Luna Property Pty Ltd v Australia and New Zealand Banking Group Ltd - [2015] SASC 137

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
LUNA PROPERTY PTY LTD & ANOR v AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD
[2015] SASC 137
Reasons of Judge Dart a Master of the Supreme Court
4 September 2015
MORTGAGES - MORTGAGES AND CHARGES GENERALLY - REMEDIES OF THE MORTGAGOR - REDEMPTION - PROCEEDINGS FOR - GENERALLY
All monies clauses - mortgagor to bring claim for damages - entitlement of mortgagee to secure future costs of litigation before discharging securities.
Project Research Pty Ltd v Permanent Trustee of Aust Ltd (1990) 5 BPR 11,225, applied.
Bank of New South Wales v O’Connor (1889) 14 App Cas 273; Greenwood v Suttcliffe [1892] 1 CH 1; Heath v Chinn (1908) 98 LT 855; Korda & Anor v Silkchime Pty Ltd [2010] WASC 155; Perry v Rolfe [1948] VLR 297; Troughton v Binkes (1801) 31 E.R. 1202, considered.

LUNA PROPERTY PTY LTD & ANOR v AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD
[2015] SASC 137
JUDGE DART:

By Summons the plaintiffs seek what it says are final orders against the defendant, which is one of the bankers to the plaintiffs.
Separately, by interlocutory application, the plaintiffs seek to enjoin the defendant from appointing a receiver. It has not been necessary to deal with that application because the defendant has given an undertaking not to appoint receivers for a short period of time, to allow the delivery of reasons in respect of the application for final orders.
The dispute is in respect of the amount required to be paid to the defendant in order to have it discharge a wide range of securities over the assets of the plaintiffs.
The defendant says that the resolution of that dispute at the moment is interlocutory. The plaintiffs say, in respect of establishing the amount due to the defendant, the orders sought are final. In some circumstances the distinction may be material, but it does not appear to be in this matter.
The orders sought by the plaintiffs are:
1.A mandatory injunction requiring and compelling the defendant, upon receipt of the sum of $507,400, to discharge the following securities:
1.1.    Deed of Priority between the defendant, Bendigo and Adelaide Bank Limited, Luna Property Pty Ltd and Annella Group Pty Ltd;
1.2.    Registered mortgage number 11920184 given by Luna Property Pty Ltd in its own right and as trustee for the Luna Property Trust over Certificate of Title Volume 5373 Folio 266 known as 14 Opala Street Regency Park SA;
1.3.    Registered mortgage number 11920186 given by Luna Property Pty Ltd in its own right and as trustee for the Luna Property Trust and Annella Group Pty Ltd in its own right and as trustee for the Annella Property Trust over Certificate of Title Volume 5238 folio 476 and Certificate of Title Volume 5238 folio 480 being the property known as 51-57 Jacobsen Crescent Holden Hill SA.
1.4.    Cross Guarantee and Indemnity dated 24 August 2006;
1.5.    First Registered Charges (Mortgage Debentures) given to the defendant by the following entities:
1.5.1.Annella Group Pty Ltd in its own right and as trustee for the Annella Property Trust dated 24 August 2006 charge number 1345144; and
1.5.2.Luna Property Pty Ltd in its own right and as trustee for the Luna Property Trust dated 25 September 2006 charge number 1306752;
1.6.    Individual Guarantee and Indemnity dated 27 October 2006 given by Francesco Salandra on account of Luna Property Pty Ltd in its own right and as trustee for the Luna Property Trust; and
1.7.    Individual Guarantee and Indemnity dated 30 May 2006 given by Francesco Salandra on account of Luna Property Pty Ltd in its own right and as trustee for the Luna Property Trust.
Background
The existing dispute arises in respect of the facilities provided pursuant to a letter of offer dated 20 December 2012. It provided for a loan to the plaintiffs in the amount of $587,400 for a term which was intended to expire on 31 December 2013. In the result, the facility was extended several times so that it ultimately expired on 31 May 2015. There is no suggestion that during the life of the facility that it was ever in default. The issue is that the facility has not been further extended and the amount due to be paid on 31 May 2015 has not as yet been paid.
On 10 August 2015 the defendant served a demand on the plaintiffs requiring payment of the sum of $507,400. That amount has not been paid, but the plaintiffs say that they are in a position to pay the amount demanded, so long as when they do so they obtain a discharge of all of the defendant’s securities.
The amount claimed in the demand has and will increase with the effluxion of time. That is not a matter of any moment. The plaintiffs say that they are in a position to pay any additional amount accruing on account of interest or legal costs.
The dispute arises because the defendant says that it will not discharge its security unless the plaintiffs secure to the defendant’s satisfaction the further sum of $348,293.90. It is prepared to accept the payment of that sum into Court, or any other equivalent form of security.
Some further history is required to understand how it is that the defendant asserts an entitlement to the additional amount. The plaintiffs’ original facilities with the defendant were first obtained in 2007. The facilities at that time were much more significant and were in the amount of approximately $7 million.
