Nicola Properties Pty Ltd v Vie De L'eau Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMON LAW DIVISION

PROPERTY LIST

S ECI 2020 02457

NICOLA PROPERTIES PTY LTD (ACN 616 984 340) as Trustee for The Nicola Family Trust	Plaintiff
v
VIE DE L’EAU INVESTMENTS PTY LIMITED (ACN 601 019 603)	Defendant

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JUDGE:	Derham AsJ
WHERE HELD:	Melbourne
DATE OF HEARING:	13 August and 4 September 2020
DATE OF JUDGMENT:	5 November 2020 (first revision 9 November 2020)
CASE MAY BE CITED AS:	Nicola Properties Pty Ltd v Vie De L’eau Pty Ltd
MEDIUM NEUTRAL CITATION:	[2020] VSC 728

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PROPERTY LAW – Application for an account by mortgagor of the proceeds of sale of property by mortgagee – Transfer of Land Act 1958 (Vic), s 77(3).

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr JB Masters	Merton Lawyers
For the Defendant	Mr C Salpigtidis	Summer Lawyers Pty Ltd

TABLE OF CONTENTS

Introduction........................................................................................................................................ 1

The questions...................................................................................................................................... 2

Background......................................................................................................................................... 3

Mortgage terms................................................................................................................................. 11

Applicable law.................................................................................................................................. 20

The evidence..................................................................................................................................... 25

Affidavits...................................................................................................................................... 25
Cross-examination...................................................................................................................... 35

The Dobb’s certificate..................................................................................................................... 37

The first question - is the defendant entitled to interest at the Higher Rate....................... 41

Submissions and consideration................................................................................................. 41
Conclusion.................................................................................................................................... 45

The second question - is the defendant entitled to retain moneys out of the surplus to cover any claim by Jetcharm....................................................................................................................... 45

Submissions and Consideration............................................................................................... 45
Consideration.............................................................................................................................. 47
Conclusion.................................................................................................................................... 52

Third question - whether the defendant is entitle to retain out of the surplus monies the anticipated costs of this application....................................................................................... 52

Submissions and consideration................................................................................................. 52
Conclusion.................................................................................................................................... 53

Fourth question – did the defendant engage in unreasonable conduct or misconduct..... 53

Submissions and consideration................................................................................................. 53
Consideration.............................................................................................................................. 54
Conclusion.................................................................................................................................... 58

Fifth question - is the plaintiff is entitled to recover from the defendant the amount of the higher interest rate charged by the first mortgagee......................................................................... 58

Submissions................................................................................................................................. 58
Consideration.............................................................................................................................. 59
Conclusion.................................................................................................................................... 60

Overall conclusion, costs and interest......................................................................................... 61

HIS HONOUR:

Introduction

The plaintiff was the proprietor of the property situated at and known as 14 Beaumont Parade, West Footscray, Victoria, and more particularly described in Certificate of Title Volume 4008 Folio 429 (Land) registered under the Transfer of Land Act 1958 (Vic) (TLA). The Land was mortgaged to Cephas Pty Ltd and Holdera Pty Ltd (first mortgagees) and Vie De L’eau Investments Pty Ltd (second mortgagee or defendant). The mortgages were both registered on 8 April 2019.

The plaintiff defaulted under the mortgages, the defendant entered into possession of the Land and in March 2020 entered into a contract to sell the Land to Jetcharm Constructions Pty ltd (Jetcharm) for the sum of $2,480,000 (Contract). The Contract was completed on 27 March 2020 and $2,482,849.77 was paid by Jetcharm to the defendant. The first mortgagees were paid the sum of $1,759,717.80 pursuant to their mortgage and the defendant was paid $651,476.96 pursuant to its mortgage. The surplus of $57,111.61 was retained by the defendant pursuant to its entitlement under the mortgage because a dispute had arisen with the purchaser, Jetcharm, under the Contract and because the defendant anticipated a dispute with the plaintiff.

The plaintiff commenced this proceeding by originating motion on 3 June 2020 seeking an order that an account be taken of the amount due to the plaintiff pursuant to s 77(3) of the TLA in respect of the proceeds of sale under the Contract. On 17 June 2020, I ordered, by consent, that the account be taken and made directions for the filing of affidavits and submissions.

The plaintiff maintains that on the taking of the account it is entitled to an order that it be paid the surplus arising on the sale in sum of $112,942.44, together with interest. The defendant maintains the surplus is only $57,111.61 and that it is entitled to retain that sum to defray the costs of the disputes, including the costs of this proceeding.

The difference between the two calculation of the surplus is comprised of interest charged by both the first mortgagees and the defendant at the higher rate under the mortgages, which was recalculated by the defendant after the default. The defendant concedes that the amounts set out in its default notice dated 1 October 2109 was the incorrect amount and that the correct amount is as stated in the schedule of account exhibited to an affidavit filed on its behalf by Benjamin Jennings (Jennings). That is because the defendant’s accounts team did not take into account the fact that it was always entitled to charge interest at the Higher Interest Rate when preparing updated Statements of Account in September/October 2019. There is no dispute by the plaintiff that from October 2019 onwards, the higher interest rate was applicable in respect of both mortgages.

The questions

The questions for determination, together with my short answers, are:

(a) Whether the defendant is entitled to revisit the charging of interest right back to the very beginning of the loans secured by the mortgages

Answer: No

(b) Whether the defendant is entitled to retain moneys out of the surplus proceeds arising on the sale of the Land to cover an anticipated claim by the purchaser of the Land.

Answer: No

(c) Whether the defendant is entitle to retain out of the surplus monies the anticipated costs of this application.

Answer: Yes, but subject to being denied after the fact if the defendant has engaged in unreasonable conduct or misconduct

(d) Whether the defendant engaged in unreasonable conduct or misconduct.

Answer: Yes

(e) Whether the plaintiff is entitled to recover as against the defendant, as the second mortgagee undertaking the sale of the Land, the amount of the higher interest rate charged under the mortgage to the first mortgagees.

Answer: No

Background

The plaintiff is the trustee of the Nicola Family Trust. Paglia is the sole director and shareholder of the plaintiff and was at the relevant times a registered builder in Victoria. In late 2017, the plaintiff arranged a loan facility to finance the proposed development of the Land. The Land had been owned by the Paglia family since about 1972, and had contained the family home. The Land was gifted to the plaintiff by Mrs Vincenza Paglia in early 2017. After the plaintiff became registered as proprietor of the Land, Paglia decided to develop the Land by constructing 12 residential apartments on it. In order to build the apartments, the plaintiff needed funding.

In November 2017, the plaintiff sought a loan facility through a mortgage manager to finance the proposed development of the Land. This resulted in 12 month loan facilities comprising two tranches, first $1,710,000 lent by the first mortgagees and $1,710,000 by the defendant. The securities were first and second mortgages registered on title (these mortgages preceded the mortgages that are in issue in this application).

In early 2019, the plaintiff sought to extend the term of the loans because it was still developing the Property. Completion of the development had been delayed, including because the original builder engaged by the plaintiff, a company controlled by Paglia called SP Builders Pty Ltd (SP Builders), had entered into receivership. The first mortgagees and the defendant agreed to extend the term of the loans for a further 8 months. The plaintiff agreed to, and did, provide fresh mortgages over the Land in their favour. The mortgages were registered on the title to the Land on 8 April 2019, but had commenced on 31 January 2019.

In about July 2019, the plaintiff made requests through Agility Finance Pty Ltd (Agility Finance), who were at that time managing the mortgages, for the lenders to extend the term of the loans for a further six months. They did not agree to the extension. The plaintiff then began trying to secure refinancing of the project from another lender, but could not do so. The date for repayment of the loans was 30 September 2019. The plaintiff defaulted under both mortgages. The defendant issued a notice of default on 1 October 2019, apparently received by the plaintiff on 10 October 2019. The notice required the default to be remedied by 7 October 2019. The defendant issued a writ in the County Court on 4 October 2019 to recover possession of the Land. The plaintiff intended to defend that proceeding. McCarthy Partners, who at that time were the plaintiff’s solicitors, wrote to the defendant’s solicitors, Summer Lawyers, inviting the defendant to discontinue the County Court proceeding on the basis that the default notice was defective.

On 1 November 2019, the defendant appointed Sam Kaso and Daniel Juratowitch of Cor Cordis as receivers and managers of the plaintiff pursuant to the mortgage (Receivers). On 21 November 2019, the County Court ordered, with the consent of the Receivers, that the defendant recover possession of the Land. The development at the Property was approximately halfway through completion at the time that the defendant, as second mortgagee, entered into possession of the Land. The receivers subsequently retired on 17 January 2020.

In the period from January to March 2020, the parties exchanged correspondence, including in relation to the payout figure under the mortgages. I set out a summary of the correspondence because it is relevant to the submissions made regarding the conduct of the defendant:

(a) on 28 January 2020, the plaintiff received an email from Victoria Smith of Agility Finance headed ‘14 Beaumont Parade Payout’. Ms Smith stated that the ‘current payout figure’ as at the date of her email was $2,267,800.20;

(b) on 29 January 2020, the plaintiff asked for a breakdown of this figure. On the same day, Ms Smith sent an email to the plaintiff attaching ‘statements for the facility showing what has been charged to the account’. Ms Smith said that, as other disbursements had come to Agility Finance’s attention that day, the total payout figure as at 28 January 2020 was $2,348,003.98, which was stated to include $60,000 in legal costs and $6,000 in estate agency fees;

(c) on 30 January 2020, the plaintiff asked Ms Smith for copies of tax invoices referred to in the statements that Ms Smith had provided. On the same day, Ms Smith replied saying that she would provide the requested documents ‘in due course’;

(d) on 31 January 2020, the plaintiff emailed Ms Smith stating that the claimed amount of $60,000 in respect of legal costs had been duplicated in the statements provided;

(e) on 3 February 2020, the plaintiff emailed Ms Smith seeking a response to the email of 31 January 2020. On the same day, Summer Lawyers sent an email to the plaintiff attaching what was described as an ‘updated clause 24 certificate’. This was a certificate under the conclusive evidence clause in the MCP otherwise known as a Dobbs certificate – a reference to the decision in Dobbs v The National Bank of Australasia Ltd[1]. I refer to the clause later (see [62]);
[1](1935) 53 CLR 643.

(f) on 4 February 2020, the plaintiff emailed Summer Lawyers asking for copies of the tax invoices previously requested, stating that the plaintiff believed some of the claimed legal fees had been duplicated. On the same day, Summer Lawyers responded stating that they were instructed that, in accordance with clause 24 of the Mortgage, the provision of a certificate issued by their clients obviated any requirement to particularise the payout figure. Summer Lawyers further stated that the plaintiff’s ‘next step’ was either to pay the payout figure or not;

(g) on or about 4 February 2020 Jeremy Paglia, the site foreman for the plaintiff’s development on the Land, went to collect the builder’s tools from the site. He observed security fencing around its perimeter and that the builder’s equipment and electrical cable had been removed from the site;

(h) on 6 February 2020, the plaintiff emailed Summer Lawyers saying that the plaintiff was yet to receive a response from Summer Lawyers or the defendant to the plaintiff’s request for the claimed invoices. The email further stated that the plaintiff had been informed that during the receivership someone had removed building materials and equipment and had stolen electrical copper conduit cabling. The email requested the details of the Receivers’ insurers, so that those details could be given to the police for the purposes of the police investigation;

(i) on 7 February 2020, Summer Lawyers emailed the plaintiff stating that the defendant’s position in respect of the invoices had already been communicated and that the Receivers would not be providing their insurers’ details, adding that if the builder left equipment and material unattended at the building site and it has been stolen then that is its fault; and

(j) on 12 February 2020 Jeremy Paglia, the site foreman for the development of the Land, filed a police report at the Footscray Police Station in relation to the theft of materials from the site.

