Equuscorp Pty Ltd v Westpac Banking Corporation
[2003] VSC 241
•4 July 2003
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 6813 of 2002
| EQUUSCORP PTY LTD ACN 006 012 344 (formerly Equus Financial Services Ltd) | Plaintiff |
| v | |
| WESTPAC BANKING CORPORATION ARBN 007 457 141 and OTHERS | Defendants |
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JUDGE: | BYRNE J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 11, 12 June 2003 | |
DATE OF JUDGMENT: | 4 July 2003 | |
CASE MAY BE CITED AS: | Equuscorp Pty Ltd v Westpac Banking Corporation | |
MEDIUM NEUTRAL CITATION: | [2003] VSC 241 | |
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Mortgages – mortgage purchased at undervalue – mortgagor insolvent company – whether purchase by directors of mortgagor – whether purchaser should rank for face value of mortgage debt or for purchase price paid.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr R.N. Wallace | Kelly & Chapman |
| For the First Defendant | Mr J. Tsalanidis | Gadens |
| For the Second Defendant | Mr M. Syme | Corrs Chambers Westgarth |
| For the Third Defendant | No appearance | |
| For the Fourth, Fifth and Sixth Defendants | Mr R.S. Randall | David Phillips |
HIS HONOUR:
The land the subject of this proceeding is a residential property situate at and known as 19 View Road, Lower Plenty. It is the land described in Certificate of Title Volume 8647 Folio 848 standing in the name of the thirdnamed defendant Jamondo Consolidated Holdings Pty Ltd (In Liquidation) ("Jamondo"). The Certificate of Title shows that the property is encumbered by three mortgages and a caveat. Their details are as follows:
·First mortgage No. L316993L registered on 17 October 1984 in favour of Statewide Building Society. The current proprietor of the mortgage is the successor to the building society, the firstnamed defendant, Westpac Banking Corporation. The amount of the debt secured by this mortgage as at 10 June 2003 was $181,848.07.
·Second mortgage No. P372971S registered on 15 August 1989 in favour of the secondnamed defendant, V.L. Credits Pty Ltd ("V.L. Credits"). This mortgage was by agreement dated 20 December 1992 sold to the sixthnamed defendant Ellen Mehmet who was described in the agreement as Ena Ellen Mehmet. The amount of the debt secured by this mortgage is a matter of controversy in this proceeding.
·Third mortgage No. P500832L registered on 31 October 1989 in favour of Kolbran Pty Ltd. Kolbran has executed a discharge of this mortgage and it may be ignored for present purposes.
·Charge created by deed dated 4 April 1989 in favour of Equuscorp Financial Services Ltd, named called Equuscorp Pty Ltd, the plaintiff. This charge is protected by caveat No. P426505K registered on 14 September 1989. The amount of the debt secured by this charge is immaterial for present purposes.
Jamondo was incorporated in 1976. Between October 1976 and 24 June 1997 its directors were the fourthnamed defendant James Lyfti Sabri and his wife, the fifthnamed defendant, Rhonda Sabri. In 1993 Jamondo went into liquidation. The liquidator paid no dividend and on 24 June 1997 the company was dissolved pursuant to s.574 of the Corporations Law. Jamondo has on 29 November 2002 been reinstated on the application of Westpac which has on 24 March 2003 commenced proceeding No. 5047 of 2003 in this Court seeking possession of the land. Judgment for possession was obtained on 8 April 2003 but the judgment has not yet been executed.
The occupants of the land are the former directors of Jamondo, Mr and Mrs Sabri. Mrs Mehmet is the mother of Mrs Sabri.
Mrs Mehmet purchased V.L. Credits mortgage in December 1992 for $165,500. The purchase price was paid by instalments made on 12 January 1993, 20 December 1993 and 23 September 1994. Pursuant to the terms of the sale agreement, V.L. Credits agreed to assign the mortgage to Mrs Mehmet or to provide a discharge if so requested after six months after the last payment, that is, after 23 March 1995. No assignment or discharge has been sought or provided, so that the Certificate of Title shows V.L. Credits as mortgagee.
There was before me some uncertainty as to the face value of the V.L. Credits debt secured by this mortgage. According to the sale agreement Jamondo was indebted to V.L. Credits under a guarantee and indemnity of the debt of Sempre Nominees Pty Ltd. The amount of the Sempre Nominees' debt is there recited to be $1,661,446.26 as at 22 December 1992, the date of the agreement. Ian Raymond Veall, a Director of V.L. Credits, told me that his company ceased making loans in 1990 and has been dormant since 1997. Its records have been destroyed and he has no personal recollection of the debt secured over the property. On 27 January 1993, however, the solicitors for V.L. Credits applied on behalf of their client for it to be admitted to vote at a meeting of the creditors of Mr and Mrs Sabri in the sum of $1,682,437.00. This amount approximates the amount mentioned in the sale agreement plus interest to that date. I find that the V.L. Credits' debt purchased by Mrs Mehmet was at the time of purchase $1,661.446.26.
