Pelenoy Pty Ltd v Donovan Oates Hannaford Mortgage Corp

[2004] NSWSC 4

CITATION:	Pelenoy Pty Ltd v Donovan Oates Hannaford Mortgage Corp [2004] NSWSC 4
HEARING DATE(S):	04/12/03, 05/12/03
JUDGMENT DATE:	3 February 2004
JURISDICTION:	Equity Division
JUDGMENT OF:	Barrett J
DECISION:	Declarations to be made recognising lien of defendant's liquidator for certain costs ranking in priority to equitable mortgage of fifth cross-defendants ranking in priority to equitable charge of plaintiff ranking in priority to equitable mortgage of tenth cross-defendants
CATCHWORDS:	MORTGAGES - mortgages and charges generally - priority of estates debts and encumbrances - equitable charge on land created by building contract - effect of agreements to grant registered mortgages - lien for property related expenses of owner's liquidator
LEGISLATION CITED:	Real Property Act 1900, s.36(1D)
CASES CITED:	Barry v Heider (1914) 19 CLR 197 Chan v Cresdon (1989) 168 CLR 242 Courtenay v Austin (1961) 78 WN (NSW) 1082 affirmed (1964) 110 CLR 550 Crampton v French [1996] ANZ ConvR 156 Double Bay Newspapers Pty Ltd v A W Holdings Pty Ltd (1996) 42 NSWLR 409 Gibson v Co-ordinated Building Services Pty Ltd (1989) 4 BPR 9639 Griffith v Hodge (1979) 2 BPR 9474 Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 Mills v Ruthol Pty Ltd (2002) 10 BPR 19381 Re Universal Distributing Co Ltd (1933) 48 CLR 171 Vrkic v Otta International Pty Ltd [2003] NSWSC 433
PARTIES :	Pelenoy Pty Limited - Plaintiff Donovan Oates Hannaford Mortgage Corporation Limited - First Defendant Sunfix Pty Ltd - Second Defendant/Cross-Claimant Kevin Watson and Kay Watson - Fifth Cross-Defendants Leslie Paul Smith, Margaret Anne Smith and StuartLeslie Smith - Tenth Cross-Defendants
FILE NUMBER(S):	SC 5217/02
COUNSEL:	Mr G P McNally - Plaintiff Mr S M Golledge, Solicitor - Second Defendant/Cross-Claimant Mr A J L Ogborne - Fifth Cross-Defendants Mr S L Smith, in person - Tenth Cross-Defendants
SOLICITORS:	Matthews Dooley & Gibson - Plaintiff The Argyle Partnership - Second Defendant/Cross-Claimant Fifth Cross-Defendants in person Tenth Cross-Defendants in person

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BARRETT J

TUESDAY, 3 FEBRUARY 2004

5217/02 – PELENOY PTY LIMITED v DONOVAN OATES HANNAFORD MORTGAGE CORPORATION LIMITED & ORS

JUDGMENT

Background

1 These proceedings concern competing claims to a sum of $384,937.58 paid into court by the first defendant. Those moneys are the balance of the proceeds of the sale of a property at Silverwater effected by the first defendant as mortgagee. The property is held under the provisions of the Real Property Act 1900. The first defendant held the only registered mortgage and, as its debt was satisfied in full out of the proceeds of sale, it has no further interest and took no part in the hearing before me.

2 The registered proprietor of the Silverwater property is the second defendant, Sunfix Pty Ltd (“Sunfix”), a company now in liquidation. It is accepted that, apart from a lien asserted by the liquidator for costs and expenses, Sunfix will receive none of the moneys in court, there being other claims one or more of which must prevail over the residuary interest of Sunfix as the owner of the land. Three such claims were agitated before me. Before outlining them, I should say something about the way in which the proceedings are constituted.

