National Australia Bank Ltd v Clowes

[2012] NSWSC 80

Supreme Court

New South Wales

Medium Neutral Citation:	National Australia Bank Ltd v Clowes [2012] NSWSC 80
Hearing dates:	31 January 2012
Decision date:	14 February 2012
Jurisdiction:	Equity Division
Before:	Gzell J
Decision:	Bank not secured.
Catchwords:	MORTGAGES - Mortgages and Charges Generally - The Mortgage - bank took a mortgage over a flat in a company title building from the shareholder entitled to occupation - whether bank secured
Cases Cited:	UTC Ltd (in liq) v NZI Securities Australia Ltd (1991) 4 WAR 349; Harrold v Plenty [1901] 2 Ch 314; General Credit & Discount Company v Glegg (1883) 22 Ch D 549; Stubbs v Slater [1910] 1 Ch 632; Adelaide Building Co Pty Ltd (in liq) v ABC Investments Pty Ltd (1990) 8 ACLC 445
Category:	Principal judgment
Parties:	National Australia Bank Limited (First Plaintiff) Michael Leo Clowes (First Defendant) Patricia Helen Moore (Second Defendant)
Representation:	Counsel C Colquhoun (Plaintiff) Solicitors DibbsBarker (Plaintiff)
File Number(s):	2011/281981

Judgment

The Shares

1. The plaintiff, National Australia Bank Ltd, advanced $636,800 to Michael Leo Clowes, the first defendant, and Patricia Helen Moore, the second defendant, on 9 May 2002. The funds were used to acquire shares in Jefferson Pty Limited, the third defendant.

1. Jefferson is the registered proprietor of a property in Double Bay, New South Wales. It is a company title property in which shareholders are entitled to occupy flats. Article 3 of Jefferson's articles of association provided:

"The shares of the Company shall be held by the members in groups of shares according to the value of the respective flats as set out hereunder. The holder of a group of shares shall subject to the conditions herein contained have the right to use as a home the flat in respect of which such group of shares is held and such holder shall not be liable for payment of rent or any other payment whatsoever except the half yearly levy or charges provided under these Articles in respect of his occupation of such flat. ..."

1. The article went on to specify the shares with respect to each flat. For flat 7 the requirement was to hold 9,000 shares numbered 52001 to 61000. It was those shares that Mr Clowes and Ms Moore acquired.

The first loan

1. The funds were acquired from the bank under an accepted letter of offer of a reducible mortgage loan. It contained the following provision:

"9. Security

By accepting this offer, you agree with the Bank that your obligations under this contract are secured by each mortgage and other security described below and that this contract is an agreement covered by each mortgage or other security given by you.

(a) The following mortgage and/or other securities is/are t o secure this loan:-

Ұ The following mortgage(s) is/are to be or has been taken from Mr Michael Leo CLOWES over the following property (which includes any rights which may arise in connection with it):-

1 st registered mortgage over 7/43 ... DOUBLE BAY NSW 2028

Ұ The following mortgage(s) is/are to be or has been taken from Ms Patricia Helen MOORE over the following property (which includes any rights which may arise in connection with it):-

1 st registered mortgage over 7/43 ... DOUBLE BAY NSW 2028

[THER E IS NO ADDITIONAL SECURITY REQUIRED]"

1. The portions deleted from the above quotation contained the street address of the Double Bay property.

1. Mr Clowes and Ms Moore also executed a mortgage and charge over their shares in Jefferson. The document identified the principal sum in recital D as the amount the bank had agreed to lend and advance to Mr Clowes and Ms Moore the repayment of which together with interest was secured by the mortgage and charge. Clause 1 contained the following provisions:

"In consideration of the principal sum being lent and advanced by the Mortgagee to the Mortgagor upon execution of this Mortgage and Charge (the receipt of which principal sum the Mortgagor acknowledges) the Mortgagor covenants with the Mortgagee as follows:

(a) the Mortgagor will repay the principal sums on the date agreed between the parties and referred to in the offer documents between the parties and accepted by the Mortgagor with respect to the Reducible Mortgage Loan and the Plain & Simple Home Loan (' Offer Documents ');

(b) the Mortgagor will pay to the Mortgagee interest on the principal sum or the balance owing on the principal sum at any relevant time at the interest rate referred to in the Offer Documents (and as varied from time to time) until such time as the principal sum is repaid. Payments of interest will be made in the manner set out in the Offer Documents."