On 6 March 2020, Summer Lawyers wrote to the plaintiff stating that the total ‘Payout Figure’ to discharge of both mortgages, with the defendant and Cephas and Holdera, was $2,335,555.40 expiring on 13 March 2020. The payout figure was set out in a Dobbs’ certificate under clause 24 of the MCP for both the first mortgagees and the second mortgagee.

The copy of the Contract of sale to Jetcharm in evidence is undated, unsigned where it is first provided to be signed, initialed on each page and signed at the end of the document.[2] The defendant entered into the Contract as mortgagee in possession exercising its power of sale, the agent for the defendant was Colliers International (Vic) Pty Ltd, the purchaser was Jetcharm, ‘c/- Jennings Partners Unit 12, 65 York Street, Sydney NSW 2000’, the price was $2,480,000 payable by a deposit of 10% with the balance payable at settlement which was ‘due on the day which is 60 days from the date of sale’. The date of sale is not specified.
[2]Exhibit SSP-11 to the first Paglia affidavit.

The Contract contained the General Conditions purportedly prescribed as Part 2, Form 2 by the Estate Agents (Contracts) Regulations 2008 (Vic), notwithstanding that they had been repealed in 2018.[3] The Contract also contained Special Conditions which prevail over the General Conditions to the extent of any inconsistency. Speaking generally, these Special Conditions attempt to cover every contingency that might arise and give to the vendor every advantage over the purchaser. Special Condition 32 dealt with the condition of the Land and provided that it was sold in an ‘as is, where is’ condition, with all faults or defects whether apparent or not apparent. Special Condition 32 provides in some detail that the vendor makes no representation or warranty about the Land or the improvements on it and Special Condition 34 provides, amongst other things, that the purchaser is not entitled to make any claim for compensation or damages in respect of any matter about which the vendor gives no warranty.
[3]Revoked as from 11 August 2018 by virtue of section 5 of the Subordinate Legislation Act 1994.

At the end of the Special Conditions there is provision for execution of the Contract. It is executed by the defendant ‘by its Attorney Benjamin Jennings under Power of Attorney dated 27 March, 2019 in the presence of – Witness (in handwriting) Victoria Smith’. It is executed by Jetcharm in accordance with s 127(1) of the Corporations Act 2001 by an unidentified person signing as a director and secretary.

Jetcharm became registered as proprietor of the Land by transfer from the defendant on 27 March 2020. On 2 April 2020, the plaintiff received an email from Jetcharm stating that Jetcharm was ‘taking over the build at West Footscray’ and was seeking plans and specifications in relation to the development. In an email sent to the plaintiff on 7 April 2020, Jetcharm stated that the Land was then owned by Jetcharm and attached a title search in relation to the Property. So far as the evidence discloses, this is the first occasion on which the plaintiff learned about the fact that the Land had been sold.

The plaintiff did not receive any part of the surplus funds at or after settlement of the Contract. Nor did the plaintiff receive any correspondence or other communication from or on behalf of the defendant in relation to any proceeds of the sale that were owing to the plaintiff.

By letter dated 6 May 2020, the then solicitor for the plaintiff (Mr Rennex) wrote to the solicitors for the defendant (Summer Lawyers) referring to the apparent sale of the Land to Jetcharm (by reference to a Domain Listing), the registration of Jetcharm as proprietor, the sale price of approximately $2.48 million, the payout figure advised to the plaintiff on 6 March 2020 as at 13 march 2020 of $2,335,555.40 (see above [12]), the entitlement of the plaintiff to any surplus funds arising from the sale, and requested the defendant’s settlement statement and all tax invoices in respect of the sale so that the plaintiff can determine the accuracy of the amount due to the plaintiff. There was no response until after two further emails, asking for a response, were sent on 8 and 12 May 2020. In the email of 12 May 2020, the plaintiff’s solicitor threatened an application to the Court seeking an order requiring production of all records relating to the sale unless they were provided by 14 May 2020.

On 20 May 2020, Summer Lawyers responded by email attaching the Contract[4] and settlement adjustment statement dated 27 march 2020. The settlement adjustment statement showed the amount payable at settlement to be $2,234,849.55 after allowing for the deposit of $248,000 previously paid, and after various adjustments the sum of $2,220,460.36 as payable to the vendor. Adding back the deposit of $248,000 the amount paid should be $2,468,460.36. The calculations made by Jennings in his affidavit are different, as I shall refer.
[4]The Contract sent with this email is the contract Paglia exhibits to his affidavit, and which is referred to above.

By email on 21 May 2020 to Summer Lawyers, Mr Rennex expressed his deep concern at the manner in which the transaction has proceeded, and the fact that they had not provided any reason why the surplus finds from the sale were not directed to the plaintiff. In addition, all tax invoices for the costs the defendant claimed were requested, and had been over three months previously, to enable the plaintiff to verify the legitimacy of the costs. The email went on to threaten an application in court to recover ‘all costs and damages if the surplus was not paid by the next day.’

Summer Lawyers responded on 22 May 2020, notifying the plaintiff’s lawyers that subcontractors or the plaintiff had damaged the Land and removed completed works, such as electrical wiring, from the Land after completion of the sale and that the purchaser may seek compensation from the defendant. For this reason, the defendant was not in a position to account to the plaintiff for the surplus until it resolves outstanding issues satisfactorily to the purchaser. In addition, because the plaintiff had reserved all its rights, the defendant is entitled to retain any surplus as security for any potential costs it may incur in defending an action brought by the plaintiff.

On 22 May 2020, Mr Rennex sent a letter denying the accusations made in the email referred to in the last paragraph. Mr Rennex further stated that Summer Lawyers and the defendant had no proper basis for withholding the surplus sale proceeds in respect of the Property. The plaintiff demanded that by 25 May 2002 the defendant provide it with an itemised summary of all costs, charges and expenses properly incurred in relation to the sale, together with an itemised summary of all interest, costs and other money claimed in respect of the mortgage. Mr Rennex said that, failing the provision of the requested information within that timeframe, the plaintiff would commence court proceedings to recover the surplus funds.

Summer Lawyers responded that day, 22 May, that the defendant would be in a position to provide tax invoices and a current payout balance by 25 May 2020. It was further stated that the defendant would not be in a position to provide a finalised itemised summary of all costs associated with its mortgage to the plaintiff or an amount of the surplus as a dispute had arisen with the purchaser and it is likely the mortgagee will continue to incur costs. The letter attached a letter from Jetcharm Constructions to the defendant dated 22 May 2020 seeking damages from the defendant (Jetcharm letter). Summer Lawyers stated that, as it was reasonably anticipated that a dispute would arise with the plaintiff, the defendant was ‘entitled to retain the surplus proceeds as security for the probable cost of any contest’.[5]
[5]Citing authorities: Bank of New South Wales v O’Connor (1889) 14 AC 273 and Project Research Pty Ltd v Permanent Trustee of Australia Ltd (1990) 5 BPR 11,225.

The Jetcharm letter was addressed to the defendant in the following terms:

Dear Victoria, [a reference to Victoria Smith]
I am writing to you with regards to the development at 14 Beaumont Parade in West Footscray. On completion of the purchase of this property by Jetcharm Constructions, I conducted a detailed site inspection and noticed extensive malicious damage to the property. The level of damage will mean significant and unforeseen costs for Jetcharm.
The damage to the property includes:
– Damage to the plumbing pipe work. Areas of the pipe work will need to be replaced.
– Sewer lines will need to be inspected to ensure they have not been tampered with. We estimate the cost of repairing and inspecting all the existing plumbing to be $15,000.
– Electrical cabling rough-in has been damaged and the lines have been cut. The entire electrical work will need to be redone.
– The main electrical feeds have been stolen from the site. New electrical feeds will need to be installed. We estimate the total cost for redoing the electrical work to be $60,000.
– The engineer is refusing to provide the certification required as his invoice has not been paid by the previous owner. The engineer will need to be paid or we will incur costs associated with having to x-ray the concrete and pay another engineer to approve the work. The engineer will cost $6000 to pay the outstanding invoice. This would be the cheapest option.

We estimate the total cost to repair the damage to be approximately $81,000 ex GST. These costs do not include my time to project manage these issues or to oversee all this additional work and repairs on site.
Given, Jetcharm Constructions bought this property without knowing that (a) trades and consultants had not been paid for their work and (b) the extent of the damage to the property before the completion of my purchase of the property, I strongly suggest that VDL investments take financial responsibility for these costs.
Yours sincerely
Damien Lane

Mr Rennex responded the following Monday, 25 May, that the plaintiff ‘flatly refutes’ that it had accessed the Land following settlement of the Jetcharm Contract, or at any time, to remove equipment or damage the land. Mr Rennex further stated that the defendant was not entitled to retain the surplus funds from the sale of the Land,[6] and that the plaintiff’s view was that the surplus proceeds should have been immediately paid to it at settlement. He again foreshadowed court proceedings.
[6]Referring to the proposition that Project Research Pty Ltd v Permanent Trustee of Aust Ltd (1990) 5 BPR 11,225 does not permit the mortgagee to retain surplus funds for anticipated legal costs and that in doing so the defendant is merely attempting to procure security for costs independently of a court order: Ginelle Pty ltd v Singh & Anor [2010] NSWSC 1166, [84].

Later that day, 25 May, Summer Lawyers sent a further email to Mr Rennex attaching a statements of account of the first mortgagees, for whom Summer Lawyers also acted, and of the defendant. Each statement was on the letter head of Agility Finance. He stated that the accounts were interim accounts and that the defendant continues to incur legal costs and disbursement associated with the mortgages. There was then further correspondence regarding the delay by the defendant, and who held the funds, which turned out to be the defendant. This proceeding was commenced on 3 June 2020.

Mortgage terms

The mortgage to the defendant is dated 13 March 2019 and incorporates Memorandum of Common Provisions AA3394 lodged in the Land Registry (MCP), as does the mortgage of the first mortgagees. Indeed, the terms of the first mortgagee’s mortgage are the same as those of the defendant. The final repayment date was defined in the MCP to mean ‘on the same day which is 8 months after the commencement date’, which was defined as 30 January 2019, so that the final repayment date was 30 September 2019. The guarantor named in the mortgage was Paglia. There were two rates of interest specified, a lower and a higher rate. The higher rate was 14.75%, the lower 9.75%. The date for payment of interest was ‘on the same day of each month as the commencement date,’ so that interest was payable on the last day of each month.

The MCP set out four interest regimes, A, B, C and D. There were special conditions in the mortgage that specified the applicable interest regime as Regime B referred to in clause 5.12 of the MCP. Despite some conflict in the versions of the mortgage and MCP produced by the parties, it was common ground that the applicable interest regime was regime B.[7]
[7]In fact the documents in evidence included two versions of the mortgage, the first, apparently executed, that specified Regime B (exhibit SSP-3 to the first Paglia affidavit), the second unexecuted specifying interest regime A (exhibit SSP-4 to the first Paglia affidavit). The version in evidence from the defendant specified regime B (exhibit BJ-1 to the first Jennings affidavit). Curiously, the MCP contained a schedule (Schedule A) that also specified the interest regime. But in the MCP produced by the plaintiff that schedule specified regime A, whilst the version produced by the defendant specified regime B.

The special conditions in the mortgage add to or vary the provisions of the MCP and include the following:

(a) for the purposes of the definition of a Material Adverse Effect (and clauses 18.2(i),(j), (o) and (p)) in the MCP the reference to the Lender’s opinion is replaced with ‘the Lender’s reasonable opinion’;

(b) the Lender (defendant) notifies the Debtor (plaintiff) that they will accept interest at the Lower Rate of Interest in lieu of interest being paid at the Higher Rate of Interest if an Event of Default has not occurred (Special Condition 2); and

(c) part of the Principal Amount (defined to mean the $1,710,000) is intended to finance Works and is to be advanced by Instalments (progress payments) which are to be advanced on requests that specified the amount, the Works completed and to be completed, supported by certificates from a quantity surveyor and engineer (if applicable) and include a statutory declaration from the builder that all accounts rendered by contractors, sub-contractors and suppliers have been paid in full;[8]

[8]Special condition 3. ‘Works’ is defined by the MCP to mean any building work (including many ancillary works) on the Land.