3 The plaintiff, Pelenoy Pty Ltd (“Pelenoy”), is a building contractor. It undertook building works on the Silverwater land under a written contract with Sunfix. Pelenoy asserts an equitable interest in the land by virtue of a provision of the building contract purporting to create an equitable charge. By summons filed on 23 October 2002, Pelenoy claimed a declaration to that effect, acknowledging that the charge ranked in priority after the first defendant’s registered mortgage. On 11 December 2002, Sunfix, as second defendant, filed a cross-claim against twenty cross-defendants, being persons who had paid money to Sunfix as part of the financing of the building and development works in relation to the Silverwater property. The cross-claim sought a order against each cross-defendant that that cross-defendant not bring any action against the first defendant in respect of the balance of the proceeds of the sale made by the first defendant as mortgagee, the object being to ensure that the net proceeds were freed from claims of right on the part of the cross-defendants.

4 By the time the proceedings came to trial, only two cross-defendants (or groups of cross-defendants) remained active. At the start of the hearing, I reviewed the evidence of service on and subsequent correspondence with the several cross-defendants. Having regard particularly to the affidavit of Mr Mullette sworn on 3 December 2003, I was satisfied that, by reason of service and subsequent notification by Sunfix’s solicitors, all cross-defendants were sufficiently on notice of the date, time and place fixed for the hearing of the proceedings. There were two appearances, in addition to those for the plaintiff (Mr McNally of counsel) and the liquidator of Sunfix (Mr Golledge, solicitor). Mr Ogborne of counsel appeared for the fifth cross-defendants, Mr Watson and Mrs Watson. Mr S.L. Smith, one of the tenth cross-defendants, appeared in person as well as in the interests of the other tenth cross-defendants, his parents, Mr L.P. Smith and Mrs M.A. Smith.

5 In the circumstances thus briefly related, I proceeded to hear the claims of Pelenoy, the Watsons and the Smiths to be recognised as the holders of equitable interests in the Silverwater property and as to the priorities of any such interests among themselves.

Sunfix and the property

6 Sunfix was established and operated by one Bradshaw, now deceased, a property developer. Its sole purpose was to undertake the acquisition of vacant land in Derby Street, Silverwater, to develop the site by the erection of nine warehouses and to sell the improved property, no doubt with an expectation of profit. Sunfix resorted to two sources of finance. It borrowed money on mortgage from the first defendant, an established provider of mortgage finance. It also sought, through newspaper advertisement and other means, to interest the wider community in making funds available. Several persons and companies (who became the cross-defendants) provided funds under documents the nature and effect of which will be examined in due course. The Watsons and the Smiths were such persons.

7 Sunfix became the registered proprietor of the land in folio identifier 129/1019075 on 21 August 2001 by transfer 7871122 from Silverwater Estate Pty Ltd for a consideration of $1,140,000. A contract in the form of the 1996 edition between those parties for a sale at that price is in evidence. The contract is dated 22 November 2000. The land is described as “Lot 222 in the Plan being part of a proposed subdivision of the Land”. The expression “Plan” is defined as meaning “the vendor’s proposed plan or plans of subdivision of the Land, a draft of which is annexure A”. Such a plan is annexed to and forms part of the contract. There are provisions requiring the vendor to do the things necessary to procure registration of the “Plan”. As it happened, the relevant plan was registered on the same day as the contract was made, 22 November 2000. Completion under the contract took place on 10 August 2001.

Pelenoy’s claim

8 Pelenoy’s claim to an interest in the land arises from a building contract made between Sunfix as proprietor and Pelenoy as builder on 1 November 2001. The land on which the works were to be performed was described as:

“Particulars of Land:
Lot No. 129 (83-85) Sub-Division Derby St, Silverwater Shire/Municipality of Auburn”.

There are spaces for title references but these are blank.

9 Clause 28 of the building contract is as follows:

“The Proprietor hereby charges the parcel of land on which or on part of which the Works are to be erected with the due payment to the Builder of all moneys that may become payable to the Builder by virtue of this Contract or otherwise arising from the carrying out of the Works.”

10 Clause 17(f) of the building contract reads:

“Should any progress payment or the final payment not be made within twenty days after request then the Builder shall be entitled to interest thereon at the rate of two per centum per month.”

11 Pelenoy’s contention is that, by virtue of clauses 28 and 17(f), the unpaid balance of the total payable under the building contract for the performance of works is secured on the Silverwater site, together with interest at the contracted rate.

