HSBC Bank Australia Ltd v Russo - [2012] SASC 9

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
HSBC BANK AUSTRALIA LTD v RUSSO
[2012] SASC 9
Reasons of Judge Lunn a Master of the Supreme Court
27 January 2012
PROCEDURE
Interlocutory application by defendant under 6R 204(6) in action under Part 17 of Real Property Act 1886 for possession of property seeking relief against acceleration clause under s 55A(3)of Law of Property Act 1936 - possession order already made and warrant executed giving possession to the plaintiff - held application incompetent as not being interlocutory because not ancillary or adjectival to any principal relief remaining in the action.

REAL PROPERTY
Application under s 55A(3) of Law of Property Act 1936 for relief against operation of acceleration clause in mortgage - defendant held land as trustee - no disclosure of ultimate beneficial owners of the property - not shown defendant or ultimate beneficiaries would suffer hardship if mortgagee exercised its power of sale or that beneficiaries not in a position to pay out the mortgage immediately - application dismissed.

HSBC BANK AUSTRALIA LTD v RUSSO
[2012] SASC 9
JUDGE LUNN:
Reasons on defendant’s application for relief under s 55A(3) of the Law of Property Act 1936
Background

At all material times, the defendant has been the sole trustee of the Aldinga Beach Unit Trust (“the Trust”) which was created by a Deed dated 13 August 1995. Under that Deed the assets of the Trust are held by the trustee for the benefit of the unit holders in the Trust. The defendant acquired the subject property at 189 Esplanade, Aldinga Beach, (“the property”) in his capacity as the trustee of the Trust. On 31 October 1996 in his capacity as trustee he borrowed $115,000 from the plaintiff and granted to the plaintiff a first mortgage over the property (“the Mortgage”) to secure the debt. The letter of offer of 23 September 1996, which apparently constituted the terms of the loan which was secured by the Mortgage, by its preamble made the loan repayable on demand. Although the “Repayment” paragraph referred to a “Maturity Date”, no such date was contained in the document. That clause specified that instalments of $390.51, or such increased amount as the plaintiff required, should be paid on account of principal and interest each fortnight. Clause 2.1 of the terms of the Mortgage also made the amount secured repayable on demand unless there was a written agreement to the contrary. Both the provisions of s 55A of the South Australia Law of Property Act 1936 (“the LPA”) and, more recently, the Commonwealth National Credit Code, applied to the loan and the Mortgage.
The defendant subsequently granted a second registered mortgage over the property to Eric and Elizabeth Buck. There has been considerable litigation in this Court concerning that mortgage. I have substantial knowledge of it, but I have ignored it for the purpose of the present application.
On about 2 June 2006 the plaintiff instituted Action SCCIV-06-721 in this Court against the defendant seeking an order for possession of the property because of arrears of instalments, but following payment of substantially all of the arrears it then discontinued that action.
In July 2007 the plaintiff commenced a further action (SCCIV-07-995) in this Court under Part 17 of the Real Property Act 1886 (“the RPA”) seeking possession of the property by reason of further defaults of the defendant in making instalment payments. On 31 October 2007 an order was made for possession in favour of the plaintiff. On 3 December 2007 the defendant paid all of the arrears and costs and the plaintiff did not then enforce this order for possession.
On 29 September 2010 the defendant was declared bankrupt and remains an undischarged bankrupt. The property is not part of his bankrupt estate because he only holds the legal title to it as a trustee.