The MCP contains about 129 definitions, 29 clauses, over 209 sub-clauses many with multiple sub-clauses, and 7 schedules. It occupies 57 pages of detailed provisions. It is framed to cover every eventuality and to protect the mortgagee. I set out the provisions of the Mortgage and MCP that appear to be relevant or which were referred to by the parties as the relevant provisions:

(a) ‘Borrower’ was defined to mean the plaintiff.[9]
[9]Clause 1.1.

(b) ‘Debtor’ was defined to mean the Borrower and/or the Mortgagor as the case may be and where (as here) the Borrower and the Mortgagor are the same person the expression means both the Borrower and the Mortgagor.[10] However, Schedule A to the Mortgage provides that the Mortgagor means both the Borrower and the Guarantor, so that a reference to the Debtor includes Paglia.
[10]Clause 1.1.

(c) ‘Encumbrance’ was defined to mean, amongst other things, any interest created in any manner whatsoever in respect of or over the Mortgaged Property. It therefore includes the first mortgage.

(d) ‘Event of Default’ was defined to mean any of the events specified in clause 18.[11]
[11]Clause 1.1.

(e) ‘Guarantor’ was defined to mean Paglia.[12]
[12]Clause 1.1.

(f) ‘Interest was defined to mean any interest payable by the Debtor to the Lender as calculated and accrued in accordance with the Mortgage including but not limited to any interest on any of the Secured Money.

(g) ‘Lender’ was defined to mean the defendant and to include ‘any Authorised Officer of the Lender and any agents, employees, executors, successors, assignees and transferees of the Lender.[13]
[13]Clause 1.1.

(h) ‘Lender’s Certificate’ was defined to mean a certificate signed by the Lender or by an Authorised Officer[14] as to any amount payable to the Lender under the Mortgage, the failure of the Debtor to comply with any Obligation, the date of the making of default in performing or observing any covenant or Obligation under the Mortgage, the occurrence or the taking place of any Event of Default or the date thereof, anything relevant to the establishment of any right or remedy of the Lender or of the liability of the Debtor under the Mortgage, any genuine pre-estimate of damage in accordance with clause 3.8 or any other matter arising in connection with the Mortgage.
[14]Authorised Officer is defined to mean one or more of a director or solicitor acting for the Lender, amongst others.

(i) ‘Material Adverse Effect’ is defined to mean in the [reasonable] opinion of the Lender, a material adverse effect on any one or more of;

(i) the ability of the Debtor to pay the Secured Money or any part thereof, pay Interest or perform any one or more of the Obligations;[15] and
[15]Clause 1.1, Definition of Material Adverse Effect, (a)(i), (ii) and (iii).

(ii) the financial position or condition of the Debtor and/or the business conducted by the Debtor.[16]
[16]Clause 1.1, Definition of Material Adverse Effect, (b)(i) and (ii).

(j) ‘Mortgagor’ was defined to mean the Borrower and the Guarantor.[17]
[17]Clause 1.1.

(k) ‘Obligation’ is defined to mean ‘all obligations, covenants, conditions, stipulations, warranties, guarantees, undertakings, assurances and agreements (whether present or future and whether express or implied) arising under or imposed by this Mortgage or by operation of Legislation or law as a result of the grant by the Mortgagor of this Mortgage’.[18]
[18]Clause 1.1.

(l) ‘Overriding Intent’ was defined to mean the overriding intent of the parties in entering into the Mortgage, namely that the Lender will be able to recover from the Debtor and/or from the Mortgaged Property any and all amounts forming part of the Secured Money or any other amounts that the Lender is entitled to under the Mortgage.[19]
[19]Clause 1.1.

(m) ‘Secured Money’ is defined to mean ‘the aggregate of all monies which the Debtor is, or at any time may become, actually or contingently liable to pay to the Lender for any reason or on any account whatsoever and includes, without limitation,’ a list of items that range from the Principal Amount, any interest, and costs and expenses and (by paragraph (h) of the definition) any money deemed by the Lender, on reasonable grounds, as necessary for it to retain so as to provide:

(i) adequate security for the Lender’s rights to be indemnified in accordance with the provisions of this Mortgage; or

(ii) for the Lender’s Legal Fees[20] in connection with the enforcement of any indemnity under this Mortgage; and
[20]‘Legal Fees’ is defined to mean all solicitor’s costs, barrister’s fees, and any disbursements on a full indemnity or solicitor and own client basis, whichever basis yields the higher amount.

any money due to the Lender as a result of the operation of the Indemnities in clause 23.[21]
[21]Clause 1.1.

(n) [Clause 1.3] The MCP and each of its terms shall be construed in accordance with and to give full effect to the Overriding Intent.[22]
[22]Clause 1.3.

(o) [Clause 1.4] No rule of construction applies to the disadvantage of a party to the Mortgage because that party was responsible for the preparation of the Mortgage.

(p) [Clause 2.1] The Mortgagor grants to the Lender a mortgage of the Mortgaged Property to secure the payment (including the punctual payment) of the Secured Money or any part thereof, and the performance, including the punctual performance, of all of the Obligations.[23]
[23]Clause 2.1.

(q) [Clause 3.1] The Debtor covenants that the Debtor shall pay the Secured Money (or any part thereof) to the Lender in accordance with the terms of this Mortgage and by the end of the Term and shall perform, observe and comply with all of the Obligations at all times and at its own cost.

(r) [Clause 5.2] The Debtor shall pay Interest to the Lender on the Date for the Payment of Interest, which was the last day of each calendar month.

(s) [Clause 5.7] the Debtor shall pay the Higher Interest Amount for any Interest Period where before the Date for the Payment of Interest for that Interest Period:

(i) the Debtor has failed to pay any amount due under the relevant mortgage by the due date for payment; or

(ii) the Debtor has failed to comply with any of the Obligations; or

(iii) there is an Event of Default.[24]
[24]Clause 5.7.

(t) [Clause 5.8] any interest not paid by the Debtor to the Lender by the Date for the Payment of interest shall be capitalised immediately upon the interest not being paid and the amount of unpaid interest shall be Outstanding Interest and form part of the Secured Money.[25]
[25]Clause 5.8.

(u) [Clause 5.9] if the Debtor has paid interest on the Date for the Payment of Interest based on the Lower Interest Amount and it later becomes apparent that at the time that the interest was paid:

(i) the Debtor had failed to pay any amount due under the relevant mortgage by the due date for the payment of that amount;

(ii) the Debtor had failed to comply with any of its Obligations; or

(iii) an Event of Default had occurred –

then the interest payable by the Debtor for the Interest Period immediately prior to the event in paragraphs (i) to (iii) above and all subsequent Interest Periods shall be the Higher Interest Amount.[26]
[26]Clause 5.9

(v) [Clause 5.12] if the Specified Interest Regime applicable to the relevant mortgage is Interest Regime B:

(i) the Debtor shall pay interest to the Lender monthly in arrears on the Date for Payment of Interest until the Outstanding Interest is paid in full;

(ii) and, the Debtor fails to pay interest on the Date for the Payment of Interest, then:

(A) the Debtor shall be liable to pay interest on the Outstanding Interest at the Higher Interest Rate compounding monthly on the Date for the Payment of Interest until the Outstanding Interest is paid in full; and

(B) the interest on the Outstanding Interest compounded on the basis specified in paragraph (A) above shall become part of the Secured Money as soon as it compounds.[27]
[27]Clause 5.12.

(w) [Clause 17.4(c)(i)] The Debtor’s Obligations as to Works under the MCP are set out in clause 17 and include an obligation to ‘pay any money due to any person as to any Works performed or to be performed and before that money falls due for payment’.[28]
[28]Clause 17.4(c)(i).

(x) [Clause 18.2] Events of Default under the MCP are defined to include any one or more of the following events:

(iii) the Debtor fails to pay any Secured Money in accordance with this Mortgage;[29]
[29]Clause 18.2(a).

(iv) the Debtor fails to comply with any of the Obligations;[30]
[30]Clause 18.2(b).

(v) if, in the Lender’s [reasonable] opinion, an event occurs which may have a Material Adverse Effect on the Debtor’s ability to comply with any of the Obligations;[31]
[31]Clause 18.2(i).

(vi) in the [reasonable] opinion of the Lender, there is a Material Adverse Effect on the financial condition of the Debtor and/or any business conducted by the Debtor;[32]
[32]Clause 18.2(p).

(vii) an Insolvency Event occurs in respect of the Debtor.[33]
[33]Clause 18.2(q).

(y) [Clause 18.3] If an Event of Default occurs, or is deemed to have occurred, the powers of the Lender in relation to recovery of the Secured Money and the sale of the Land are extremely broad including:

(i) any sale by the Lender of the Mortgaged Property may be in any manner and on such terms and conditions as the Lender may in its absolute discretion determine and in that respect the Lender may sell the Mortgaged Property in one line or in lots;[34]

[34]Clause 18.3(d).

(ii) upon taking possession of the Land, pay any money owing to any person for any chattels, fixtures or other improvements to or on the Mortgaged Property;[35]
[35]Clause 18.3(g)(v).

(iii) pay to any mortgagee of any other Encumbrance the whole or any part of the amount owing to that mortgagee and any money so paid by the Lender will form part of the Secured Money and will be secured by this Mortgage.[36]
[36]Clause 18.3(h).

(z) [Clause 23.1 and 23.2] The Debtor indemnifies and agrees to keep the Lender harmless against all Claims which the Lender may be sought to be made liable for, is liable for or is required to defend as a result of any one or more of the following matters:

(i) any neglect on or default of the Debtor to observe and perform any of the Obligations contained in or implied by the Mortgage;[37]
[37]Clause 23.2(a).

(ii) any actual or assumed obligation of the Lender (whether solely or jointly with the Debtor or any other Person) to pay any money or to do anything related to the Mortgaged Property howsoever arising;[38] and
[38]Clause 23.2(e).

(iii) any claim actual or threatened against any one or more of the Lender or any of its servants or agents by any person whatsoever.[39]

(aa) [Clause 23.5] The Lender may retain any money it may have in its possession or what is in the possession of any Receiver resulting from the sale of the Mortgaged Property to secure its rights arising by reason of any indemnity in this Mortgage.[40]

(bb) [Clause 24] This clause contains the Dobb’s certificate provision which I set out later in these reasons.

[39]Clause 23.2(g)

[40]Clause 23.5.

Applicable law

Section 77(1) of the Act provides for the conditions for, and terms upon which, a mortgagee may sell the mortgaged land, including that such sale must be made in ‘good faith and having regard to the interests of the mortgagor’. Section 77(2) provides for the instrument of transfer, and s 77(3) deals with the application of the proceeds of the sale, as follows:

(3)The purchase money received arising from the sale shall be applied—
(a)firstly in payment of all costs charges and expenses properly incurred incidental to the sale and consequent on such default;
(b)secondly in payment of the moneys which are due or owing on the mortgage or charge;
(c)thirdly in payment of moneys owing under or in respect of subsequent mortgages and charges in the order of their respective priorities;
(d)fourthly in payment of the residue (if any) to the mortgagor or into the Supreme Court under the provisions so far as they are applicable of section sixty-nine of the Trustee Act 1958 and the rules referred to therein….

In Re S & D International Pty Ltd (in liq) (rec and mgr apptd) v MIG Property Services Pty Ltd,[41] Robson J surveyed authorities bearing upon the operation of s 77 of the Act. His Honour distilled a number of relevant principles based upon his review of the authorities. The principles include the following:
[41][2009] VSC 225 at [106]–[158] (S & D International).