The Watsons’ claim

12 The claim of the Watsons is advanced by reference to four documents dated 26 March 2001. The four documents were, at the time of their receipt by the Watsons, bound together in a single booklet. The first document consists of twelve sheets, the first of which is a title page identifying it as “Loan and Guarantee Agreement”. The second sheet is headed “Deed of Equity Participation” and is the first page of a deed dated 26 March 2001 and made among Mr Watson and Mrs Watson (referred to as “the Lender”), Sunfix (called “Sunfix”), Entervin Pty Ltd (called “Guarantor”) and Mr Bradshaw (also called “Guarantor”). Clause 3.1, headed “The Loan”, states that the Lender agrees to lend and the “Borrower” (not defined but, in the context, clearly Sunfix) agrees to borrow the “Principal Sum”. The Borrower then covenants to pay “so much of the Principal Sum and the Fixed Fee as shall remain outstanding on the Termination Date”. “Principal Sum” is defined as $200,000, “Fixed Fee” as $60,000 and “Termination Date” as the earlier of “the date of settlement of the sale of the Property” and the day one year after the date of the agreement.

13 Clause 7 is a curious provision. It begins with the word “WHEREAS” and contains nine subclauses designated A to H. Subclause A defines “the Development” as “the development of the property described in Item 2 of the Schedule”. There are in fact two schedules. Schedule 1, however, contains an Item 2 headed “The Property” which contains the following:

“Address: Lot 222 _____ 81-83 Derby Street, Silverwater NSW.”

In the definition clause in the body of the document, there appears the following:

“Property means Lot 222, 81-83 Derby Street, Silverwater, NSW.”

14 Clause 7F reads as follows:

“The Lender has agreed to assist with the Development. Such funds will be secured by an unregistered second mortgage over 4 Wall Avenue, Asquith, until the completion of the purchase of the property referred to in Item 2, Schedule 1 (the Development). Whereupon The Borrower will grant The Lender a registered joint second mortgage over the said development. The joint second Mortgage will be registered immediately following the registration of the transfer and the first Mortgage.”

15 The definition clause contains a definition of “Security” as follows:

“Security means unregistered second Mortgage over 4 Wall Avenue, Asquith until the completion of the purchase of the Property referred to in Item 2, Schedule 1. Then a joint registered second Mortgage over the Property will be issued.”

This definition does not seem to be employed anywhere in the agreement’s substantive provisions, although its general flavour is consistent with the intent manifested in clause 7F.

16 The second document in the booklet is a form of mortgage under the Real Property Act between Sunfix as mortgagor and the Watsons as mortgagees. It is executed by the parties and dated 26 March 2001. The mortgaged property is described as follows:

“Lot 129 (222) DP1005561 81-83 Derby Street Silverwater Suburb of Silverwater Parish of St John County of Cumberland.”

The operative words of the mortgage are:

“Sunfix Pty Ltd (ABN 19 094 984 102) mortgages to the mortgagee all the mortgagor’s estate and interest in the land specified above and covenants with the mortgagee that the provisions set out in annexure A / memorandum No Q860000 filed in the Land Titles Office are incorporated in this mortgage.”

17 The third document is a form of caveat under the Real Property Act by which the Watsons claim an estate or interest as “2nd Mortgagee” in property described as:

“Lot 129(222) Plan DP1005561 81-83 Derby Street Silverwater Suburb of Silverwater Parish of St John County of Cumberland Folio 129/1005561.”

18 The fourth document is a form of mortgage under the Real Property Act, with the word “Unregistered” added before “Mortgage” in the heading. The mortgagor is Entervin Pty Limited – identified in the agreement itself as guarantor – and the mortgagees are the Watsons. The mortgaged property is described as “4 Wall Avenue, Asquith NSW 2077”.

19 After execution of all these documents on 26 March 2001, the Watsons advanced $200,000 to Sunfix. The advance was made on 28 March 2001.