On 21 January 2011 the plaintiff commenced the present action, SCCIV-11-80, against the defendant again seeking an order for possession of the property under Part 17 of the RPA. It alleged arrears of instalment payments due by the defendant. These arrears had been the subject of a notice under s 55A(1) of the LPA which had been served on 26 November 2010 and which had not been complied with. The contents of the notice, and its due service, have not been disputed. At a hearing on 9 May 2011 I informed the defendant, who then appeared in person, that any application to be relieved of the effect of the acceleration clause in the Mortgage could be dealt with if the arrears were paid in full. At a hearing on 7 June 2011 the plaintiff’s solicitor informed me that the arrears had not been paid. On 14 June 2011 I made an order for possession in favour of the plaintiff, but it was subject to the usual proviso:
3.If the said Defendant pays to the Plaintiff all moneys secured by the above Memorandum of Mortgage, the Plaintiff (subject and without prejudice to the due exercise of any power of sale for the time vested in the plaintiff) is to redeliver possession of the property to the said Defendant and discharge the Memorandum of Mortgage.
The sealed order was served on the defendant on 18 June 2011. On 21 July 2011 the plaintiff caused a warrant for possession of the property to be issued.
On 4 August 2011 the defendant, acting in person, took out an application (FDN9) to stay the warrant. In his supporting affidavit (FDN10) he made a payment proposal which would have paid out the loan by 29 February 2012. On 5 August 2011 another Master dismissed this application. On that day the warrant was duly executed and possession of the property was delivered to the plaintiff. However, the plaintiff has not yet exercised its power of sale under the Mortgage, but it intends to do so shortly.
The present application
On 14 December 2011 the defendant issued an application (FDN11) seeking an order that he be granted relief under s 55A(3) of the LPA and, in particular, that the effect of the acceleration clause in the Mortgage be reversed and possession of the property be given back to him. In his affidavit (FDN13) in support the defendant deposed that since 18 July 2011 payments totalling $50,200 had been made on behalf of the Trust to the plaintiff in reduction of the Mortgage principal. He said this money had been sourced from his extended family and that he expected to receive ongoing support from that family to be able to meet further scheduled repayments.[1] He deposed that David Beard had told him that he was willing to lend him up to $60,000 from the proceeds of the sale of a property which he owned at Pennington by May 2012, which would enable the balance of the loan to be discharged. He claimed that but for the operation of the acceleration clause the loan would not be in arrears because of the payments recently made. An affidavit (FDN12) was also filed from David Beard confirming that he had a property on the market for sale which he expected to be sold in the next two to four months and that he would lend up to $60,000 from the proceeds of sale to the defendant as the trustee of the Trust.
[1] He did not say who were those family members, or show that they were obliged in any way, or able, to make such further payments.
As at 5 January 2012 the balance owing under the loan was $61,710 plus any legal costs recoverable by the plaintiff for FDN11 and for any steps which it was taking to sell the property. The plaintiff opposes any relief being granted to the defendant under s 55A(3) of the LPA.
At the hearing on 18 January 2012 the defendant’s counsel proposed an order should be made in the following terms:
15.1That the Defendant changes the trustee of the Trust to Ms Gina Caminiti within 14 days of the Plaintiff consenting to such a change;
15.2That the operation of the acceleration clause under the mortgage be reversed;
15.3That possession be returned to the Defendant on the condition that on proof by the Plaintiff that if the Defendant does not make payment of any amount due under the mortgage within 7 days written notice of that payment being due then:
15.3.1The full amount outstanding to the Plaintiff and secured by the mortgage will become due and payable; and
15.3.2the Plaintiff will be immediately entitled to an order for possession of the property.
15.4If Mr Beard offers the Defendant finance on the terms set out in his affidavit, the Defendant will accept that offer of finance and will apply the funds thereby received in discharge of the debt to the Plaintiff.
15.5That if the debt to the Plaintiff has not been repaid in full by 1 June 2012, the Plaintiff will be entitled to take possession of the Property in any event.
It is desirable to dispose of this application as soon as practicable, so that the plaintiff is not further delayed in exercising its power of sale. I base my refusal of the application under s 55A(3) on the following two grounds. It is not necessary to go into the other sometimes complex and difficult issues raised in the course of argument.