(a) a mortgagee under a mortgage, whether it is a general law mortgage or a registered mortgage under the Act, holds the surplus from the sale of the mortgaged land on trust for the mortgagor and the subsequent encumbrancers;[42]
[42]S & D International [2009] VSC 225 at [159(c)], citing Bank of New South Wales v Adams [1982] 2 NSWLR 659, Adams v Bank of New South Wales [1984] 1 NSWLR 285 at 296, Avco Financial Services Ltd v Commonwealth Bank of Australia (1989) 17 NSWLR 679, Chant v Deputy Commissioner of Taxation (1994) 15 ACSR 184 at 188–9, Re Morrison; Bennell v Smith [1962] Tas SR 337 at 338 and Westpoint Finance Pty Ltd v Chocolate Factory Apartments Ltd [2002] NSWCA 287 at [58].

(b) the first mortgagee who sells the mortgaged property is obliged, if asked, to account to the mortgagor and the subsequent mortgagees in respect of his claims under the mortgage in respect of principal, interest and costs;[43]
[43]S & D International [2009] VSC 225 at [159(f)], citing Adams v Bank of New South Wales [1984] 1 NSWLR 285.

(c) the mortgagee must account as at the date that he receives the proceeds from the sale of the mortgaged property;[44]
[44]S & D International [2009] VSC 225 at [159(g)], citing Charles v Jones (1887) 35 Ch D 544 at 549–50 and Adams v Bank of New South Wales [1984] 1 NSWLR 285.

(d) the mortgage of the first mortgagee who sells the mortgaged property for an amount sufficient to meet his claim for principal, interest and costs is discharged upon the sale at the date of settlement of the sale;[45]
[45]S & D International [2009] VSC 225 at [159(h)], citing Charles v Jones (1887) 35 Ch D 544 at 549–50 and Adams v Bank of New South Wales [1984] 1 NSWLR 285. See also at [162].

(e) likewise, any subsequent mortgage is discharged if sufficient proceeds are received to meet the subsequent mortgage at the mortgagee’s sale. The mortgagor is not responsible for interest to the subsequent mortgagee if the first mortgagee fails to account to the subsequent mortgagee as it should. The subsequent mortgagee is treated as having the moneys owed to it under its security held on trust for it by the first mortgagee as and from the receipt by the first mortgage of the proceeds of sale;[46]
[46]S & D International [2009] VSC 225 at [159(i)], citing Charles v Jones (1887) 35 Ch D 544 at 549–50, Adams v Bank of New South Wales [1984] 1 NSWLR 285, West v Diprose [1900] 1 Ch 337 at 339 and Incorporated Trustees of Australian Clergy Provident Fund v Perpetual Executors & Trustees Association of Australia Ltd [1957] VR 390 at 395– 6.

(f) the mortgagee who accounts is only obliged to do so once and that is when his mortgage is discharged at settlement;[47]

(g) if there is any doubt as to the entitlement, priority or quantum of the subsequent encumbrances, the mortgagee should put aside the trust moneys in an interest bearing account until the entitlements have been determined or, alternatively, pay the money into court.[48]

(h) the mortgagee may hold surplus money for a reasonable time pending the establishment of any claim which may be made to the moneys.[49] That is not authority for not calculating the surplus or for refusing to pay the money into court where the known claimants to the surplus request that be done.[50] The surplus moneys are held on trust. That assumes that the balance has been used to satisfy the mortgagee’s debt. If the debt is satisfied, then the mortgage is discharged and satisfied. There is no basis for charging any further sums against the moneys held on trust.[51]

[47]S & D International [2009] VSC 225 at [159(j)], citing Adams v Bank of New South Wales [1984] 1 NSWLR 285, Challenge Bank Ltd v Hodgekiss (unreported, NSW SC, Young J, 17 August 1995, at 9), Colin D Young Pty Ltd v Commercial & General Acceptance Ltd [1982] NSW ConvR 56,572 at 56,573 and Equus Financial Services Ltd v RMBL Investments Pty Ltd (1996) 22 ACSR 744 at 745

[48]S & D International [2009] VSC 225 at [159(k)], citing Charles v Jones (1887) 35 Ch D 544 at 549–5 and Ex parte Australian Co-operative Development Society Ltd [1978] Qd R 395.

[49]S & D International [2009] VSC 225 at [163], citing Ex parte Australian Co-operative Development Society Ltd [1978] Qd R 395.

[50]S & D International [2009] VSC 225 at [163].

[51]S & D International [2009] VSC 225 at [164].

In Melbourne Property Group Pty Ltd v SC Australia Pty Ltd,[52] I referred to these principles and in relation to the principle referred to in paragraph [33(a)] above, referred to the subsequent decision of the High Court of Australia in Bofinger v Kingsway Group Ltd, ‘where the obligation is described as a fiduciary obligation to account rather than a full blown trust’.[53]
[52][2013] VSC 701 at [52]–[53].
[53]Ibid fn 34, citing Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at 291 [50].

There is general rule that a mortgagee who is threatened by the mortgagor with a contested taking of accounts is entitled to retain its costs of the accounts.[54] That is so even where there is no express provision in the mortgage and extends to ascertaining or defending its rights, in preserving the security or in recovering the mortgage debt.[55] Where, as here, there is a proceeding by a mortgagor against the mortgagee for the taking of an account of what is due to the mortgagor after a sale of the mortgaged land, the principles applicable are those derived from a mortgagor’s redemption proceeding in which the mortgagor relies on his equitable right to redeem the mortgage.[56]
[54]Project Research Pty Ltd v Permanent Trustee of Aust Ltd (1990) 5 BPR 11,225; Equus Financial Services Pty Ltd v RMBL Investments Pty Ltd (1996) 7 BPR 14,966, 22 ACSR 744; Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd [2003] NSWCA 27; S & D International [2009] VSC 225 at [185].
[55]Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd [2003] NSWCA 27, [61] per Hodgson J.
[56]Project Research Pty Ltd v Permanent Trustee of Aust Ltd (1990) 5 BPR 11,225, 11,227.

In Project Research Pty Ltd v Permanent Trustee of Aust Ltd,[57] a decision upon which both parties relied, Hodgson J noted that in such proceedings the mortgagee is generally allowed his costs out of the security, unless he has been guilty of misconduct, even if the mortgagee had previously claimed, as the price of redemption, more than was found to be due; at least so long as the demand was made bona fide and not unreasonably.[58] However, if such a demand was unreasonable, and particularly if the mortgagee refused a tender of the proper amount, this may be considered misconduct, and the mortgagee may be deprived of his costs of the redemption proceedings, and may even be ordered to pay the mortgagor’s costs.[59]
[57](1990) 5 BPR 11,225.
[58]Ibid, 11,228, citing Cotterell v Stratton (1872) LR 8 Ch App 295; Re Watts; Smith v Watts (1882) 22 Ch D 5.
[59]Ibid, 11,228, citing Rourke v Robinson [1911) 1 Ch 480; cf Webb v Crosse [1912) 1 Ch 323.

Hodgson J noted that in Heath v Chinn,[60] mortgagees who claimed too much were ordered to pay the mortgagor’s costs of taking accounts, although they were given some of their costs of the redemption proceedings up to judgment. In that case, Eve J stated there propositions:
[60](1908) 98 LT 855.

(a) that a mortgagee has an absolute right to costs unless they are forfeited by misconduct;

(b) that, if the absolute right is forfeited by misconduct, the costs are in the discretion of the judge; and

(c) 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.

Hodgson J reviewed other authorities and concluded:

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 nevertheless 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 that 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. I think this is to some extent recognised by the judgment of the Privy Council in Bank of New South Wales v O’Connor, above, where in referring to the practice whereby the court may order the return of deeds in return for substitution of a sum equal to the amount secured plus a proper margin, reference was made to a payment of “principal and interest and the probable costs of the suit”.[61]….
…I turn to consider the case where a mortgagee exercises a power of sale, and the proceeds of sale are more than sufficient to pay out principal, interest and costs. The mortgagee is then required to pay any balance to the mortgagor, if there are no subsequent secured creditors. What if before he does so, the mortgagor says he will seek an account against the mortgagee? The previous discussion suggests that in such a case, the mortgagee may be able to retain money out of the balance of the proceeds as security for the costs of those proceedings; although I am not aware of any direct authority for that proposition. On the other hand, if no such suggestion is made by the mortgagor, it would seem inconsistent with the mortgagee’s duties that he retain any part of the proceeds against the possibility that the mortgagor may seek an account; so that in those circumstances, if the mortgagor does subsequently seek an account, notwithstanding that this was not foreshadowed to the mortgagee, the mortgagee would not have any security for the costs of those proceedings. Perhaps in that situation, a mortgagee may be entitled as of right to an order for security for costs when the proceedings are brought by the mortgagor. I am not aware of any authority or practice to that effect, but it seems consistent with the principles I have discussed.[62]

[61](1990) 5 BPR 11,225, 11,229-11,230.

[62]Ibid, 11,230.

In that case, Hodgson J accepted that the mortgagee did reasonably anticipate proceedings in the nature of accounts, for which it would be entitled to costs unless it had been guilty of misconduct, and in relation to which it could be reasonable for it to retain security out of which to satisfy those costs. But he did not think it reasonable for the mortgagee not to attempt to give an estimate of those costs.[63] He concluded that it may be reasonable for the mortgagee to specify a very generous estimate of its anticipated costs on the basis that it ‘always costs more than you expect’.[64]
[63]Ibid, 11,230.
[64]Ibid, 11,231.

Where the mortgagee claims a payout figure which does not bear some reasonable relationship to the amount truly owing and anticipated costs, then this may amount to unreasonable conduct or misconduct which disentitles the mortgagee to costs subsequently incurred in determining the rights of the parties.[65]
[65]Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd [2003] NSWCA 27, [63] per Hodgson J.

The evidence
Affidavits

The plaintiff relies on the affidavits of Steven Santo Paglia (Paglia) sworn on 4 June 2020 (first Paglia affidavit), 7 August (second Paglia affidavit) and 12 August 2020 (third Paglia affidavit) and Tran Lam affirmed on 27 July 2020 (Lam affidavit), and the exhibits to those affidavits.

The defendant relies upon the affidavits of Jennings sworn on 13 July 2020 (first Jennings affidavit), 7 August 2020 (second Jennings affidavit) and the affidavits of Karunya Vetcha sworn on 6 August 2020 (first Vetcha affidavit), 21 August (second Vetcha affidavit) and 3 September 2020 (third Vetcha affidavit), and the exhibits to those affidavits.

The trial of the application was held remotely on 13 August and 4 September 2020, and on the latter date there was cross-examination of Paglia and Jennings.[66]
[66]The hearing and determination of the proceeding was referred to an associate Judge pursuant to r 77.05 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) by order of John Dixon J made on 10 June 2020.

In the first Paglia affidavit, Mr Paglia gives evidence of most of the matters set out above under the headings ‘Introduction’ and ‘Background’ and exhibits the mortgages, MCP, Contract and various emails and letters.

In the second Paglia affidavit, Mr Paglia gives evidence of accessing the website of Jetcharm and finding that Jennings is referred to there as a director of that company. That website contains the following statement:

Ben Jennings
Director
Ben leads the commercial side of Jetcharm delivering financial and strategic business advice. He is a highly experienced chartered accountant and brings a wealth of experience from the building industry as well as other industries to the table. Ben has been actively involved in many of his own property developments and has a passion for building and real estate.
When he is not in the Jetcharm office, you will find Ben running his own successful accountancy practice, and in his spare time, spending time with his family, sampling the different restaurants Sydney has to offer and pursuing his love of fishing!