This proceeding is brought by Equuscorp by Originating Motion filed on 15 August 2002. In its current form[1] the application seeks an order for the sale of the property, directions for the sale to be conducted by Equuscorp and an order that the net proceeds of sale be paid to the mortgagees and then to Jamondo. Orders are also sought for possession and for accounts of the moneys secured by the Westpac mortgage and by the V.L. Credits mortgage.
[1]Further Amended Originating Motion filed 3 March 2003.
It is abundantly clear that most, if not all, of this relief should be denied Equuscorp. Westpac as the undisputed first mortgagee is entitled to realise its security. I was told that it intends to recover possession and sell the property. In these circumstances, I would not order a sale by a subsequent encumbrancer. If requested, however, I shall stand this part of the case over until it be known whether Westpac is in fact pursuing its right to realise its security.
The real dispute before me, however, was whether there was any security available to Equuscorp, given that it ranked after the Westpac mortgage and the V.L. Credits mortgage. It was accepted that the realisable value of the land was between $500,000 and $700,000 or thereabouts. This means that, after a sale by Westpac, there is likely to be available the sum of about $320,000 to $520,000 for subsequent encumbrancers. If the V.L. Credit mortgage is treated as securing a sum of about $1.6M, there is clearly nothing for Equuscorp. If, on the other hand, Mrs Mehmet is to be treated as a secured creditor of Jamondo in the sum of only $165,500, then there is a sum of approximately $170,000 to $370,000 available for Equuscorp. The debt secured by the Equuscorp charge far exceeds this sum so that no other creditor is involved. The question, therefore, which was agitated before me was how, for present purposes, the secured debt of Mrs Mehmet should be valued for the purpose of ranking.
On behalf of Mrs Mehmet, counsel submitted that she should rank for the full value of the debt and the mortgage which she purchased, notwithstanding that she paid very much less for it. That this was the general principle was not disputed by counsel for Equuscorp.[2] He, nevertheless, submitted that this case fell within an exception to this general rule, for Mrs Mehmet made the purchase as agent for her daughter and son in law who stood in a fiduciary relationship to the debtor, Jamondo, because they were at all relevant times its directors.
[2]Elders Rural Finance Ltd v Westpac Banking Corporation (1988) 4 BPR 9383 at 9385.
It is well established that a fiduciary will not be permitted to take or retain a benefit from property the subject of the trust to the prejudice of the beneficiary.[3] This principle has been applied to company directors, at least in the case of an insolvent company.[4] The reasoning behind this is that, when the purchase at an undervalue of the company debt, the director purchasers would otherwise receive the full value of the secured debt, leaving for the creditors of the company only the purchase price which was paid for the debt. The directors in these circumstances would be taking a benefit to the prejudice of these creditors if they were permitted to take the full value of the security and the creditors received only a dividend from the funds of the company which included the price received. Applying this principle to the directors in this case, they would have been entitled to rank only for the amount paid plus interest had it been they who purchased the V.L. Credits mortgage.
[3]Hobday v Peters No. 1 (1860) 28 Beav. 349; 54 ER 400 at 401, per Romilly MR.
[4]In re Imperial Land of Marseilles; ex parte Larking (1876) 4 Ch D 566 at 578, per Malins V-C, a view with which the Court of Appeal agreed at 4 Ch D at 580.
It was suggested on behalf of the defendants that it had not been shown in this case that the directors took a benefit or that Jamondo or its creditors suffered a prejudice from the purchase. I have found the value of the debt to be of the order of $1.6M. The approximate present value of the security property is known but not its value at the time of the purchase. There is no evidence which displaces the apparent inference that the purchase here, assuming it to have been made by the directors, represented their seizing of a bargain at the expense of the insolvent company and its creditors. In these circumstances, they would not be entitled to retain the benefit of the transaction.
The question, then, in this case, becomes whether Mrs Mehmet should be treated any differently. The case for Equuscorp was that she was merely the alter ego of the directors, Mr and Mrs Sabri, and that she should be treated as they would had they made the purchase in their own name.