Application FDN11 is incompetent
The relevant parts of s 55A of the LPA are as follows:
55A—Enforcement of rights against mortgagor
(1)A right of sale or foreclosure in respect of mortgaged land, a right to enter into possession of mortgaged land or a right to appoint a receiver in respect of mortgaged land shall not be enforceable by the mortgagee under a mortgage to which this section applies against the mortgagor by action or otherwise unless—
(a)the mortgagee has served upon the mortgagor a notice in writing—
…
(2)Where a mortgage to which this section applies contains a provision by virtue of which a liability to repay moneys under the mortgage falls due in the event of a breach of a covenant or condition of the mortgage at an earlier date than if there were no such breach, that provision shall be inoperative unless a notice has been served upon the mortgagor in conformity with the provisions of subsection (1) of this section and where requirements are made of the mortgagor in the notice, he has failed to comply with those requirements.
…
(3)In any proceedings brought by a mortgagee for the recovery of a mortgage debt or for the enforcement of a mortgage, or in proceedings instituted by a mortgagor within twenty-one days after service of a notice under this section, a court may, upon such fair and equitable terms as it may determine, grant relief to a mortgagor against the enforcement of rights of a kind referred to in subsection (1) of this section, and may reinstate the position of the mortgagor in all respects as if no breach of a covenant or condition of the mortgage had occurred.
(5)This section applies to a mortgage of land (whether or not the land has been brought under the provisions of the Real Property Act where—
(a)     the mortgagor is a natural person; and
(b)     the land is appropriated for domestic or agricultural use.
(6)     For the purposes of this section—
(a)     land shall be deemed to be appropriated for domestic or agricultural use unless the mortgagor has made a statutory declaration that during the currency of the mortgage—
(i)no part of the land is to be used as a place of dwelling for the mortgagor's own personal occupation; and
(ii)in the case of land exceeding two hectares in area, no part of the land is to be used by the mortgagor for the business of primary production; and
(b)     where such a declaration has been made it shall be conclusively presumed that the land is not appropriated for domestic or agricultural use.
FDN11 is brought within the terms of s 55A(3). However, 6R 204, which applies to this Part 17 action, provides:
(1) This rule applies to an action for possession of land in which the plaintiff seeks an order enforceable against anyone who may happen to be in possession of, or physically present on, the land.
…
(6) Any applications under sections 55A … of the Law of Property Act 1936 … which relate to the subject matter of an action under Part 17 of the Real Property Act 1886 may be made by interlocutory application in that action.
This only authorises an application under s 55A(3) by an interlocutory application. The term “interlocutory” is a word of limitation and confines such applications to those which are ancillary and adjectival to the final relief sought in the action.[2] An interlocutory application for the purposes of 6R 204(6) must have an interlocutory proceeding as its subject matter. “Interlocutory proceeding” is defined in 6R 4 as follows:
[2] Adplan Pty Ltd v Gerblich, Lunn M, 22 July 2011, [2011] SASC 118.
interlocutory proceeding means a proceeding of any of the following kinds in which an order or direction of the Court is sought—
(a)a proceeding that is preliminary or ancillary to an action or appellate proceeding, or an intended action or appellate proceeding, in the Court;
Examples—
1An application to require production of evidentiary material that may assist in the formulation of an action.
2An application for a Mareva order.
(b)a proceeding for an order or direction about the course or conduct of an action or appellate proceeding;
Example—
An application for extension of time to take a step in an action.
(c)a proceeding related to the enforcement of a judgment;
Example—
An application for an order or direction under the Enforcement of Judgments Act 1991.
Here there is no principal relief in the action still remaining to be determined. The order for possession has been made and executed. The Court is functus officio and there is no application to set aside the possession order. In other words, there is no principal relief left extant in the action to which the interlocutory application FDN11 can be attached so that it can be properly classified as an interlocutory application. Therefore, FDN11 is outside the ambit of 6R 204(6) and is incompetent.