He also exhibits company searches of the defendant, Jetcharm, Jennings Partners Pty Ltd (Jennings Partners) and Agility Finance obtained by his Lawyers. They showed:

(a) Jennings to be a director and the secretary of the defendant, and that the defendant’s registered office and address is level 12, 65 York Street, Sydney, NSW;

(b) Jennings is not recorded as a director of Jetcharm, but that its registered office is at Jennings Partners, unit 12, 65 York Street, Sydney, NSW, and its sole director, secretary and shareholder is Damian Lane of Elanora Heights, NSW;

(c) Jennings is the sole director of Jennings Partners and a shareholder with Jennings Group Investments Pty Ltd, and the registered office and principal place of business is level 12, 65 York Street, Sydney, NSW;

(d) Jennings is the sole director and secretary of Agility Finance, the shares in which are held equally by one Melanie Boulden and Jennings Group Investments Pty Ltd and the registered office is at Jennings Partners and its principal place of business is level 12, 65 York Street, Sydney, NSW .

Ms Vetcha is a solicitor at Summer Lawyers. The first Vetcha affidavit seeks to introduce evidence to substantiate a breach by the plaintiff of its obligation ‘to pay any money due to any person as to any Works performed’ (clause 17.4(c)(i) of the MCP) on the Land so as to set up a breach of an Obligation in 2019 that then constitutes an Event of Default entitling the defendant to charge the higher interest rate. She gives evidence of conversations, on 4 and 5 August 2020, with a manager of APS Southern Pty Ltd (APS), which she describes as a company ultimately contracted by the plaintiff during the construction of the development on the Land to perform design, supply and post tensioning to the concrete slabs in the development. In consequence of the conversations:

(a) Ms Vetcha requested from APS copies of outstanding invoices relating to the services rendered on the Land by APS. She received and produces copies of those invoices The first invoice is dated 25 October 2018 from APS to Form 8 Structures Pty Ltd (Form 8) for claim No 2, the second an invoice dated 25 November 2018 from APS to Form 8 for Claim No 3;

(b) she also produces an email chain between APS and Mr Lam of the plaintiff attaching an invoice dated 19 June 2019 from APS to the plaintiff in the amount of $28,399.80 (plaintiff’s APS Invoice). She comments that the email chain makes clear that SP Builders Pty Ltd (SP Builders) was in liquidation and that the invoice ought be readdressed to the plaintiff and Mr Lam would have Mr Jeremy Paglia look at the invoice;

(c) Ms Vetcha followed up on the email sent to her by APS in an effort to obtain a copy of any agreement between APS and SP Builders, any invoices rendered to SP Builders and a copy of the invoice issued in 2019 to SP Projects (Vic) or SP Builders;

(d) she was told in the course of one of the conversations that Form 8 was contracted by SP Projects (Vic) to complete concreting work and APS was subcontracted by Form 8 to carry out the post tensioning work. Form 8 went into liquidation in 2019 and the invoices were then forwarded to SP Projects (Vic) but were never paid. She says she was told that SP Projects (Vic) later changed its name to Nicola Properties Pty Ltd (the plaintiff);

(e) Ms Vetcha obtained an ASIC search of SP Builders Pty Ltd (ACN 115 715 609), which shows that it went into liquidation on 3 April 2019, and that the director of the company is Paglia;

(f) Ms Vetcha sought from APS further documents and in consequence received a Purchase Order directed by the plaintiff to ASP for the same works as had been contained in a Purchase Order given to APS by SP Builders for the sum of the $28,399.80 (plaintiff’s Purchase Order); and

(g) that from her conversations with the manager of APS, and from the emails, purchase orders and unpaid invoices that were provided to her, Ms Vetcha says that she is informed and believes that neither the plaintiff nor Paglia paid the invoices owing to APS and, in particular, after contracting directly with APS still failed to pay the SP Builders invoice or the plaintiff’s APS Invoice as well as the previous invoices for work performed by APS.

The third Paglia affidavit gives evidence in response to the first Vetcha affidavit in relation to an unpaid debt due by Form 8 to APS in respect of building work on the Land and in that connection deposes that:

(a) SP Projects is the trading name of SP Builders and is not the former name of the plaintiff;

(b) SP Builders undertook the building works on the Land. It contracted with Form 8 to undertake various works as a part of the development. Form 8, in turn, contracted with APS to undertake building works on the Land. Form 8 is unrelated to Paglia, his family or any entity associated with his family. Form 8 went into liquidation in 2019. SP Builders went into liquidation on 3 April 2019;

(c) after Form 8 went into liquidation, SP Builders contracted directly with APS to ensure it continued to be involved with the development on the land because APS had not issued compliance documents that were required for the development. This is the reason for the purchase order from SP builders to APS dated 5 March 2019;

(d) on 25 May 2019, APS issued an invoice to SP Builders. This was after SP Builders entered into liquidation. In June 2019, the plaintiff offered to pay the amount of the invoice from APS that had been issued to SP Builders. The plaintiff issued a purchase order dated 19 June 2019 (unsigned) to APS in order to give effect to that offer. APS then reissued an invoice to the plaintiff. The plaintiff ultimately did not pay the amount of that invoice. Although the plaintiff offered to pay the invoice issued by APS, it did not intend to contract with APS and did not understand that it was contracting with APS; and

(e) on 15 April 2020, APS commenced a proceeding in the magistrates Court of Victoria against the plaintiff claiming the amount of the invoice originally issued to SP Builders and reissued to the plaintiff. On 12 June 2020, the plaintiff filed a notice of defence in that proceeding denying that there was any agreement between it and APS and denying that it owes any amount to APS. That proceeding remains on foot.

Mr Lam is the company accountant of the plaintiff. He points out that there is a discrepancy between the amount now claimed to be due by the plaintiff under both the defendant’s mortgage and the first mortgagee’s mortgage, and the amount claimed to be due in the notice of default issued by Agility Finance on 1 October 2019. That discrepancy is due to the later recalculation of interest from the commencement of the mortgages at the higher rate of interest. He calculates the discrepancies of $17,587.34 for the defendant’s mortgage and $38,243.49 for the first mortgage, a total of $55,830.83.

The second Vetcha affidavit exhibits ASIC searches of SP Builders, including searches which reveal the Liquidators statutory report and other detail relating to its winding up. The third Vetcha affidavit was filed the day before the adjourned hearing date of 4 September 2020 when cross-examination of Paglia and Jennings was scheduled to take place.[67] The affidavit exhibits further correspondence between the solicitors for the parties, Notices of Default given by Summer Lawyers on behalf of the defendant and the first mortgagees on 20 May 2019 in consequence of SP Builders going into liquidation, correspondence disputing the default alleged, further correspondence evidencing a form of compromise, or withdrawal of the notices of default,[68] and conditions under which draw-downs under the mortgages were to continue. Interest continued to be charged at the lower rate thereafter. Also exhibited were progress claims with supporting documentation (Quantity Surveyors certificates and statutory declarations) at various dates up to September 2019.
[67]Jennings was not available on 13 August 2020, notice to cross-examination having been given too late. It was agreed by the parties in the course of the hearing on 13 August 2020 that openings and arguments would be dealt with on that day and another day arranged to conduct cross-examination and hear final submissions.
[68]Nicola Properties Pty Ltd v Vie De L’eau S ECI 2020 02457, Transcript 4 September 2020 (Transcript - 4/9), p. 21.13.

The first Jennings affidavit deals first with the loan and mortgage to the defendant and all the attendant documentation to which I have referred earlier; followed by the default and recovery of possession of the Land from the plaintiff. The evidence of the entry into the Contract is imprecise – it was sold to Jetcharm ‘in March’ and the Contract was completed on 27 March 2020. He deposes:

(a) that leading up to and shortly after the sale to Jetcharm, invoices were issued to the defendant ‘by various service providers for the engagement of their services, insurance and to assist in the recovery and subsequent sale of the property and were paid or to be paid from the sale proceeds’. He sets out the invoices and amounts. No issue is raised with respect to these payments.

(b) that the amount that Jetcharm was required to pay at settlement was $2,482,849.77 (described as the ‘Sale Proceeds’), including adjustments totaling $2,849.77. From the Sale Proceeds were paid various fees, rates and taxes and the debt owing to the first mortgagees in the sum of $1,759,717.80 and the debt owing to the defendant in the sum of $651,474.96, leaving a surplus of $57,111.61.

(c) as to the correspondence referred to above at [22] – [24] and the Jetcharm letter, which I have set out above ([25]). He then refers to the relevant provisions of the MCP, in particular the definition of ‘Secured Money’ which includes any money deemed by the Lender, on reasonable grounds, as necessary for it to retain so as to provide:

(iv) adequate security for the Lender’s rights to be indemnified in accordance with the provisions of the mortgage; and

(v) for the Lender’s Legal Fees in connection with the enforcement of any indemnity under the mortgage.

(d) that he is informed by Mr Reese of Summer Lawyers, and believes, that the ‘Surplus’ will not be adequate security for the defendant and/or for the defendant’s legal fees:

(i) if Jetcharm commences a proceeding against it for damages in the sum of $81,000 as foreshadowed. The estimated costs if the defendant was to be sued by Jetcharm may be as much as $20,000;

(ii) if the plaintiff commences proceedings against it for damages for any reason including as a result of not accepting a reduced payout figure that it offered the defendant in February 2020 or for any loss and damage including loss and damage for loss of opportunity as foreshadowed in an email from the plaintiff’s solicitors on 22 May 2020. The legal costs of any proceeding if brought by the plaintiff may amount to as much as $50,000 to $70,000;

(iii) to defend this application. The cost of this application is anticipated to be about $25,000 to $35,000.

The second Jennings affidavit is partly evidence and partly submission. He deposes that having read the Vetcha and Lam affidavits:

(a) in or around February 2019, Jennings was made aware that various contractors had contacted his office to advise that they have not been paid for their work performed on or at the Land;

(b) in his reasonable opinion, on behalf of the defendant, the failure by Paglia and/or the plaintiff to pay the contractors that performed Works, as defined in the MCP, not only constituted a breach of their Obligations pursuant to the MCP but also constituted a Material Adverse Effect as defined in the MCP;

(c) further, in his reasonable opinion, on behalf of the defendant, the application to wind up S P Builders commenced by JLM Fencing Pty Ltd on 27 November 2018 also constituted a Material Adverse Effect as it was a material adverse effect on the financial position or condition of the business conducted by Paglia;

(d) the last two matters constituted Evens of Default pursuant to clause 18.2(i) and (p) of the MCP which entitled the defendant to charge interest at the higher rate pursuant to clauses 5.2, 5.7 and/or 5.9 of the MCP;

(e) in or about September 2019 the accounts team of the defendant prepared a statement of account. Interest was calculated on the Lower Interest Rate as the accounts team was unaware that an Event of Default had occurred under the Mortgage, namely that neither the plaintiff nor the guarantor, Paglia, had paid the contractors for work performed at the Land pursuant to their obligations under clause 17 of the MCP from the commencement of the agreement nor that he (Jennings) had formed the view that an event had occurred which may have a Material Adverse Effect on the Debtor’s ability to comply with any of the Obligations. He referred to the first Vetcha affidavit in this regard;

(f) the failure of the plaintiff to pay contractors [meaning the APS invoice] constituted and Event of Default under the MCP and pursuant to clauses 5.2, 5.7 and/ 5.9 the Debtors were required to pay interest at the higher rate;

(g) the Events of Default occurred at the commencement of the Agreement, as invoices prior to 13 March 2019 were not paid by Nicola Properties or Mr Paglia. Further the application to wind up Mr Paglia’s company SP Builders was commenced prior to 13 March 2019 being the date of the Agreement;

(h) in September 2019, Agility Finance on the defendant’s behalf sent the Statement of Account to Nicola Properties as contained in exhibit TL-1 to the Lam affidavit. That Statement of Account was in error as it did not take into account the matters set out in paragraphs (b) to (f) above, namely the entitlement of the defendant to receive the Higher Interest Rate nor did it take into account the matters in paragraph (i) below;

