Farrugia v Official Receiver in Bankruptcy

[1982] FCA 55

Re: GEORGE FARRUGIA
Ex parte: VICTORIA NATALIE FARRUGIA
And: OFFICIAL RECEIVER IN BANKRUPTCY (1982) 58 FLR 474
No. NSW1101 of 1980
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
Deane J.(1)

CATCHWORDS

Bankruptcy - husband and wife - mortgage on jointly owned property - moneys partly applied for benefit of husband and partly for benefit of husband and wife - husband's bankruptcy - whether equitable doctrine of exoneration applies - whether wife is as between husband and herself in the position of surety.

Bankruptcy Act, 1966, s.111

Bankruptcy - Husband and wife - Jointly-owned real property - Moneys raised on security of property applied partly for benefit of husband and partly for benefit of husband and wife - Husband's bankruptcy - Subrogation of wife to mortgagee's rights - Equitable doctrine of exoneration - Wife's charge upon husband's interest - Interest - Bankruptcy Act 1966 (Cth), s. 111.

HEADNOTE

The applicant and her husband were joint tenants of real property. They borrowed $23,000 secured by first mortgage on the property. Of that sum $12,500 discharged a previous mortgage over the land, and the balance, namely $10,500, was applied by the applicant's husband in a business in which the applicant had no direct financial interest. The applicant's husband became bankrupt and the property was sold. The proceeds of sale were applied partly in satisfaction of the first mortgage and the balance divided equally between the applicant and the official receiver as trustee of the estate of the applicant's husband.

The applicant applied for a declaration that in addition to such equal share, she was entitled to receive a further $5,250 from the proceeds of sale: a sum representing one-half of $10,500 applied by the applicant's husband for his own purposes, together with the benefit of interest paid on that amount invested pending the outcome of the application.

Held: (1) Since all the mortgagees' rights under the mortgage had been satisfied and the mortgage fully discharged, the applicant was not subrogated to the rights of the mortgagee under the mortgage.

(2) Where joint property is charged partly for the benefit of the husband alone and partially for the benefit of both husband and wife and it is possible to apportion the principal between the two, there is room for the application of the equitable doctrine of exoneration and the wife is, in the absence of agreement to the contrary, entitled to exoneration to the extent of what was borrowed and applied for the benefit of the husband alone. Thus, the applicant was entitled to throw that part of the borrowing on the husband's interest in the land to the exoneration of her own.

Gee v. Smart (1857), 8 E1 & B1 313; 120 ER 116, referred to.

(3) The applicant had a charge upon her husband's interest in the land by way of indemnity to secure her right of exoneration.

Gee v. Liddell, (1913) 2 Ch 62, referred to.

(4) That charge was not obliterated by the bankruptcy of the applicant's husband and his interest in the property which passed to the official receiver was subject to it.

Aguilar v. Aguilar (1820), 5 Madd 414; 56 ER 953; Re Berry, (1976) 2 NZLR 449; Re Thompson; Ex parte Smith (1975), 38 FLR 165, referred to.

(5) Section 111 of the Bankruptcy Act 1966 did not apply to defeat or postpone the applicant's rights.

Thompson v. Smith (1976), 135 CLR 102; Gosling v. McCombie (1972), 126 CLR 487; Re Cronmire, (1901) 1 KB 480; Re Berry, (1976) 2 NZLR 449, referred to.

(6) Accordingly, the applicant was entitled to receive, in addition to her equal share in the balance a further sum of $5,250 together with the benefit of any interest earned on that amount whilst placed on interest-bearing deposit.

HEARING

Sydney, 1982, March 11; April 15. #DATE 15:4:1982

APPLICATION.

Application by the wife of a bankrupt against the official receiver as trustee of the estate of the bankrupt seeking declarations.

The facts appear in the judgment.

A. C. Bennett, for the applicant.

N. Bluett, for the official receiver.

Cur. adv. vult.

Solicitors for the applicant: N. J. Schweizer & Co.

H. W. FRASER

ORDER

1. DECLARATION that Victoria Natalie Farrugia was entitled to be paid out of the proceeds of sale of the land contained in Certificate of Title Volume 12371 Folio 80 an amount of $5,250 in addition to the amount of $9,124.75 which was paid to her. This application involves some not uncomplicated questions of law. I have however reached a firm view upon them. It is preferable that I give my judgment forthwith. On 31 July, 1979, Mr. George Farrugia and his wife, Mrs. Victoria Farrugia, were registered as proprietors as joint tenants of certain land at Seven Hills which constituted their matrimonial home. On that day they

2. DECLARATION that Mrs. Farrugia is entitled to be paid the interest earned on the sum of $5,250 placed on interest bearing deposit.