The plaintiffs, over time, became disenchanted with the manner in which the defendant operated the facility. The initial dispute related to the line fees charged by the defendant in respect of the various facilities. Those line fees increased from time to time in circumstances where the plaintiffs assert there was no entitlement to such an increase.
The dispute about the line fees has never been resolved and remains a live issue. As a result of the disenchantment with the defendant, the plaintiffs obtained replacement funding in 2012 from the Bendigo and Adelaide Bank. That bank provided funds to pay out the plaintiffs’ then facilities. However, because the facilities provided by the defendant were not due to expire at the time of the refinance, it asserted an entitlement to charge various break costs arising from the early termination.
The defendant’s letter of offer on 20 December 2012 was an offer to lend to the plaintiffs the monies in dispute in respect of line fees and break costs which were not covered by the facilities provided by the Bendigo and Adelaide Bank. That bank of course took its own security and entered into a deed of priority with the defendant.
For a considerable period of time the plaintiffs have asserted that they have a legal claim against the defendant in respect of both the line fees charged from time to time and the break costs incurred in 2012. The plaintiffs have threatened to sue the defendant in respect of those amounts, plus consequential damages for loss of use of money. The total of the claim is said to be in the amount of $5 million.
The dispute in respect of the securing of the additional sum of $348,293.90 arises because the defendant says that it is entitled to secure an amount in respect of the legal costs it will incur in defending the anticipated litigation. It says the plaintiffs are obliged to secure that sum to the satisfaction of the defendant before it is obliged to discharge the securities. The plaintiffs deny that the defendant has any such entitlement.
The contractual arrangements
The plaintiffs seek to discharge both the mortgage and the charges.
Relevantly, the mortgage is an all monies mortgage and contains the following provision in the standard terms and conditions of mortgage said to be applicable. Clause 2.2 of the mortgage provides:
This Mortgage secures all my obligations in relation to all Unregulated Arrangements. To the extent it does so, Secured Money means all money owing to ANZ for any reason:
(a) by me;
(b) now or in the future;
(c)actually or contingently (money is ‘contingently’ owed where I have an obligation to pay ANZ if something happens or is discovered),
other than under a Regulated Arrangement.
It includes:
(i)principal and interest;
(ii)fees, costs, charges and expenses;
(iii)liability under a guarantee or indemnity;
(iv)liquidated and unliquidated damages; and
(v)amounts payable under clause 9.
The provisions of clause 9 deal with, inter alia, legal fees to be paid on a full indemnity basis. The concept of money being owed contingently is wide enough to encompass future legal costs owed to the defendant.
Separately and distinctly, the charge in clause 14.15 provides as follows:
14.15        Continuing security
This charge is a continuing security for all the secured money. It continues until it is finally discharged by ANZ. It would not be considered as satisfied or discharged by anything which happens in the meantime.
For example it would not be considered satisfied or discharged:
(a)     by any payments or credits towards the secured money;
(b)     any settlement of account; or
(c)     even though an account may be in credit.
The company is not entitled to a discharge of this charge at a time when, in ANZ’s opinion, any liability (whether direct, indirect, contingent or otherwise) exists or may arise;
(a)     which falls within the definition of secured money; or
(b)in respect of which ANZ could seek recourse against, or indemnity from, the Company.
The charge is drawn slightly differently to the mortgage. It permits the defendant to form an opinion about a contingent liability. It appears to have done so here. It cannot be said that the opinion is unreasonable. What is clear is that, while the securities remain in place, any legal costs incurred in proceedings would be covered by the security. The question is whether the defendant is obliged to release its securities and become unsecured on those future costs.
Effect of the legal authorities
These proceedings are properly to be categorised as redemption proceedings. In a redemption proceeding a mortgagor is not merely seeking an equitable remedy for the enforcement of a legal right; he is also seeking that intervention of equity to relieve him from legal consequences of a failure to perform a legal duty.[1]
[1] Perry v Rolfe [1948] VLR 297 at 301.
In a redemption proceeding it is necessary for the mortgagor to make an offer to redeem the tender.[2]
[2] Troughton v Binkes (1801) 31 E.R. 1202.
In equity a redemption proceeding has three stages, which are:
1A determination by the Judge as to whether the plaintiff is entitled to redeem the mortgage and other questions of principle; and
2Determination and enquiry before the Master as to the amount owing to the mortgagee; and
3Payment of the amount certified to be owing and the provision of a discharge.
The common form order for redemption directs that an account be taken of what is due to the mortgagee under the mortgage, including his taxed costs of the proceedings, and orders for the mortgagor to pay to the mortgagee, within a set time from the date of the certificate of the Master, the amount certified to be due. Upon such payment, the mortgagee is ordered to surrender the security.[3]
[3] Fisher & Lightwood’s Law of Mortgage, 3^rd Australian ed [33.20].