(i) the same error occurred when on or about 1 October 2019, Summer Lawyers requested the accounts team of the defendant to produce updated Statements of Accounts to issue the Default Notice dated 1 October 2019 to the plaintiff. The figures provided to Summer Lawyers were also in error as they were calculated on the Lower Interest Rate and not the Higher Interest Rate, those figures also did not take into account the matters in the next paragraph;

(j) The interest paid to the first mortgagees as set out in Exhibit TL-1 to the Lam affidavit was calculated on the Lower Interest Rate. However, the first mortgagees ultimately charged interest at the Higher Interest Rate pursuant to their facilities and mortgages with the plaintiff. Accordingly, the figures contained in exhibit TL-1 to the Lam affidavit are not correct;

(k) pursuant to clause 24 of the MCP on 7 August 2020 he certified a number of matters. He exhibited that certificate. Omitting formal parts, the certificate states:

2.I have reviewed the books, accounts and records of VDL in respect of its loan to Nicola Properties Pty Ltd as trustee for the Nicola Family Trust (Nicola Properties). I have used the file and those records to make this certificate.
3.VDL [defendant] was entitled to be paid interest at the Higher Interest Amount at all times since March 2019 as neither Nicola Properties [plaintiff] nor the Guarantor, Steven Santo Paglia, defined in the MCP as the Debtor, complied with their Obligations under the MCP in that they did not pay moneys owing for Works performed on the Mortgaged Property. The failure to comply with their Obligations constituted an Event of Default entitling VDL to charge interest at the Higher Interest Rate from the commencement of the Agreement.
4.In my reasonable opinion, on behalf of VDL [defendant], the failure by Mr Paglia and/or Nicola Properties [plaintiff] to pay the contractors that performed Works, as defined in the MCP, not only constituted a breach of their Obligations pursuant to the MCP but also constituted a Material Adverse Effect as defined in the MCP.
5.In my reasonable opinion, on behalf of VDL [defendant], the application to wind up SP Builders Pty Ltd (ACN 115 715 609) commenced by JLM Fencing Pty Ltd on 27 November 2018 also constituted a Material Adverse Effect as it was a material adverse effect on the financial position or condition of the business conducted by Mr Paglia.
6.The matters set out in paragraphs 4 and 5 constituted an Event of Default pursuant to clause 18.2(i) and (p) of the MCP entitling VDL [defendant] to charge interest at the Higher Interest Rate from the commencement of the Agreement.
7.The amount set out in the Default Notice dated 1 October 2019, namely the amount of $477,136 is incorrect. Also incorrect is the Registered mortgage number AQ517269L referred to in that notice.
8.In accordance with the terms of the Mortgage executed on or about 13 March 2019 by Nicola Properties [plaintiff] in favour of VDL [defendant] as the Lender and registered on the title to the property situate and known as 14 Beaumont Parade, West Footscray in the State of Victoria (Property) being the land contained in folio of the Register Volume 4008 Folio 429, the surplus after the sale of the Property is $57,111.61 excluding legal costs and expenses relating to proceeding S ECI 2020 02457. The said surplus is subject to VDL’s [defendant’s] rights to retain moneys pursuant to paragraph (h) of the definition of Secured Money as set out in the MCP.
9.VDL [defendant] as the Lender issues this certificate of matters pursuant to clause 24 of the MCP contained and Incorporated within the Mortgage as conclusive evidence of the matters set out herein.
(the Dobbs Certificate)

Cross-examination

Paglia was cross-examined regarding the insolvency of SP Builders, the plaintiff’s Purchase order to APS and the plaintiff’s APS invoice. In substance, Paglia maintained the separate corporate personality of SP Builders from the plaintiff and the absence of any financial impact of the liquidation of SP Builders on the plaintiff. In relation to the plaintiff’s Purchase Order to APS, Paglia’s evidence was that it was unsigned and for that reason gave rise to no contractual relations between the plaintiff and APS and that in any event the work referred to in the Purchase Order and APS invoice had not been performed.

Jennings was cross-examined. He gave evidence that Jennings Partners conducts a chartered accountancy and business advisory business from Level 12, 65 York Street, Sydney. He confirmed he is the sole director of Jennings Partners and Agility Finance, which conducts a mortgage origination and servicing business from the same address. Agility Finance managed the mortgages between the plaintiff and the defendant as well as the first mortgagees.

He was cross-examined regarding his relationship with Jetcharm. He denied he was a de facto director of it. He did not know that he was recorded on the Jetcharm website as a director. He did not know who wrote the words describing him appearing on the website and said they were not correct (see above at [45]). He said that he performed the role of finance director at Jetcharm:

I’m finance director. I perform a finance director role for many, many years and when I say finance director, I mean CFO, financial advisory role, board, strategic advice, that’s what I do, it’s my job, that’s what I do for lots and lots and lots of different companies; doesn’t mean I’m a director.[69]

[69]Transcript 4/9, p 68.12-17.

Jennings Partners is paid a monthly fee for this work. It was wrong that the website stated that he led the commercial side of Jetcharm. Although he did not specifically recall, he believed that he must have raised with Damian Lane, the director of Jetcharm, that the Land was for sale, because there was no other way he could have found out the Land was for sale.

Jennings believed that the contract was beneficial because it was the highest price and got the defendant’s mortgage paid out:

Do you remember deciding that this was a contract that the defendant should enter into?‑‑‑I believe it was enough money to get the second mortgagee paid out so on that basis alone, um, it was higher than the other prices, I believe, that were offered so it seemed reasonable to enter into it.
How many other offers were paid (sic made)?‑‑‑I think there was, um, the first mortgagee attempted to market the property; is that right? I believe the first mortgagee was attempting to market the property and was looking to take a lower price which would have left a deficit for the second mortgagee. I believe the property was marketed as well and that this price was higher than any others. That’s my recollection.[70]

[70]Transcript 4/9, p. 75.19 – 76.1.

Jennings said that he viewed the purchase of the Land by Jetcharm as a commercial opportunity for it:

Now, before the Jetcharm contract was entered into, Mr Jennings, did you regard this development in West Footscray as presenting a commercial opportunity for Jetcharm?‑‑‑Yeah, sure. I mean, I, I needed an opportunity to get Vie De L’Eau paid back all their money and so far the prices that were on offer were not going to go, to get us paid back in full.
Yes?‑‑‑There was going to be a loss.
Yes. Now, your answer to my last question was that, yes, you did regard this development as presenting a commercial opportunity for Jetcharm; did you discuss that commercial opportunity with Mr Lane?‑‑‑Not that I recall. We needed a buyer for the property.[71]

[71]Transcript 4/9, p. 76. 23 - 77.4

Jennings was cross-examined about a discrepancy in the amounts payable at settlement. In his first affidavit he deposed that the amount Jetcharm was required to pay at settlement was $2,482,849.77 including purchaser adjustments of $2,849.77. But in the Statement of Adjustments exhibited to his first affidavit the balance due to the Vendor was stated as $2,026,007.35, and the adjustments deducted were $205,992.65 comprising, in part, the sum of $204,871.01 described as ‘Additional Fee/Allowance Funds held by Vendor on behalf of Purchaser’. When asked to explain the sum held on behalf of the Purchaser he was unable to answer, he did not know as ‘I don’t play an active role in this business.’[72] This evidence was given in the context of an affidavit which he made on behalf of the defendant, of which he is a director, and was said to be ‘based on his own knowledge except where otherwise stated’.
[72]Transcript 4/9, p. 78.20-21.

Jennings was cross-examined about the Jetcharm letter of 22 May 2020 (see above [25]) and the allegation of damage, in particular, that the main electrical feeds had been stolen from the site. He was taken to an email from the plaintiff’s then lawyers dated 6 February 2020 complaining that during the receivership builders material and equipment had been removed from the site and that electrical copper conduit cabling had been stolen (referred to above at [12(h)]). He did not know whether the defendant had made Jetcharm aware of the damage to the building site before the contract was entered into, but agreed that if the defendant knew of it then it should have done so.[73]
[73]Transcript 4/9, p. 81.

The Dobbs Certificate provides that:

…the surplus after the sale of the Property is $57,111.61 excluding legal costs and expenses relating to proceeding S ECI 2020 02457. The said surplus is subject to VDL’s [defendant’s] rights to retain moneys pursuant to paragraph (h) of the definition of Secured Money as set out in the MCP.

The plaintiff contends that none of the matters identified provides a basis for the defendant to withhold payment of the amount otherwise owing to the plaintiff under s 77(3) of the Act. The plaintiff submits there is apparently a close relationship between Jennings and Jetcharm.:

(a) the registered address of Jetcharm is Jennings Partners Pty Ltd, Level 12, 65 York Street, Sydney;

(b) the registered address and principal place of business address of the defendant is Jennings Partners, Level 12, 65 York Street, Sydney;

(c) the registered address and principal place of business address of Agility Finance, the manager of the mortgages, is Jennings Partners, Level 12, 65 York Street. Jennings is the sole director and secretary of Agility Finance;

(d) Jennings is one of two directors of the defendant and the secretary of the defendant;

(e) Jennings is the sole director and a shareholder of Jennings Partners; and

(f) the information contained on Jetcharm’s website evidences that Jennings is a de facto director of Jetcharm.

The plaintiff submits that although the Jetcharm letter does not specify any cause of action that might be available to it, and notably goes no further than demanding that the defendant ‘take responsibility’ for the identified costs, it is apparent that the basis of the Jetcharm demand is an alleged failure by the defendant to disclose certain matters to Jetcharm at the time of sale or to allow damage between the date of the Contract and the date of settlement. A failure by a vendor to disclose relevant matters to a purchaser at the time of sale might, most obviously, found a claim under s 18 of the Australian Consumer Law, being Schedule 2 to the Competition and Consumer Act 2010 (Cth). It might also give rise to other causes of action.

The evidence is clear that on 4 February 2020, the plaintiff complained to the defendant, before the Contract was entered into, that builder’s equipment and electrical cable had been removed from the Land (see above at [12(g)]). On 6 February 2020, the plaintiff requested the details of the receivers’ insurers, so that those details could be given to the police of the purposes of a police investigation into the theft from the Land and on 7 February 2020 the defendant refused to so. The evidence thus establishes that the defendant was aware of damage to, and theft of, items situated at the building site on the Land from 6 February 2020. It is difficult to conceive how Jetcharm could maintain a claim against the defendant on the basis of non-disclosure at the time of sale. For this reason, the foreshadowed ‘claim’ of Jetcharm does not provide a basis for the defendant to withhold any part of the surplus that would otherwise be owing to the plaintiff.

Consideration

The obvious basis for indemnity relied on by the defendant are the matters specified in clause 23, as follows:

(a) any neglect on or default of the Debtor to observe and perform any of the Obligations contained in or implied by the Mortgage;[86]

(b) any actual or assumed obligation of the Lender (whether solely or jointly with the Debtor or any other Person) to pay any money or to do anything related to the Mortgaged Property howsoever arising;[87] and

(c) any claim actual or threatened against any one or more of the Lender or any of its servants or agents by any person whatsoever.[88]

[86]Clause 23.2(a).

[87]Clause 23.2(e).

[88]Clause 23.2(g)

The second and third of the bases set out in the last paragraph appear to provide a basis for the retention of the surplus as security for the supposed claim by Jetcharm. This raises in the first place the validity of the claim foreshadowed in Jetcharm’s letter of 22 May 2020.