3. ORDER that the said sum of $5,250 and the said interest be paid by the Official Receiver to Mrs. Farrugia upon his receipt of the same.

4. ORDER that the costs of Mrs. Farrugia and the costs of the Official Receiver be paid out of the bankrupt estate of George Farrugia.

Declarations accordingly.

JUDGE1

This application involves some not uncomplicated questions of law. I have however reached a firm view upon them. It is preferable that I give my judgment forthwith.

On 31 July, 1979, Mr. George Farrugia and his wife, Mrs. Victoria Farrugia, were registered as proprietors as joint tenants of certain land at Seven Hills which constituted their matrimonial home. On that day they borrowed an amount of $23,000 from a Mr. and Mrs. Davis upon the security of a first mortgage over that land. $12,500 of the proceeds of the mortgage was applied in discharging a previous mortgage over the land. The remaining $10,500 were obtained and used by Mr. Farrugia in a building business which he carried on and in which Mrs. Farrugia had no direct financial interest.

Mrs. Farrugia's affidavit evidence as to the circumstances surrounding the mortgage is as follows:
"I signed the mortgage document dated 31st July, 1979 after a conversation with my husband to the following effect:-

My Husband: "I need some money for the business. I want to take a bigger mortgage over the property so that I can get some more money. I want you to sign a new mortgage".

I said: "What do you want the money for?"

He said: "That has nothing to do with you; I need the money for the business".

I said: "Very well, I will sign the mortgage".

After the moneys were received from Mr. and Mrs. Davies by Mr. Roberts, the solicitor, my husband collected the money. I did not see the cheque he received from the solicitor nor did I see any of the moneys obtained by means of this mortgage. I did not exercise any control over what happened to the proceeds of the mortgage.

My husband and I did operate a joint cheque account. However, I rarely signed cheques on this account. I do not recall signing any cheque in the sum of $3,538.00 or a cheque for any similar amount in August, 1979".
Evidence from bank records supports Mrs. Farrugia's account of what took place and I accept her evidence in that regard.

On 17 November, 1980, Mr. Farrugia was made bankrupt. In November of that year, contracts were exchanged for the sale of the subject property for $47,700. Settlement took place on 5 March, 1981. On settlement $24,887.50 was paid to Mr. and Mrs. Davis on discharge of the mortgage. The net proceeds of sale, after discharge of the mortgage, legal costs and adjustments, was, apparently, $18,249.50. The sum of $9,124.75 was paid to Mrs. Farrugia. An equal amount was paid to the Official Receiver as trustee of Mr. Farrugia's bankrupt estate.

The present application is brought by Mrs. Farrugia against the Official Receiver. In it, Mrs. Farrugia seeks a declaration that, in addition to the $9,124.75 which she has already received, she is entitled to receive a further $5,250 from the proceeds of sale. That figure represents one half of the $10,500 which was received by Mr. Farrugia and used for his own purposes from the proceeds of the mortgage to Mr. and Mrs. Davies. Mrs. Farrugia also claims the benefit of interest paid on that amount which has, apparently, been invested in an interest bearing deposit pending the outcome of the application.

Mrs. Bennett, who appears for Mrs. Farrugia, puts her case primarily on the basis of subrogation, that is to say, she argues that her client was subrogated to the rights of the mortgagees under the mortgage. I am, however, unable to see that Mrs. Farrugia could obtain any benefit from any such subrogation (if it be available) since all the mortgagees' rights under the mortgage have been satisfied and the mortgage is fully discharged. That is not, however, the end of the matter. Reliance is also placed, on Mrs. Farrugia's behalf, on the principles underlying the equitable doctrine of exoneration.

Where the property of a married woman is mortgaged or charged in order to raise money for the benefit of her husband, it is presumed, in the absence of evidence showing an intention to the contrary, that, as between her husband and herself, she meant to charge her property merely as a surety. In such a case, she is, as between her husband and herself, in the position of surety and entitled both to be idemnified by the husband and to throw the debt primarily on his estate to the exoneration of her own (see, generally, 22 Halsbury's Laws of England (4th Ed.) paras. 1071-1076; Fisher & Lightwood's Law of Mortgage (8th Ed.) p. 445; Huntingdon v. Huntingdon (1702) 2 Bro. Parl. Cas. 1; 1 E.R. 753; Peirs v. Peirs (1750) 1 Ves. Sen. 521; 27 E.R. 1180; Pocock v. Lee (1707) 2 Vern. 604; 23 E.R. 995; Hall v. Hall (1911) 1 Ch. 487).

