. So, the mortgagee must have regard to the interests of the DPP in exercising its power of sale. But, that does not require the mortgagee to consult with or reach agreement with the DPP in relation to any aspect of the sale, including price. A mortgagee has no such obligation with regard to the mortgagor, and there is nothing in the Act or the TLA to suggest that the DPP was intended to be placed in a higher position than the mortgagor in relation to s 77.
There was no evidence in this case to suggest that the CBA was not intending to comply with its obligations under s 77 of the TLA.
For these reasons, I declined to make the proposed sale price order.
The DPP also sought an order requiring the property to be sold and settled within six months of the making of the variation orders. I declined to make such an order, on the basis that it would also involve an unjustifiable limitation on the CBA’s power to sell the property in accordance with s 77(1). In the absence of any relevant evidence, I also came to the conclusion that six months was a completely arbitrary period.
Similarly, there was no legal or evidentiary basis for requiring that the balance of the deposit be held by the ACO, rather than the CBA, pending settlement.
Finally, I note that the DPP argued that he has fiduciary obligations towards persons whose property comes temporarily or permanently within his reach under the Act, including an obligation to rationally maximise the equity in restrained property, either for the benefit of the State or the alleged offender (if they are ultimately acquitted). The source and scope of any such obligations was not really explored in argument, and was doubted by the CBA. Even accepting, without deciding, that the DPP is subject to such obligations, there seems to be no reason in principle why that would place any limit on the legal powers and obligations of a mortgagee under s 77.
Other considerations
Contrary to the DPP’s submissions, the ACO will not always be in the best position to decide on an appropriate sale price. The ACO relies upon what were described as “kerbside estimates”, obtained from the Valuer-General’s Office. There may be cases where such an estimate does provide a realistic assessment of the value of a property. But, as the CBA pointed out, many of the properties which are the subject of restraining orders have been used for the growing or manufacture of drugs. Some of those activities involve significant structural damage or internal alterations, which may not be apparent from an external inspection, or known to ACO staff.
Nevertheless, there may well be cases in which it would be prudent, for various reasons, for a mortgagee to at least consult with the ACO about the proposed sale price, before undertaking a public or private sale. But that is not to say that the ACO has a right to set the sale price, or to veto the price at which the mortgagee proposes to sell.
There may be cases in which an arm’s length mortgagee such as the CBA, intentionally or unintentionally, enters into a contract to sell restrained property to a family member or criminal associate of the registered proprietor. Irrespective of the identity of the purchaser, the DPP has a remedy if the mortgagee fails to comply with its obligations under s 77(1).
If the DPP’s concern is that the family member or criminal associate may themselves be using the proceeds of crime to purchase the property, an application for a further restraining order may be made on appropriate material. As mentioned earlier, it is routinely ordered that the mortgagee provide the ACO with a copy of the contract of sale within 5 days of its execution. If, upon scrutinising the contract, the ACO has such concerns, it can take steps to make an appropriate application.
No doubt it would be more convenient to the ACO for it to simply have a power to set sale conditions, or to veto particular transactions, but the legislation does not provide for that as a matter of course.
The proposed time order may not be commercially appropriate in many cases. For example, there may be cases where the mortgagee decides that it is inadvisable to sell within a particular period, for example, due to an actual or anticipated change in market conditions, or the necessity or desirability of performing some works on the property before sale. Or, it may be a case where the best price can be obtained from a purchaser who requests a long settlement period.
The general remarks which I have made in these reasons are not intended to limit the court’s discretion to do what is “just” in any particular application to vary a restraining order. But in cases involving an arm’s length mortgagee, particularly a reputable, institutional lender, it is likely that a court would require solid evidence of risk, before it would be persuaded to limit the wide powers granted to a mortgagee under s 77(1) of the TLA.
Orders
For these reasons, I indicated that I would not make any of the proposed sale, time or deposit orders.
The DPP then sought the following order, in lieu of the proposed sale order:
That the property be sold for its fair market value or the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.
Such an order has been made by some judges in other cases, although it is not clear that it has ever been made other than by consent.
The CBA opposed the making of the alternative order, on the basis that it involved an unjustified re-writing of its rights and obligations under s 77(1) of the TLA. I agreed with the CBA and declined to make the alternative order.