Before turning the various ‘claims’ made in the Jetcharm letter, it is necessary to refer back to the terms of the Contract. As I have said, the Contract contains Special Conditions that limit the availability of any claim. In particular, Special Condition 32, which deals with the condition of the Land and provides that it is sold in an ‘as is, where is’ condition, with all faults or defects whether apparent or not apparent. Further, Special Condition 32 provides in some detail that the vendor makes no representation or warranty about the Land or the improvements on it and Special Condition 34 provides, amongst other things, that the purchaser is not entitled to make any claim for compensation or damages in respect of any matter about which the vendor gives no warranty. Plainly the defendant, as vendor, gave no warranty as to the condition of the Land, it was sold in whatever its condition was at the time of the Contract.

It is necessary to look in some detail at the Jetcharm letter to see what might, conceivably, be a valid claim by Jetcharm against the defendant:

(a) the first matter of complaint is damage to the plumbing pipe work. It is said that areas of the pipe work will need to be replaced. There is no indication when this damage occurred and what the extent of it is. It may well have been the situation as at the date of the Contract. I note that Jetcharm is a Sydney based company and, according to the evidence given by Jennings, this is the first construction work undertaken by it in Melbourne.[89] There is no indication whether Jetcharm undertook and inspection of the Land before entering into the Contract;
[89]Transcript 4/9, p. 76.

(b) the second matter of complaint is that the sewer lines will need to be inspected to ensure they have not been tampered with. It was estimated that the cost of repairing and inspecting all the existing plumbing to be $15,000;

(c) the third matter of complaint was that electrical cabling rough-in has been damaged and the lines have been cut. It was asserted that the entire electrical work will need to be redone;

(d) the fourth matter is that the main electrical feeds have been stolen from the site. This appears to be the matter of which the plaintiff complained to the defendant in February 2020; and

(e) the fifth matter is that the engineer is refusing to provide the certification required as his invoice has not been paid by the previous owner. There can be no basis for recovery of this amount under the Contract.

It needs to be remembered that the Receivers were in control of the building site on the Land from 1 November 2019 until 17 January 2020 and thereafter the defendant was in control of it until completion of the Contract. The proposition that the provisions of the Contract, combined with the fact that in so far as the removal or theft of electrical cable is concerned, and perhaps other damage, the evidence known to the defendant at the time indicates that it is likely to have occurred before the Contract was entered into, make it improbable that Jetcharm could maintain any claim against the defendant or that the defendant could reasonably believe that it could do so. In correspondence, the defendant indicated that subcontractors or the plaintiff had damaged the Land and removed completed works, such as electrical wiring, from the Land after completion of the sale. If that was so, there would need to be sound grounds to reasonably form the opinion that the plaintiff had gone onto the Land after 27 March 2020 and damaged it or removed materials from it, and none are disclosed.

In addition, the timing of the Jetcharm letter is informative. The sequence of events was broadly as follows:

(a) the Contract was completed, or settled, on Friday 27 March 2020 (and possibly entered into on that date as well);

(b) on 2 April 2020, Jetcharm contacted the plaintiff saying that it now owned the Land and was seeking documents relating to the building project;

(c) on 6 May 2020, the plaintiff’s then solicitor wrote to Summer Lawyers in relation to the entitlement of the plaintiff to any surplus funds arising from the sale, and requested the defendant’s settlement statement and all tax invoices in respect of the sale so that the plaintiff can determine the accuracy of the amount due to the plaintiff. There was no response until after two further emails, asking for a response, were sent on 8 and 12 May 2020;

(d) it was not until 20 May 2020 that Summer Lawyers responded attaching the Contract and settlement adjustment statement dated 27 march 2020. This delay is surprising as Summer Lawyers acted for the defendant in the sale and its conveyancing;

(e) this led to the email from Mr Rennex on 21 May 2020 to Summer Lawyers (see above at [21]); and

(f) this email elicited the response from Summer Lawyers dated 22 May 2020 that subcontractors or the plaintiff had damaged the Land and removed completed works, such as electrical wiring, from the Land after completion of the sale and that the purchaser may seek compensation from the defendant. For this reason the defendant was not in a position to account to the plaintiff for the surplus until it resolves outstanding issues satisfactorily to the purchaser. In addition, because the plaintiff had reserved all its rights, the defendant is entitled to retain any surplus as security for any potential costs it may incur in defending an action brought by the plaintiff. Later that day a copy of the Jetcharm letter was sent to the plaintiff’ solicitor.

What this sequence of events shows is that it was only when the defendant was pressed for the provision of an accounting as to the costs and expensed of the sale that after a lengthy delay, both since the completion of the sale on 27 March 2020, and since the formal request on 6 May 2020, that the defendant responded with the proposition that there was damage to the building site on the Land and the purchaser, Jetcharm, was somehow holding the defendant responsible for that. Further, there is no evidence since 22 May that Jetcharm is pursuing the claim, notwithstanding that shortly before the first hearing on 13 August 2020, Jennings filed his second affidavit, and the day before the adjourned hearing on 4 September 2020, the most recent affidavit filed on behalf of the defendant was made on 3 September 2020. Neither affidavit makes any mention of the Jetcharm claim being further pursued.

These events occurred against the backdrop that Jetcharm was a client of Jennings Partners, that Jennings was involved in Jetcharm, in his own words as-

…finance director. I perform a finance director role for many, many years and when I say finance director, I mean CFO, financial advisory role, board, strategic advice…

Jetcharm plainly learned of the sale of the Land from Jennings. The relationship between Jennings and Jetcharm was not an arm’s length one. Although there is no suggestion that the Land was sold at an undervalue, the inference from the evidence given by Jennings is that it was acceptable because it was the highest price offered and was sufficient to pay out both the first mortgagees loan and the defendant’s loan. There can be little doubt that Jennings introduced Jetcharm to the transaction and, given his role as financial advisor, influenced Jetcharm’s decision to buy the Land because he viewed the purchase a commercial opportunity for Jetcharm. In addition, there is a shadow cast over the Contract itself. It is undated, save for the date of the power of attorney pursuant to which Jennings signed on behalf of the defendant, 27 March 2020, which was also the date of the settlement of the Contract. This was not a matter to which the parties or the Court adverted in the course of the hearings. Had it been so there may have been an innocent explanation. But it tends to support the inference that the Contract was not an arms’ length transaction and nor is the complaint set out in the Jetcharm letter.

Although Jetcharm may well have discovered damage to the works at the Land, and was unhappy about it, and indeed Damian Lane may have complained to Jennings about it, in my view it is highly likely that the Jetcharm letter was written at the suggestion of the defendant so as to provide a basis for the retention of the surplus, or a part of it.

Conclusion

In my view there are no reasonable grounds for the defendant to retain any part of the surplus to provide for security for any claim from Jetcharm.

Third question - whether the defendant is entitle to retain out of the surplus monies the anticipated costs of this application.
Submissions and consideration

The plaintiff submitted that the costs of this application cannot provide a basis for the defendant to withhold any of the alleged surplus from the plaintiff essentially because no suggestion was made by the plaintiff that it would seek an account before this application was brought. Accordingly, applying the reasoning of Hodgson J in Project Research,[90] the defendant does not have any security for the costs of this proceeding.
[90]Project Research Pty Ltd v Permanent Trustee of Aust Ltd (1990) 5 BPR 11,225.

The defendant points to the threats that preceded the commencement of this proceeding, to which I have referred (see above at [19]-[23]). In this case, it seems to me to be clear that the defendant as mortgagee did reasonably anticipate proceedings in the nature of an action for an account. The general rule therefore applied, namely that the defendant having been threatened by the plaintiff with a contested taking of accounts, is entitled to retain its costs of the accounts.[91] That is, unless the defendant has been guilty of unreasonable conduct or misconduct. If the right to retains costs is forfeited by unreasonable conduct or misconduct, the costs are in the discretion of the Court.
[91]Project Research Pty Ltd v Permanent Trustee of Aust Ltd (1990) 5 BPR 11,225; Equus Financial Services Pty Ltd v RMBL Investments Pty Ltd (1996) 7 BPR 14,966, 22 ACSR 744; Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd [2003] NSWCA 27; S & D International [2009] VSC 225 at [185].

Conclusion

The defendant was entitled to retain its reasonable costs of this proceeding, but that retention is, and always was, subject to being denied after the fact if the defendant has been guilty of unreasonable conduct or misconduct, to which question I now turn.

Fourth question – did the defendant engage in unreasonable conduct or misconduct
Submissions and consideration

The plaintiff submitted that the defendant engaged in unreasonable conduct or misconduct as mortgagee in:

(a) failing, without reasonable cause, to pay to the plaintiff the amount owing to it pursuant to s 77(3) of the Act within a reasonable time after settlement of the sale of the Property in March 2020;

(b) after the Property was sold to Jetcharm, the defendant made no contact with the plaintiff regarding what, if any amount, was owing to the plaintiff until the plaintiff’s solicitors emails and letters on 6, 8 and 12 May 2020.76. A response was only received to that correspondence on 18 May 2020 and a substantive response was not received until 20 May 2020;

(c) asserting from May 2020 that Jetcharm may claim against the defendant in respect of matters allegedly not disclosed to Jetcharm at the time of sale of the Property, in circumstances where the defendant knew or ought to have known that assertion to be without a reasonable foundation.

(d) relying on that assertion as a basis for denying to the plaintiff the amount owing to it pursuant to s 77(3) of the Act; and

(e) the correspondence sent on behalf of the defendant to the plaintiff in May 2020 made no mention of the relationship between Jennings and Jetcharm; nor did the evidence filed on behalf of the defendant in this proceeding. The evidence of Paglia, who is the sole director of the plaintiff, is that he was not aware of that relationship until 6 August 2020. The fact that Jennings is either the ‘finance director’ or even a de facto director of Jetcharm was only brought to the Court’s attention by the plaintiff.

Consideration

It was common ground that the law as stated by Hodgson J in Overton Investments was applicable here. His Honour said:

If the mortgagee does not specify a payout figure which bears some reasonable relationship to the amount truly owing and its anticipated costs, this may amount to unreasonable conduct or misconduct which disentitles the mortgagee to costs subsequently incurred in determining the rights of the parties…[92]

[92]Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd [2003] NSWCA 27, [63].

It is also not in issue that the costs of resolving matters of accounting on which minds can reasonably differ are recoverable by a mortgagee, but that:

It is perhaps not so clear in relation to a question of whether or not a mortgage, properly interpreted, does or does not include certain debts. In my opinion, costs incurred by a mortgagee in making a claim that the mortgage includes debts which the mortgage on its true construction does not include, even if this claim has some support in the text, are not necessarily incurred in the capacity of a mortgagee, or in respect of the mortgage, or in respect of something that the mortgagee is permitted to do under the mortgage. The more doubtful the question, and the more reasonable the claim, the readier the Court would be to find in the mortgagee’s favour on this matter. On the whole, although I think the appellant’s [mortgagee’s] arguments were not entirely without merit, in my opinion the costs it incurred in seeking to have the mortgage extend to debts that it did not in fact cover are not properly regarded as costs incurred in the capacity of a mortgagee, or in respect of the mortgage, or in respect of something that the mortgagee is permitted to do under the mortgage.[93]

[93]Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd [2003] NSWCA 27, [62].

There are, in my view, a number of reasons why the claims made by the defendant in this case are unreasonable and are not ‘properly regarded as costs incurred in the capacity of a mortgagee, or in respect of the mortgage’, namely:

(a) the claim to recalculate the interest at the higher rate from the commencement of the mortgage was never justified or justifiable on the proper construction of the MCP. Properly advised, this should have been known to the defendant.