In support of this contention counsel marshalled a number of factors. I should observe at the outset that neither Mrs Mehmet nor Mr Sabri nor Mrs Sabri was called to give evidence with respect to these matters nor to refute the inferences which I was invited to draw from them. I do not, of course, speculate as to what evidence they might have given. The matters relied upon on behalf of Equuscorp were the following.
First, Mrs Mehmet is a close relative of the directors and it may be supposed that she wished to protect them from eviction from their home at the hands of V.L. Credits. I find this to be the case. At the time of the purchase, V.L. Credits was threatening to realise its security.
Second, the sale of the mortgage was conducted in a surreptitious way. At the time of the sale Mr and Mrs Sabri were taking steps to enter into an arrangement with their creditors pursuant to Part X of the Bankruptcy Act. There was evidence, which I accept, that they sought to conceal the sale from their creditors. The sale agreement itself provides that V.L. Credits will continue to appear and act as creditor in the Part X proceedings, but in accordance with Mrs Mehmet's directions.
Third, for the purpose of the purchase, Mrs Mehmet retained the services of a solicitor, Mandy Greenlaw. I state immediately that no person suggested that Ms Greenlaw acted in any way inappropriately or improperly and I make no such finding. The fact remains that, behind her conduct of the transaction stood Mr Sabri. It was his solicitor who introduced Mrs Mehmet to Ms Greenlaw for the purpose of obtaining independent advice. It was he who paid Ms Greenlaw's accounts. It was he who received copies of letters sent on his mother in law's behalf and who in effect gave to Ms Greenlaw her instructions.
Fourth, in her letter of 4 January 1993 Ms Greenlaw confirms with Mrs Mehmet her instructions that the sum of $165,500 was provided by her to assist her daughter and son in law to save their family home. She continues in this letter as follows:
"I further confirm that you have entered into a private agreement with Rhonda and Jim with respect to advancing the sum of $165,500, and that you fully understand the risk involved."
I infer from this that there was some arrangement whereby Mr and Mrs Sabri were indebted to Mrs Mehmet for all or part of the sum advanced. This suggests that they, and not Mrs Mehmet, were the real purchasers of the mortgage.
Fifth, in any event, the evidence as to the source of the funds used to purchase the V.L. Credits mortgage suggests that some of them were provided by Mr Sabri. According to Ms Greenlaw's note of 21 December 1995, the first instalment of $125,500 was made up of three payments: $20,000 from Commonwealth Bank, Greensborough, $82,500 from Westpac Bank, Shepparton and $20,000 from the National Bank at Collingwood. The second instalment of $20,000 was paid by Mr Sabri, "source of funds unknown". In a letter of 15 March 1994 Ms Greenlaw records that Mr Sabri advised her on 16 December 1993 that he was assisting Mrs Mehmet to arrange for this second instalment to be paid. The third and final instalment of $20,000 was paid by Bitara Pty Ltd trading as E. Mehmet & Sons. I find that the second instalment only was provided by Mr Sabri. The source of the funds for the other payments is unknown.
Sixth, notwithstanding that, under the terms of the sale agreement, Mrs Mehmet was entitled to call for a discharge of the V.L. Credits mortgage, she did not do so. In his letter of 3 June 1994 to Ms Greenlaw, Mr Sabri, who describes himself as carrying on business of chartered accountant under the name James L. Sabri & Associates, mentions the strategy that V.L. Credits be "still a creditor entitled to get proceeds from the trustee of the Part X". This letter also discloses ongoing litigation with Equuscorp in the Federal Court to overturn the Part X Deed of Arrangement. The strategy was presumably embraced by Mrs Mehmet inasmuch as she did not lodge a caveat to protect and disclose her interest in the V.L. Credits mortgage and did not cause it to be discharged or transferred.
Faced with this evidence, I accept that Mrs Mehmet was acting as the alter ego of the former directors, Mr and Mrs Sabri. Accepting as I do that the law will not permit them as fiduciaries to derive a benefit from the purchase of the security at undervalue, it will not permit them to achieve the same result by using the name of another person. Accordingly, for the purposes of competing with other creditors of Jamondo Mrs Mehmet is entitled to rank only for $165,500 and interest.
I therefore propose the following orders:
1.That the application for orders for sale be adjourned to a date sufficient to know whether Westpac is proceeding itself to realise the property.
2.Declare that, as between Equuscorp and Mrs Mehmet, the proceeds of sale after satisfaction of the Westpac mortgage be applied first in payment to Mrs Mehmet of the sum of $165,500 plus interest and then to Equuscorp.
I will hear counsel further as to the question of Mrs Mehmet's interest, as to the precise terms of the orders to be made to give effect to my conclusions, and as to costs.
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