Ilend Capital Pty Ltd v Kingdom Towers 2 Pty Ltd

[2022] NSWSC 989

Supreme Court

New South Wales

Medium Neutral Citation:

Ilend Capital Pty Ltd v Kingdom Towers 2 Pty Ltd [2022] NSWSC 989

Hearing dates:

22 July 2022

Date of orders:

22 July 2022

Decision date:

22 July 2022

Jurisdiction:

Equity - Expedition List

Before:

Parker J

Decision:

See [39]-[47]

Catchwords:

MORTGAGES AND SECURITIES – equitable charge – finance broker and customer – customer agrees to charge real property with payment of brokerage fees – broker assigns its “right title and interest” in its “debts” to assignee – whether assignee entitled to enforce charge against customer

Legislation Cited:

Personal Property Securities Act 2009

Cases Cited:

Morley v Morley (1858) 53 ER 633

Native Bond Pty Ltd v Cant [2016] VSC 206

Texts Cited:

Tyler, ELG, PW Young and CE Croft, Fisher & Lightwood's Law of Mortgage (LexisNexis Butterworths, 3rd Australian ed, 2014)

Category:

Principal judgment

Parties:

Ilend Capital Pty Limited (First Plaintiff)
Loan Securities Capital Pty Limited (Second Plaintiff)
Kingdom Towers 2 Pty Limited (Defendant)

Representation:

Counsel:
C Stomo (Plaintiffs)
S Fitzpatrick (Defendant)

Solicitors:
Juris League Consultancy (Plaintiffs)
Unsworth Legal (Defendant)

File Number(s):

2022/158811

Publication restriction:

Nil

Judgment – EX TEMPORE

Revised from transcript and annotated; issued 26 July 2022

1. One of the claims made by the plaintiff in these proceedings is for recognition of an equitable security interest over land owned by the defendant. There has been a separate hearing before me as to whether the plaintiff is entitled to succeed on that claim. This judgment deals with that question.

2. The property in question is at Ingleburn Road in Leppington. The proceedings arise out of attempts by the defendant, Kingdom Towers 2 Pty Limited (“KT2”), to raise funds on the security of the property, apparently to redevelop it. For this purpose, KT2 retained the services of a company called Loan Securities Capital Pty Limited (“Loansec”). That company conducted a finance broking business. Loansec and KT2 entered into three mandate agreements pursuant to which Loansec was to obtain finance in specified amounts and for specified terms. In return Loansec was to receive fees.

3. The plaintiff, Ilend Capital Pty Limited (“Ilend”), is an assignee of Loansec. In these proceedings it seeks to recover unpaid fees pursuant to the mandate agreements. Ilend also seeks to enforce entitlements under the security agreements to a charge over the property as security for those outstanding fees. It is the claim for the charge which is the subject of the separate hearing with which I am dealing. The sole issue which arises is whether the assignment included that security interest.

Chronology of key facts

4. Brief affidavit evidence was given on both sides but there was no cross‑examination and there is no factual issue to be resolved. The question is essentially one of construction of the relevant documents.

5. There are three mandate agreements; each of them is in what appears to be a standard form used by Loansec. The first mandate agreement is dated 30 March 2020, the second and third are both dated 10 June 2020.

6. Each mandate agreement is signed on behalf of KT2 by Mazan Houssam Kabbara. KT2 appears to have been his company. Mr Kabbara also signed as guarantor, but he is not a party to these proceedings, and whether he has any personal obligation as guarantor does not arise for decision in the proceedings.

7. The next relevant document is a deed of assignment between Loansec and Ilend. It is dated 10 March 2021. There is no evidence about the circumstances in which the deed was executed. As will be seen, the consideration for the assignment was nominal; it was only $1. It is not suggested that this affected the enforceability or effect of the deed in equity.

8. In November last year, about eight months after the deed of assignment was executed, two caveats were lodged on the Leppington property in the name of Loansec. It is unclear who was responsible for this; it may be that the caveats were lodged on the instructions of Ilend, which by then appears to have assumed control of Loansec's business.

9. Although the caveats were lodged in November, KT2, according to an affidavit of its solicitor, only became aware of them on 1 April this year. About a month later KT2 applied to the Registrar General for lapsing notices. Those notices were issued on 11 May. In the meantime, on 1 May, Loansec had been deregistered.

10. These proceedings were commenced by Ilend on 1 June, one day before the caveats were due to lapse. An ex parte application was made to the Court on an urgent basis, as a result of which an order was made extending the caveats. But a copy of the order was not lodged with the Office of the Registrar General in time. As a result, the caveats lapsed. About three weeks later, on 23 June, Ilend lodged a fresh caveat, this time in its own name.