(b) the matters of fact deployed to justify the recalculation of the interest back to the mortgage commencement were largely gathered after the sale of the Land for the purpose of an attempt to justify the recalculation. One factual ground was not. It is the liquidation of SP Builders. It was used as a ground in the Notice of Default given in May 2019 (see above at [50]). But the Notices were not relied upon after the challenge to their validity was made on behalf of the plaintiff. If the defendant truly had formed a ‘reasonable opinion’ that the liquidation of SP Builders was an event that had a material adverse effect on the financial position or condition of the plaintiff and Paglia, or the business conducted by the plaintiff and Paglia[94] so as to constitute and Event of Default, then having given Notices of Default under the Mortgage, why did the defendant not press the matter? The answer lies in a careful analysis of the somewhat difficult terms of the MCP and the Mortgage of the kind I have undertaken. There is no reasonable basis to conclude that the liquidation of SP Builders had any effect on the financial position or condition of the plaintiff or Paglia or on its or his business, and properly advised the defendant should have known that there was no reasonable basis. Indeed one is entitled to infer that in May 2019 the defendant did receive that advice, leading to it not relying on the Notice; and

[94]Clause 1.1, Definition of Material Adverse Effect, (b)(i) and (ii).

(c) reliance on the claim by Jetcharm should be viewed with considerable scepticism. The availability to Jetcharm to make a claim having regard to the terms of the Contract must be extremely limited. There is no evidence of any misleading or deceptive conduct by the defendant in trade or commerce in relation to the entry into the Contract. The Land was under the control of the defendant, the Receivers and then the defendant from November 2018 to the date of the Contract. The basis upon which the defendant is entitled to claim against the plaintiff under the Mortgage and MCP in respect of its own failure to care for the Land has never been made clear. It is to be doubted whether such a claim is available under the Mortgage. The inference from all these facts is that there was no genuine dispute raised by Jetcharm. Those facts, in summary, are:

(iv) the relationship between Jennings and Jetcharm;

(v) the terms of the Contract;

(vi) the nature of the claims for compensation;

(vii) the wording of the Jetcharm letter;

(viii) the fact that the defendant was informed of the damage to the Land in February 2020;

(ix) the control exercised by the defendant or the Receivers over the Land from November 2019 to 27 March 2020; and

(x) the absence of any follow up by Jetcharm after the Jetcharm letter.

There are additional matters that show conduct that was certainly unreasonable and which may show misconduct. Before the correspondence commencing on 6 May 2020, the plaintiff’s employees had been attempting to verify the payout figure under the mortgage. There were repeated requests for the invoices that underpinned some of the charges against the running account kept by the defendant or its mortgage manager, Agility Finance. The evidence is summarised above in paragraphs [12] and [13]. The invoices requested were never provided. The defendant thought it sufficient to give a Dobbs certificate (under clause 24 of the MCP) and relied on that as replacing its obligation to provide details of the charges levied against the plaintiff’s mortgage account.

That, in my view, was an unwarranted liberty. The mortgagee who sells the mortgaged property is obliged, if asked, to account to the mortgagor in respect of his claims under the mortgage in respect of principal, interest and costs.[95] It cannot be a proper accounting to give to the mortgagor a Dobbs certificate, particularly where the particular words of the clause in this case give the certificate effect only ‘in any proceeding by the Lender [defendant] against the Debtor [plaintiff] whether in a Court or a Tribunal or before any Government Authority’.
[95]S & D International [2009] VSC 225 at [159(f)], citing Adams v Bank of New South Wales [1984] 1 NSWLR 285.

The usage to which Dobbs certificates are conventionally put, and the wording of clause 24 in this case confirms that usage, is in establishing indebtedness and other matters in proceedings to recover lenders’ debts – and to recover possession of land that secures the debts. Reliance on Dobbs clauses obviates the need to gather evidence from disparate sources in proceedings in courts and tribunals and aids in expedition and finality, and thus the administration of justice. They are not usually a substitute for the provision of proper detailed accounting in cases of this kind, unless the parties have contracted for that outcome. Here they have not done so. There is good reason to construe the clause strictly in accordance with its wording.[96] That wording does not enable the certificate to be used in the way in which the defendant did, to cut off the reasonable requests by the plaintiff to see the invoices that went to make up the various items charged to the plaintiff’s mortgage account. The conduct of the defendant in response to apparently reasonable requests from the plaintiff was ‘high handed’.
[96]Shomat Pty Ltd v Rubinstein (1995) 124 FLR 284.

Even in a proceeding in which the Dobbs clause is relied on, the defence that the information in the certificate is incorrect will ordinarily give rise to discovery by the party relying on the certificate of the documents that underpin it. The certificate given by Jennings in this case expressly exposes the documents that would need to be discovered, as the certificate opens with the following:

I have reviewed the books, accounts and records of VDL in respect of its loan to Nicola Properties Pty Ltd as trustee for the Nicola Family Trust (Nicola Properties). I have used the file and those records to make this certificate.

Conclusion

For the reasons set out above, the defendant has engaged in conduct that is unreasonable, amounting to misconduct, and has not acted in good faith. The raising of an untenable claim to retain the surplus money constitutes misconduct by which the defendant’s right to costs of this proceeding is forfeited. The defendant was not entitled to retain from the surplus the anticipated costs of this proceeding. The costs are in the discretion of the Court. There is no realistic prospect of any other proceeding being commenced by the plaintiff for damages. If there were there would be an Anshun estoppel raised.[97]
[97]Port of Melbourne Authority v Anshun Property Ltd (1981) 147 CLR 589.

Fifth question - is the plaintiff is entitled to recover from the defendant the amount of the higher interest rate charged by the first mortgagee.
Submissions

The defendant contends that the plaintiff cannot take issue with the calculation of the amount paid to the first mortgagees without the addition of them as parties to this proceeding. It was acknowledged by the defendant that the first mortgages also recalculated interest on the mortgage loan from its commencement at the higher rate after default by the plaintiff at the end of September 2019. But there is no evidence of the basis on which this was done. The priority for the payment of the proceeds of a mortgagee’s sale under s 77(3) does not deal with the situation where it is a second or subsequent mortgagee that exercises the power of sale. The priority afforded to the first mortgagee means he must be paid out first.

The plaintiff contends that it can recover against the defendant for the over payment made to the first mortgagees because:

(a) the relief that is being sought includes an account of the moneys that are owing to the plaintiff pursuant to s.77(3) of the TLA. That provision provides for the application of proceeds, including payment of moneys owing under other mortgages. Section 77(3)(d) provides that the last of the payments to be made is the ‘residue (if any) to the mortgagor or into the Supreme Court under the provisions so far as they are applicable of section sixty-nine of the Trustee Act 1958…’. The earlier paragraphs of s 77(3) provide for the payment of the amounts due under other mortgages;

(b) precisely the same issues that arise in respect of the defendant’s mortgage, must arise in respect of the first mortgagees. That is because the terms of the two mortgages are, for all intents and purposes, identical. The factual circumstances are identical. Both mortgagees engaged Summer Lawyers. Both mortgagees incorporate Summer Lawyers’ MCP; and

(c) both mortgages were managed by Agility Finance, a company of which Jennings is the sole director. Agility Finance originally charged the lower rate of interest in respect of both mortgages. The schedule of accounts relied upon by the defendant substantiate what it says is the surplus, refers to charges at the higher interest rate in respect of both mortgages.

It follows, the plaintiff submitted, that if the court accepts that the lower rate of interest applies under the defendant’s mortgage up until October 2019, it must follow that the lower rate of interest applies up to October 2019 under the first mortgagees mortgage. The plaintiff submitted, therefore, that the defendant’s alleged surplus of $57,111.61 plus the sum of $55,830.83 calculated by the plaintiff as the difference between the competing running accounts (at the lower and higher interest rates) giving a total $112,942.44 is the sum payable.

Consideration

Under s 77(3) of the TLA, there is no express provision that caters for the situation where a second mortgagee exercises its power of sale under its mortgage. Plainly the second mortgagee must, in order to give good title to the purchaser, be in a position to pay out the first mortgagee, either by arrangement pursuant to agreement (including priority agreement), or by purporting to exercise its right to redeem that mortgage, in effect informally exercising its right under s 87 of the TLA. That section provides:

Puisne mortgagee may tender payment
If the money secured by any mortgage is due and the mortgagee requires payment thereof any other mortgagee of the same land may tender and pay to the mortgagee requiring such payment the money due upon his security, and the mortgagee making such payment shall be entitled at his own cost to a transfer of the interest of the mortgagee requiring such payment who shall effect the transfer accordingly.

In addition, by clause 18.3 of the MCP, the defendant is empowered, in relation to the sale of the Land, to pay to any mortgagee of any other ‘Encumbrance’ the whole or any part of the amount owing to that mortgagee and any money so paid will form part of the Secured Money and will be secured by the Mortgage. ‘Encumbrance’ is defined to mean, amongst other things, any interest created in any manner whatsoever in respect of or over the Mortgaged Property. It therefore includes the first mortgage.

The difficulty that faces the plaintiff, in seeking from the defendant an account of the part of the proceeds of sale paid to the first mortgagees, is that it is not known that the basis on which the first mortgagees recalculated the interest at the higher rate from the commencement of the mortgage is the same basis as the higher rate was applied by the defendant. It is, admittedly, very difficult to see any other basis for the first mortgagees to charge the higher rate for the whole term of the mortgage, and the inference is very strong that as the mortgages were managed together by Agility Finance the same process was applied.

Conclusion

I am not in a position to make an order against the defendant for the recovery of any overpayment it made to the first mortgagees without there being evidence that the basis for the recalculation of the interest was the same under the first mortgage as under the second mortgage. If it was on the same basis, I would expect a mortgagee acting ‘in good faith and having regard to the interests of the mortgagor’ to abide by the decision in this case rather than require a second proceeding.

Overall conclusion, costs and interest

The questions addressed above lead to the result that the plaintiff is entitled to recover the overpayment of interest to the defendant calculated by Lam in his affidavit in the sum of $74,698.95 (comprising $57,111.61 claimed by the defendant to be the surplus from the sale proceeds and the sum of $17,587.34 being the amount of interest overpaid by the plaintiff in respect of the defendant's mortgage by application of the higher rate of interest) plus interest pursuant to s 58 of the Supreme Court Act 1986 (Vic) (SCA). The unreasonable conduct and misconduct of the defendant means that the cost of this proceeding are in the discretion of the Court.

That involves the exercise of the discretion conferred by s 24(1) of the SCA. That discretion has been described as absolute, unconfined or unfettered, although it must be exercised judicially, by reference to facts connected with or leading up to the litigation.[98]The settled practice (sometimes called a general rule), in the absence of good reason to the contrary, is that the successful litigant should receive their costs.[99] In this case there is no reason to the contrary. The complexity of the matters and questions for consideration made the proceeding appropriate for determination in this Court, despite the small amount ultimately found due. The proceeding was conducted efficiently and relatively cost effectively.
[98]See for example Latoudis v Casey (1990) 170 CLR 534, 537; cited with approval in Oshlack v Richmond River Council (1998) 193 CLR 72, 86 (Oshlack).
[99]Ritter v Godfrey [1920] 2 KB 47, 52; Donald Campbell and Co Ltd v Pollak [1927] AC 732, 809 Milne v Attorney-General for the State of Tasmania (1956) 95 CLR 460, 477.

In relation to interest, s 58(1) of the SCA provides:

If in a proceeding a debt or sum certain is recovered, the Court must on application, unless good cause is shown to the contrary, allow interest to the creditor on the debt or sum at a rate not exceeding the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983…from the time when the debt or sum was payable (if payable by virtue of some written instrument and at a date or time certain) or, if payable otherwise, then from the time when demand of payment was made.

Section 58 has been given a beneficial construction.[100] It seems to me that that the plaintiff will recover a sum certain, and possibly it is also a debt arising under the mortgage and the operation of s 77(3) of the TLA. The time when it was payable and whether payable ‘at a date or time certain’, or when the demand of payment was made, is less clear. I will ask the parties to confer as to the appropriate date from which interest is to run and if they cannot agree, I will require written submissions.
[100]Sutherland v Globe Real Estate Pty Ltd & Ors [2018] VSC 408, [34] –[41].

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[2020] VSC 728

5 November 2020 (first revision 9 November 2020)