1. Mr Clowes and Ms Moore by cl 2 of the document mortgaged and charged in favour of the bank the 9,000 shares in Jefferson as follows:

"The Mortgagor as beneficial owner mortgages and charges in favour of the Mortgagee ALL THOSE 9000 shares numbered 52001 to 61000 inclusive classified as ordinary shares in the capital of the Company for the purpose of securing payment to the Mortgagee of the principal sum together with interest and costs in accordance with the terms of the Mortgage and Charge and Offer Documents. However if the Mortgagor pays to the Mortgagee the principal sum with interest at the rate and in manner appointed and expressed for payment respectively in the Offer Documents or as agreed between the parties, together with all other moneys secured or covered by this Mortgage and Charge, then the Mortgagee shall at the request of and at the expense of the Mortgagor execute a discharge of this Mortgage and Charge. The Mortgagee will then re-deliver to the Mortgagor, or as she shall direct, the share certificate held by it."

1. There was no advance by the bank to Mr Clowes and Ms Moore of any amount under a Plain & Simple Home Loan to which the mortgage and charge then applied.

The second loan

1. On 18 December 2002 the bank agreed to advance $20,000 to Mr Clowes and Ms Moore under a peak performance equity mortgage facility that was drawn down on 20 December 2002. It specified first ranking mortgages by Mr Clowes and Ms Moore of 7/43 at the relevant address in Double Bay. The document made no mention of the mortgage and charge over the shares in Jefferson. Mr Clowes and Ms Moore executed a continued reliance and extension of security but the security specified in that document was a prime first registered mortgage over 7/43 at the relevant address in Double Bay.

The third loan

1. On 10 November 2005 the bank advanced $705,000 to Mr Clowes and Ms Moore under a Plain & Simple Home Loan. It was said to be secured by a first ranking mortgage over 7/43 at the relevant address in Double Bay. There was no mention of the mortgage and charge over the shares.

1. On the same day, $606,945.71 was utilised to pay out the reducible mortgage loan and that account was closed. The bank retained and still holds the share certificate for the 9,000 shares in Jefferson.

1. Mr Clowes and Ms Moore defaulted in payment of principal and interest at the rates specified in the peak performance facility and in the home loan. They did not appear at the hearing.

Are the loans secured?

1. The bank seeks a declaration that the shares in Jefferson are subject to a mortgage to the bank and that mortgage secures the peak performance facility and the home loan. The bank seeks an order for the delivery up of possession of 7/43 at the relevant address in Double Bay and judgment for the outstanding amounts under the peak performance facility and the home loan.

1. 7/43 at the relevant address in Double Bay, while occupied by Mr Clowes and Ms Moore because of their holding of the shares, was not their property. Flat 7 at the relevant address in Double Bay was part of the building owned by Jefferson. Mr Clowes and Ms Moore could not grant a first registered mortgage over that property.

1. The mortgage and charge over the shares did not overtly apply to the peak performance facility or the home loan. Reliance was placed on cl 6(a) which gave the bank full power to enter and take possession after default by Mr Clowes and Ms Moore in payment of the principal sum "or other money secured". But while the mortgage and charge could have been extended to other loans, the short answer is that it was not.

1. The bank up-stamped the mortgage and charge over the shares to $725,000, the total of the peak performance facility and the home loan.

1. But the problem was that the bank used security documents inappropriate to security by way of mortgage and charge of shares in a company title property.

1. Counsel put the bank's case for security on three bases. First, that the mortgage and charge of shares applied to the peak performance facility and the home loan. Secondly, that the description of the property the subject of the security under those facilities should be read as referring to 9,000 shares in Jefferson. Thirdly, that an equitable mortgage arose by reason of the deposit of the share certificate with the bank.

1. It was submitted that the execution by Mr Clowes and Ms Moore of the continued reliance and extension of security document evinced an intention on the part of the bank and Mr Clowes and Ms Moore that the security for the reducible mortgage loan should apply to the peak performance facility and that security included the mortgage and charge over the shares.