Section 55A(3) of the LPA empowers the Court not only to give relief against a right to enter into possession, but also against the exercise of a power of sale. In essence, FDN11, in the way in which it was argued at the hearing, is an attempt to restrain the exercise of the plaintiff’s power of sale for a sufficient time to enable the defendant to pay out the Mortgage. There is no apparent utility in possession of the property being returned to the defendant, other than it will impede the plaintiff from exercising its power of sale.[3] Proceedings under Part 17 of the RPA are directed solely to obtaining possession of the land and, unless amended, cannot be used for any wider purpose.[4] Any issue about the exercise of the power of sale, or of the determination of the amount owing, can only be dealt with in a Part 17 action where they are ancillary to the claim for possession. Where, as here, FDN11 is primarily directed to deferring the exercise of the power of sale, it is not ancillary to any claim to possession, and so for this reason also it cannot be an interlocutory proceeding maintainable in a Part 17 action.
[3] The defendant did not say he would occupy the property if possession was restored to him and did not suggest that such possession would be used for any beneficial purpose for the Trust.
[4] Griffiths v ANZ Banking Group Ltd (2002) 83 SASR 491.
6R 204(6) is only permissive. It does not exclude s 55A(3) relief being sought in other ways. However, the only other way in which it could be sought under the Rules in this action is by a cross-claim or counterclaim for that relief. 6RR 28 and 29 relevantly provide:
(1)An action is a proceeding in the Court (other than an interlocutory or appellate proceeding) in which a person (the plaintiff) asks the Court to make a final determination of a justiciable issue or to exercise any other power vested in the Court.
…
(3)A reference in these rules to an action extends, according to context, to a primary or secondary action, or to the action as a whole.
…
29—Secondary actions
(1)     Secondary actions are of two classes—
(a)     cross actions; …
(2)A cross action is an action introduced into an existing action by a party against another party.
Relief under s 55A(3) is an “action” for the purpose of 6R 28(1) and by 6R 29(1)(b) it could be pursued as a cross-claim in this action.[5] However, it has not been pursued as a cross-claim. Whether it is too late to do so need not now be considered.
[5]    For the reasons already given, it is not an interlocutory proceeding which is excluded from the definition of “action” in 6R 28(1).
Furthermore, s 55A(3) only empowers the Court to grant relief “against the enforcement of rights of the kind referred to in sub-section (1)”. In the context of this action, that can only be a reference to “a right to enter into possession of mortgaged land” in sub-section (1). However, the right of the plaintiff to enter into possession has already been enforced by the possession order and the warrant for possession. “Shall not be enforceable” in sub-s (1) refers to a future enforcement, and not to one which has already taken place. Therefore, on the terms of sub-ss (3) and (1) the Court cannot exercise any power under sub-s (3) to grant relief against an enforcement of a right to possession which has already been effected.
For these reasons alone, this Court cannot make any order in favour of the defendant on FDN11.
Exercise of discretion under s 55A(3)
Even if s 55A(3) could be invoked by the defendant, the Court would exercise its discretion under it against him and refuse him any relief.
Section 55A applies to this mortgage by virtue of sub-s (6)(b) because no declaration was made excluding it. However, a major purpose of s 55A(3) can be inferred from sub-ss (5)(a) and (6)(a). It is to relieve mortgagors from hardship where the land is the mortgagors’ personal homes.[6] However, there is no evidence that the defendant resides, or ever has resided, in the property.[7] As he has no beneficial interest in the property because he is only a trustee, he is not seeking to protect his equity in his family home. While these considerations do not preclude a court from exercising its powers under s 55A(3) in favour of the defendant, they strongly suggest that he does not come within the ambit of the real purpose of s 55A.
[6] It is not necessary to consider sub-s (6)(a)(ii), as there is no suggestion that the property here exceeds two hectares.
[7] In most documents his address is not shown as that of the property.