11. Following the ex parte hearing on 1 June the proceedings were referred to the Real Property List for case management. On 3 June it was ordered that they should continue by way of pleadings. Ilend’s statement of claim was lodged a few days later.

12. On 1 July, no application for expedition having been made on behalf of Ilend, an application was foreshadowed on behalf of KT2. KT2’s legal advisors intended to bring this application after KT2 had filed its defence but there was a delay while KT2 sought particulars.

13. Eventually, on 15 July KT2 made an application for expedition, having filed its defence despite not having received particulars which it considered satisfactory. The application was referred to me but Mr Yakenian, the solicitor for Ilend, was unable to appear on that day. The determination of Ilend’s claim for security was obviously urgent and I therefore heard the application for expedition on 18 July and made directions which resulted in the hearing today.

Assignment of security interest

14. Mandate agreements: As I have indicated, the mandate agreements were in standard form. Clause (ii) set out KT2’s obligation to pay fees. These consisted of an initial commitment fee, payable when the mandate agreement was entered into, with the remainder of what was described as the brokerage fee to be paid upon settlement of the loan. But if a loan meeting the requirements set out in the mandate agreement was obtained by Loansec and KT2 did not proceed with it, the fee was payable anyway.

15. Loansec’s entitlement to a charge was dealt with in clause (iv) which relevantly provided (emphasis added; I have also omitted some apparently surplus words):

In Recognition of LOANSEC Providing its services under the terms of this Agreement [KT2] hereby consents to LOANSEC securing payment of all of its monies/service fees which may become payable by [KT2] to LOANSEC under this guarantee, [KT2] hereby charges with the due payment of those monies all of [KT2’s] interest, right and title in any real property both (a) present, and (b) future, and … consents to LOANSEC lodging and registering a Caveat(s) noting its interests hereunder without challenge by [KT2]. Such registration of a Caveat/s by LOANSEC over [KT2’s] property/ies shall not be challenged by [KT2] in any way whatsoever, and [KT2] agrees not to take any steps in filing a ''Lapsing Notice" via the Land Titles Office to have the Caveat/s removed until such time [KT2] has paid all monies owing by it to LOANSEC as claimed from time to time. [KT2] further agrees not to circumvent this agreement and deal or transact business directly with funder/s proposed or nominated by LOANSEC without first gaining consent from LOANSEC; upon such an event occurring the monies/service fee made under this arrangement will automatically become due and payable and not challenged by [KT2] in anyway whatsoever.

16. The reference in clause (iv) of the mandate letter to moneys payable by KT2 to Loansec “under this guarantee” does not make much literal sense. The mandate agreement is described as a mandate, brokerage agreement and irrevocable authority rather than as a guarantee, and the obligation on KT2 is a principal obligation. Clearly, the phrase “under the guarantee” must be read as meaning “under this agreement.”

17. Deed of assignment: The recitals to the deed of assignment were:

A.   The Assignor has various debts indebted to it by multiple debtors (the debts).

B.   The assignor has agreed to assign the debts to the assignee.

18. The operative provisions of the deed were contained in clause 2. Subclause (2)(a) provided (emphasis added):

In consideration of the payment of $1.00 by the assignee to the assignor, the receipt of which is acknowledged, the assignor as beneficial owner assigns to the assignee absolutely all of the assignor's right title and interest in all debts indebted to it together with all interest which has accrued or which may accrue in the future on the debts and all amounts payable by the debtors.

19. Subclause (2)(b) contained various covenants by the assignor which it is not necessary to set out. Clause 3 conferred a power of attorney on the assignee, enabling the assignee to take action towards recovery of the debt in the assignor’s name.

20. Clause 4 was headed “Registration”. Subclause (4)(a) provided:

The assignor agrees to do all things requested by the assignee, acting reasonably to assist and enable the assignee to register or perfect the assignee's interests including security interests, under or arising in connection with this deed.

21. Subclause (4)(b) provided that the assignor waived rights it had to receive notices under the Personal Property Securities Act 2009 or related legislation. I received supplementary submissions from counsel on this subclause. But neither counsel suggested that it had any significance for the purposes of the construction issue with which I am concerned. Thus, I will not deal with it any further.

22. Clause 5 provided that the parties were to keep the terms of the deed confidential.

23. The critical words of subclause 2(a) of the deed of assignment were that Loansec assigned to Ilend all of Loansec’s interest in “debts indebted to it.” Counsel for KT2 submitted that in terms the assignment covered debt obligations owed to Loansec and not security interests held by Loansec covering those debts.