1. I reject that submission. The continued reliance and extension of security document limited the security to be extended to the peak performance facility to a first registered mortgage over 7/43 at the relevant address in Double Bay. That was a security that Mr Clowes and Ms Moore were incapable of giving and did not give.

1. The mortgage and charge over the shares was not an "all moneys" security. It applied to a principal sum to be advanced by the bank upon the execution of the mortgage and charge in an amount that the bank had already agreed to lend and advance and the receipt of which was acknowledged by Mr Clowes and Ms Moore.

1. That description of the principal sum in the mortgage and charge over the shares was clearly limited to the reducible mortgage loan and did not extend to the future advances under the peak performance facility and the home loan.

1. That the bank up-stamped the mortgage and charge over the shares does not establish a common intention that would justify rectification of the mortgage and charge over the shares to constitute it as an "all moneys" mortgage.

1. As to the second basis, the description of the security in the documentation for each of the three loans as a first registered mortgage over 7/43 at the relevant address in Double Bay is not apt to apply to the 9,000 shares in Jefferson. It is an apt description of a Torrens title mortgage over land. I reject the submission that the description should be treated as if it applied to the shares in Jefferson.

1. As the third basis, cl 2 of the mortgage and charge over the shares required the bank to return the share certificate to Mr Clowes and Ms Moore when the reducible mortgage loan was paid out.

1. Counsel submitted that the obligation to return the share certificate was subject to any agreement of the parties to the contrary and the court should find that the parties had agreed between themselves that there was no obligation to redeliver the share certificate.

1. But the words "as agreed between the parties" in cl 2 of the mortgage and charge over the shares do not apply to the obligation to redeliver the share certificate. They apply to the amount of principal and interest payable on discharge. Furthermore, there was no evidence of any agreement between the parties to vary any obligations under the mortgage and charge over the shares.

1. The bank had not received from Mr Clowes and Ms Moore an executed transfer of the shares as required under the mortgage and charge over the shares and, no doubt, decided unilaterally to retain the share certificate.

1. Counsel relied upon UTC Ltd (in liq) v NZI Securities Australia Ltd (1991) 4 WAR 349 where Malcolm CJ at 351 and Ipp J at 354, with whom Nicholson J agreed, said that there was a long established general rule that a deposit of title deeds to secure a debt was presumed to operate as an equitable mortgage over the property in the title deeds. (See also Harrold v Plenty [1901] 2 Ch 314; General Credit & Discount Company v Glegg (1883) 22 Ch D 549; Stubbs v Slater [1910] 1 Ch 632; Adelaide Building Co Pty Ltd (in liq) v ABC Investments Pty Ltd (1990) 8 ACLC 445).

1. But the retention of the share certificate in this case after the discharge of the mortgage and charge over the shares distinguishes this case from the above authorities. There was no voluntary deposit of the share certificate after the reducible mortgage loan was paid out. There was an unjustified retention of the certificate contrary to the obligation of the bank to return it.

1. Furthermore, it was not the deposit of the share certificate that gave rise to the bank's security. Its security arose from the mortgage and charge over the shares.

1. I reject the submission that an equitable mortgage of the shares arose following the discharge of the reducible mortgage loan.

1. In my opinion the peak performance facility and the home loan were unsecured and the bank is not entitled to relief on the basis that it is secured.

1. There is ample evidence of default on the part of Mr Clowes and Ms Moore which would justify judgment entered against them for the principal amount of the peak performance loan and the home loan together with interest at the rates specified in the documentation to which Mr Clowes and Ms Moore agreed.

1. However, Ms Moore was declared bankrupt on 2 February 2012 and her property vested in the trustees of her bankrupt estate. Judgment should not be entered against her.

1. I have received an interest calculation to 13 February 2012. As at that date the outstanding balance of the peak performance loan was $29,879.17 and the home loan stood at $939,383.24. I enter judgment in the amount of $969,262.41 against Mr Clowes and order him to pay the bank's costs. The summons is otherwise dismissed. The exhibits are to be returned.

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Decision last updated: 16 February 2012