In Barker v Perpetual Trustees Australia Ltd[8] Bleby J, with whom Prior J concurred, stated as follows:
29On the hearing of a substantive application under s 55A based on hardship to the mortgagor, the power of the Court is to interfere with the exercise of the lawful rights of a mortgagee. It then behoves the mortgagor to make a true, full and frank disclosure to the Court of all relevant circumstances. There must be a full and frank explanation by the mortgagor as to why the default has occurred. Where the application is based on circumstances of alleged temporary or permanent hardship or unexpected changes in circumstances, those circumstances must be fully explained, with no room for suggestion or inference that there may be some other reason for the default. When, as is usually the case, the mortgagor is seeking the indulgence of the Court, it will be necessary to propose what the mortgagor suggests should be the fair and equitable terms on which the relief should be granted. The mortgagor cannot hope to avoid a sale without being required to comply with some material and perhaps ongoing terms and conditions.
30Where there has been a temporary lapse in payment of instalments payable under the mortgage and the mortgagor proposes to resume payments, the Court should be satisfied that the mortgagor has a reasonable prospect of making those payments or of complying with the fair and equitable terms that the mortgagor proposes or that the Court thinks fit to impose. The mortgagor must present sufficient information to enable the Court to reach its own independent conclusion that that is the case. The mortgagor's unsupported assertion to that effect will seldom be sufficient.
31If, when viewed as a whole, the mortgagor's application appears to be no more than an attempt to delay and frustrate the exercise of the mortgagee's rights, then the application for relief may well fail.
[8] (2003) 85 SASR 263 at [29]-[31].

In FDN11 the defendant is representing, and protecting, the interests of the beneficiaries under the Trust. The evidence is that the sole beneficiary of the Trust is another trust, the Phoenix Trust, of which the defendant’s associate, Gina Caminiti, is the trustee. The defendant has not disclosed who is behind the Phoenix Trust and thus who are the ultimate beneficiaries in the property. This is contrary to the obligation spoken of by Bleby J in the passage just quoted. It is unclear whether these ultimate beneficiaries are the persons who have contributed the $50,200 which has been recently paid off the Mortgage. They are also the persons who the defendant says in his affidavit will provide the funds to meet the fortnightly instalments under the Mortgage until the loan from Mr Beard pays it off entirely. There is no evidence that these ultimate beneficiaries of the property do not have the means to pay out the Mortgage immediately. No hardship to the defendant personally has been established and, likewise, no hardship to these ultimate beneficiaries. No good reason has been shown why the plaintiff should not be entitled to exercise its legal right forthwith to exercise its power of sale over the property.
The defendant relied heavily on being able to pay out the balance of the Mortgage within a few months by reason of the loan from David Beard which was to be received by 1 June 2012. However, it is far from certain that this loan will occur. The Pennington property has already been on the market for some time without being sold. Mr Beard has not committed himself to reducing his price for the property if it cannot be sold for his asking price. Furthermore, he has not legally obligated himself to make any loan to the defendant out of the proceeds of sale. Although his bona fides in offering the loan are not challenged, legally he is apparently entitled to change his mind, as he has not entered into any deed, or contract supported by valuable consideration, to make the loan. If this money is not forthcoming from Mr Beard, the plaintiff will be substantially delayed in recovering the balance of the loan.
As stated above, no utility has been shown in the possession of the property being restored to the defendant, other than that it would presumably impede the plaintiff’s exercise of its power of sale. Even if it was otherwise proper to restrain the plaintiff from exercising its power of sale, there would seem to be no good reason why the property should not remain in its possession in the meantime.
The history of the matter does not inspire confidence that if the acceleration clause in the Mortgage was set aside the defendant would continue to make the fortnightly payments on time.
The relief sought in FDN11 presupposes that there is an acceleration clause in the Mortgage against whose operation the defendant can be relieved. I could not find such a clause. However, the point was not mentioned in argument and I do not base my decision upon it.
I have today made the following orders:
1FDN11 dismissed.
2Liberty to the plaintiff to apply for a costs order if it does not seek to rely upon its right to costs under the Mortgage.