24. In support of this submission, counsel relied on the decision of Judd J in the Victorian Supreme Court in Native Bond Pty Ltd v Cant [2016] VSC 206. That case likewise concerned a loan arrangement made by a lender with a borrower, where the lender later executed an assignment in favour of an assignee and the assignee was seeking to enforce security rights. As in this case, the assignment in that case referred only to debts owed to the assignor by the borrower and did not expressly refer to security interests.

25. Judd J held (at [29]-[31]) that on its true construction the assignment did not extend to security interests. The assignee was therefore unable to appoint a receiver pursuant to the loan documentation which had been entered into between the borrower and the assignor.

26. The proposition that a debt and a security interest are two different types of chose in action is clearly established. In a passage referred to by Judd J in the Native Bond case, the learned authors of Fisher & Lightwood's Law of Mortgage [1]  state, at [14.7]:

A mortgage transaction has two aspects: the contractual – that is, the covenant to pay; and the proprietary – that is, the mortgage or charge. These two elements – the debt and the security – may be transferred together in whole or in part, or separately and independently …

…

If the whole or part of the debt is assigned without the transfer of any of the security for the debt, the assignor remains the person entitled to exercise the powers and remedies qua mortgagee, but he is trustee thereof and must hand over to the assignee the appropriate part of any moneys he receives by exercising such power and remedies: Morley v Morley (1858) 25 Beav 253; 53 ER 633.

1. Tyler, ELG, PW Young and CE Croft, Fisher & Lightwood’s Law of Mortgage (LexisNexis Butterworths, 3rd Australian ed, 2014).

27. This clearly establishes that it is possible for an assignor who holds both debt and security to assign the debt only. But the question in this case is whether the parties actually intended that. Often, perhaps usually, it makes little commercial sense for the assignor to assign the debt, but retain the security, because there is no point in doing so if the benefit of the debt has been assigned.

28. In Morley v Morley (1858) 53 ER 633, referred to by Fisher & Lightwood, the deed of assignment expressly provided that only some of the securities held by the assignor for the debt were the subject of the assignment. A mortgage held by the assignor was not included.

29. Romilly MR described the instrument as “certainly very singularly framed” (at 635). He said that if it had simply provided for the assignment of the debt, “it would have carried this mortgage with it” (at 635). But as the mortgage had been specifically excluded, effect had to be given to the parties’ intentions.

30. In interpreting the deed of assignment which is the subject of these proceedings it is, I think, critical to analyse the security obligations created by the mandate letter which Ilend seeks to enforce against KT2. The wording of clause (iv) is clumsy, but counsel for KT2 did not dispute that it purported to create an immediately effective charge over KT2’s property (so far as it applied to present property). Insofar as the clause provided for a charge in the Leppington property, however, it was ineffective to do so at law. A charge over land which is under the Torrens system (as the Leppington property is), is a registrable interest. Such a charge can only be created, at law, by execution and registration on the register of an instrument of charge.

31. It follows that, despite its language, insofar as the mandate agreement created a charge, it was an equitable charge. That is, it was an agreement to create a charge enforceable by way of specific performance in equity. Counsel for Ilend accepted this analysis.

32. The question is, therefore, whether the entitlement to require KT2 to execute and register a charge over the land as security for the fees owed to Loansec falls within the terms of the assignment. This is not a case, as in Morley (and, indeed, in Native Bond) where an instrument creating the security interest had already been executed, at the time of the assignment. [2]

    2. It is unnecessary to consider the potential conflict between what Romilly MR said (obiter) in Morley and what Judd J said in Native Bond about whether an assignment of a “debt” simpliciter carries with it the securities for that debt.

33. Counsel for Ilend laid heavy emphasis on the reference in the assignment to all of Loansec’s “right title and interest”. He submitted that this was broad language which was apt to include a security interest. But the textual difficulty with his argument was that the assignment was of Loansec’s right title and interest “in” the relevant debt. An interest in a debt is different from a right against a separate asset (here, land) as security for the debt. The security asset may not even be owned by the debtor, in the case of a third party security.

34. Usually, in a lending context, a “debt” would be understood as a liquidated sum. Furthermore, the subject matter of the assignment was debts “indebted to” [sic] Loansec. This language, in its natural meaning, seems to me to be confined to debts (that is, liquidated sums) which are in existence as liquidated sums at the date of the assignment. While a specifically enforceable obligation to create a charge may have existed at the date of the assignment, I do not think it falls naturally within the meaning of the term “debt”. [3]

    3. The assignment also covered interest and “all amounts payable” by the debtor but nothing was made of this.

35. I think that my conclusions are reinforced by the recitals to the deed. As with subclause 2(a) itself, the recitals speak only of debts.