In Heath v Chinn,[4] a redemption proceeding, Eve J stated the following three propositions:
1.That a mortgagee has an absolute right to costs unless they are forfeited by misconduct;
2.That, if the absolute right is forfeited by misconduct, the costs are in the discretion of the judge; and
3.That the raising of an untenable defence, or a claim of a balance due after the mortgage has been fully paid off, both constitute misconduct by which the absolute right to costs is forfeited.[5]
[4] (1908) 98 LT 855.
[5] Supra, at 858.
The plaintiffs are prepared to make payment of the amount claimed by the defendant, but in effect they do so under protest, because they say that excessive line fees were charged and there was no entitlement to break costs. The amounts secured by the current facility relate to both of those issues. A mortgagee is not entitled to refuse a payment made under protest.[6]
[6] Greenwood v Suttcliffe [1892] 1 CH 1.
The plaintiffs intend to sue to recover the monies that they now offer to pay and also for consequential losses for having been denied the use of those monies.
In Project Research Pty Ltd v Permanent Trustee of Aust Ltd[7] Hodgson J said:
It seems to me that the absolute right of a mortgagee to have the costs of a redemption suit (including the taking of accounts) taken out of the security, unless he is guilty of misconduct, should not be lost merely because a mortgagor is prepared to pay under protest the amount claimed by the mortgagee, so that the legal contest between them takes place not in redemption proceedings, but in proceedings to recover an alleged overpayment. If the mortgagee acted reasonably in stating the figure which he did, but nonetheless is found to be incorrect, though not in such a way as to constitute misconduct, then the principles laid down in the cases I have referred to strongly suggest that he should normally be entitled to his costs of the proceedings which determine the matter, irrespective of the particular form which they take. Furthermore, they suggest he should be entitled to have those costs out of the security, or else out of some alternative security which is provided for the purpose.[8]
[7] (1990) 5 BPR 11,225.
[8] Supra, at 11,229.
His Honour then further went on to say:
Accordingly, although initially I considered this unlikely, it does now seem to me that if a mortgagee bona fide and on reasonable grounds states a payout figure, which a mortgagor proposes to pay under protest, it is open to the mortgagee to require the payment, in addition to that figure, of a reasonable sum to cover anticipated costs of the proceedings in which the matter will be contested.[9]
[9] Supra, at 11,230.
In Korda & Anor v Silkchime Pty Ltd[10] Le Miere J was dealing with a party seeking to obtain orders to have receivers retire because they had realised sufficient money to discharge in full the debt owed to their appointor. There were proceedings afoot alleging that the receivers had misconducted the receivership. The receivers said both that they were not obliged to retire and, further, that they were entitled to sell more assets to create a fund to act as security for their costs of the action.
[10] [2010] WASC 155.
In the result, Le Miere J applied the principle set out in Project Research and held that the receivers were not obliged to retire until they had accumulated such a fund.[11]
[11] Supra, at [95].
The critical point of both of the abovementioned authorities is that the entitlement to secure costs is not limited to proceedings that are strictly redemption proceedings. In both decisions the entitlement was extended to other actions claiming damages arising from the relationship of lender and borrower.
The quantum of costs
The defendant’s solicitor has filed a reasonably detailed estimation of the costs that will be incurred in defending the anticipated proceedings. It needs to be borne in mind that the defendant is entitled to costs on a full indemnity basis. The schedule of costs is calculated on the basis of an eight day trial and a subsequent appeal.
The hourly rates allowed for are, generally speaking, within the range currently contemplated by the Supreme Court Scale and the Guide to Counsel Fees. A trial of this action will no doubt be reasonably complex. The majority of the proposed damages claim of $5 million appears to be comprised of consequential losses caused by having been denied the use of money. That is likely to involve significant causation and other issues relating to the calculation of the loss. It is to be expected there will be significant need for accountants’ reports.
The submission of the plaintiffs is that the defendant has significantly overstated the amount of the costs likely to be incurred.
In the Privy Council case of Bank of New South Wales v O’Connor[12] it was held that in requiring a party to surrender its security it was necessary to substitute for the security a sum equal to the full amount secured plus a proper margin. That was said to involve an allowance for the probable costs of the suit.[13]
[12] (1889) 14 App Cas 273.
[13] Supra, at 283.
In the Project Research case Hodgson J said that it was reasonable for a mortgagee to specify a very generous estimate of its anticipated costs, having regard to the need for a proper margin.[14]
[14] Project Research Pty Ltd v Permanent Trustee of Australia Ltd (1990) 5 BPR at 11,231.
Having regard to the authority and the need to provide for a generous estimate so that the defendant is not out of pocket by reason of inadequate provision of security, I find that the amount claimed by the defendant is an appropriate amount to be secured in anticipation of its possible future entitlement to a costs order against the plaintiffs.
Conclusion
Although the result seems counterintuitive, and perhaps a little unfair, it is clear on the authorities that the bank is permitted to secure its possible future entitlement to costs before it becomes obliged to discharge the securities. I will hear the parties as to the appropriate form of orders to be made.