The present case is not, however, the simple one where the whole of the moneys borrowed jointly by husband and wife on the security of their joint property have been applied for the benefit of the husband. As has been mentioned, $12,500 of the amount borrowed was applied for the joint benefit of Mr. and Mrs. Farrugia upon the discharge of the previous mortgage under which they were jointly liable. It was only the balance of $10,500 that was applied for the benefit of Mr. Farrugia alone. A question which arises is whether the one borrowing can, for the purposes of the application of the relevant equitable principles, be in effect subdivided into what was borrowed and applied for the joint benefit of Mr. and Mrs. Farrugia and what was borrowed and applied for Mr. Farrugia's benefit alone. In my view it can. It seems to me that where the joint property is charged partially for the benefit of the husband alone and partly for the benefit of both husband and wife and it is possible to apportion the principal between the two, there is room for the application of the equitable doctrine of exoneration and the wife is, in the absence of agreement to the contrary, entitled to exoneration to the extent of what was borrowed and applied for the benefit of the husband alone (see, 22 Halsbury's Laws of England (4th Ed.) para. 1073; Gee v. Smart (1875) 8 El. & Bl. 313 at p. 319; 120 E.R. 116 at p.119).

I turn to the application of these principles to the facts of the present case. In so far as the mortgagees were concerned, Mr. and Mrs. Farrugia were both principal debtors in respect of the whole of the $23,000 which was advanced under the mortgage. As between Mr. and Mrs. Farrugia however, they were principal debtors in respect of $12,500 of that money. Between themselves, Mr. Farrugia was in the position of principal debtor and Mrs. Farrugia the position of surety as regards the balance of the $10,500 which Mr. Farrugia applied for his own purposes. Mrs. Farrugia was entitled to throw that part of the borrowing on her husband's interest in the land to the exoneration of her own. If Mr. Farrugia had not become bankrupt, Mrs. Farrugia would, upon the sale of the property, have been entitled to require that the whole of the $10,500 applied for Mr. Farrugia's benefit be repaid out of Mr. Farrugia's share of the proceeds of sale. More importantly, Mrs. Farrugia had a charge upon Mr. Farrugia's interest in the land by way of indemnity to secure her right of exoneration (see, Gee v. Liddell (1913) 2 Ch. 62 at p. 72). That charge was not obliterated by Mr. Farrugia's bankruptcy. Mr. Farrugia's interest in the property which passed to the Official Receiver was subject to it (see Aguilar v. Aguilar (1820) 5 Madd. 414; 56 E.R. 953; Re Berry (1976) 2 N.Z.L.R. 449). I am fortified in that conclusion by the fact that it accords with the views of no less an authority on the law of bankruptcy than the late Mr. Justice Riley (see Re Thompson Ex parte Smith (1975) 8 A.L.R. 475 at p. 477).

No specific argument has been advanced before me to the effect that s.111 of the Bankruptcy Act, 1966 applies in the present case to defeat or postpone Mrs. Farrugia's rights. It seems to me that the provisions of that section do not have that result in the particular circumstances of the present case. Mrs. Farrugia cannot be said, for the purposes of that section, to have made available her interest, as a joint tenant with her husband, in the land (see Thompson v. Smith (1976) 135 C.L.R. 102). Nor can it properly be said that, in the particular circumstances of the present case, a loan by Mrs. Farrugia to her husband resulted from the mere fact that Mr. Farrugia applied part of the proceeds of the mortgage, to which he and his wife were jointly entitled, to his own purposes (see, Gosling v. McCombie (1972) 126 C.L.R. 487 at p. 504; In re Cronmire (1901) 1 K.B. 480; Re Berry, supra,at p. 452).

In the result, I am of the view that the whole burden of the repayment of the $10,500 should, in calculating the respective entitlement of Mr. and Mrs. Farrugia to the net proceeds of the sale of their property, have been cast upon Mr. Farrugia. It follows that Mrs. Farrugia was entitled to receive, in addition to the $9,124.75 paid to her, a further amount of $5,250. She is also entitled to the benefit of any interest earned on that amount while it has been placed on interest bearing deposit.

I propose to make declarations and orders to that effect and to order that the costs of Mrs. Farrugia and of the Official Receiver to be paid out of Mr. Farrugia's bankrupt estate.