36. Counsel for Ilend also sought to support the interpretation for which he contended by referring to subclause 4(a), which contained an express reference to the registration of “security interests” as being “interests arising under or in connection with this deed”. The response from counsel for KT2 was that subclause 4(a) was a mechanical provision which could not be used to expand the scope of the operative assignment provision in subclause 2(a). I think there is force in that submission, but there is another point.

37. As already noted, the assignment is of all of Loansec’s “right title and interest” in the relevant debts. That is wide language. It would clearly include a security interest in a debt, whether arising from an assignment by way of mortgage of the debt or otherwise. Once that is understood there is clearly work for subclause 4(a) to do. If Loansec had a security interest of some type in the debts which were the subject of the assignment, clause 4(a) would cover the case. I do not think that subclause 4(a) compels the widening of the operative assignment in subclause 2(a) for which counsel for Ilend contended.

38. It may be that Ilend took over the management of Loansec’s business but the deed of assignment did not provide for the assignment of that business. Nor did it even provide for the assignment of the benefit of the mandate agreements made between Loansec and its customers. It provided only for the assignment of debts owed by those customers. In my view that does not include the security interest which Ilend seeks to enforce against KT2 in these proceedings. Ilend’s claim fails.

Orders

39. Before parting with the case, I need to mention the difficulty with the way in which Ilend’s case has been framed in its statement of claim. That difficulty is unfortunately not uncommon in this Division. It is an overreliance on declaratory forms of relief.

40. In the initial version of its statement of claim, Ilend sought by prayer 1 a declaration that KT2 was “liable for payment to the Plaintiff of the Mandate Fee in the sum of $648,560”. Prayer 2 then sought an order that KT2 pay that sum to Ilend. The remaining prayers for relief dealt with interest and costs.

41. Prayer 1 of the statement of claim was redundant. All that Ilend needed to do was to seek judgment against KT2 for the amount of the “brokerage fee”.

42. There was another problem. The justification for Ilend bringing the proceedings in this Division was to obtain proprietary relief pursuant to its alleged entitlement under the charge. Ilend sought interlocutory relief preserving the caveats, but no final relief of a proprietary nature was sought. As I have already indicated, Ilend’s real claim was for specific performance of KT2’s obligation to execute and register a charge over the Leppington land.

43. Yet on the face of the prayers for relief, all Ilend was seeking was payment of the brokerage fees. That was a claim which could have been brought by way of contractual action (as assignee) in the District Court. The sum sought was within that Court’s jurisdiction.

44. When the proceedings were before the Court on 18 July, I pointed this out to Mr Yakenian and gave him leave to amend the statement of claim accordingly. But when the amended statement of claim was filed, all that was done was to seek a declaration that the property was “charged for the amount of” the brokerage fee.

45. There are of course some cases where it is appropriate for the Court to grant declaratory relief only. In other cases, a declaration may be the appropriate course where damages or compensation are to be determined at a later stage of proceedings. But it is usually unsound to seek a declaration alongside (or even worse, instead of) the relevant substantive relief. In some cases, it can lead to confusion about what it is that the plaintiff is really seeking. That is particularly important when, on analysis, there may be no substantive equitable relief sought at all, or where the substantive equitable relief that is sought is within the jurisdiction of the District Court.

39. However, although what was done in the present case was unsatisfactory, it has not caused any difficulty, given the limited issues which were argued. I can dispose of the claim which is the subject of the separate hearing by ordering that the plaintiff’s claim for the declaration of charge be dismissed. I will hear the parties on what other orders I should make, and in particular, what I should do about the determination of the other claims in the proceedings.

(Parties addressed on the form of orders and costs)

47. The orders of the Court are:

1. Order that paragraph 3a of the prayers for relief in the Amended Statement of Claim be dismissed.

2. Order that Caveat AS 244802 lodged on 23 June 2022 be withdrawn by the plaintiff.

3. Strike out paragraph 1 of the prayers for relief in the Amended Statement of Claim

4. Order that the remainder of the proceedings be transferred to the District Court.

5. Order that the plaintiff pay the defendant’s costs of the separate hearing on paragraph 3a of the prayers for relief in the Amended Statement of Claim, including the defendant’s application for expedition.

**********

Endnotes

Decision last updated: 26 July 2022