The Smiths’ claim

20 The general nature of the Smiths’ claim is similar to that of the Watsons. The claim is advanced by reference to a document entitled “Equity Participation, Loan and Guarantee Agreement” the parties to which are Stuart Leslie Smith, Leslie Paul Smith and Margaret Anne Smith (called “Lender”) and Sunfix (referred to as “Borrower” and “Developing Company”). This agreement is dated 2 November 2001. As in the case of the Watsons, there is a clause 3.1 by which the Lender agrees to lend the Principal Sum to the Borrower which, in turn, covenants to pay on the Termination Date so much of the Principal Sum and the Fixed Fee as are then outstanding. In this case, the Principal Sum is again $200,000, the Fixed Fee is $50,000 and the Termination date is the earlier of “settlement of the sale of the Property” and “the term nominated in the agreement”. The meaning of “the term nominated in the agreement” is open to debate, although, having regard to the content of Item 1 of Schedule 1, the term seems likely to be a term of six months commencing on the date of the agreement, 2 November 2001. Clause 3.3 is as follows:

“The Lender has agreed to loan the development company funds to assist with the development. These funds will be placed in trust with the borrowers solicitors until the completion of the purchase of the Property. Whereupon the Borrower will grant to the Lender a registered joint second mortgage over the property. The joint second Mortgage will be registered immediately following the registration of the transfer and the first Mortgage to the Borrower.”

“Property” is defined as “Lot 129, 81-83 Derby Street Silverwater 2128.”

21 The agreement with the Smiths contains a definition of “Security” as follows:

“ Security means funds are held in solicitors trust account until the completion of the purchase of the Property referred to in Item 2, Schedule 1. Then a joint registered second Mortgage over the Property will be issued.”

As in the case of the Watsons, the definition of “Security” does not seem to play any substantive role in the agreement’s operative provisions, although its general intent is consistent with clause 3.3.

22 In the Smiths’ case, unlike the Watsons, Sunfix did not execute any form of mortgage. The Smiths advanced $200,000 after execution of the document.

Identification of the land and related matters

23 Before dealing with the parties’ claims, I must say something about the ways in which the property is described and its title particulars. The subject matter of the transfer in favour of Sunfix registered on 21 August 2001 was described as the whole of the land in folio identifier 129/1019075. It may be accepted, therefore, that that was a description that had, at that time, a clear and settled meaning ascertainable from records maintained by the Registrar General. Search results in evidence show that folio identifier 129/1019075 relates to lot 129 in deposited plan 1019075. A copy of that deposited plan shows that lot 129 has an area of 3266 square metres, a frontage of 46 metres to Derby Street, a rear line of 46 metres, an eastern boundary (abutting Lot 52 in Deposited Plan 652045) of 71 metres and a western boundary also of 71 metres. The copy of deposited plan 1019075 also shows that the plan was registered on 22 November 2000 and is a subdivision of lot 128 in deposited plan 1005561. A copy of the latter plan shows lot 128 to include an area corresponding with what later became lot 129 in deposited plan 1019075. Among documents identified by the Watsons as given to them by Sunfix before they entered into the agreement with it are a site plan of the nine proposed warehouses and a plan marked “Proposed Industrial Subdivision of Lots 201 and 202 in Previous Application” showing the site of the proposed warehouses as “Lot 222”. It is clear from the dimensions (area of 3266 square metres, frontage of 46 metres to Derby Street, rear line of 46 metres and side boundaries each of 71 metres) and the fact that the eastern boundary abuts lot 52 in Deposited Plan 652045 that this “Lot 222” corresponds with and is identical with what later became lot 129 in deposited plan 1019075. The plan annexed to the contract for sale under which Sunfix acquired the property was, in material respects, identical with the site plan showing “Lot 222” given by Sunfix to the Watsons.

24 With these matters in mind, it is useful to note the following chronology:

11 October 1999 – Registration of deposited plan 1005561 and consequent creation of lot 128 therein.

22 November 2000 – Date of contract for purchase by Sunfix of “Lot 222” as shown in annexed plan.

22 November 2000 – Registration of deposited plan 1019075 and consequent creation of lot 129 therein.

26 March 2001 – Execution of documents between Sunfix and the Watsons referring variously to “Lot 222, 81-83 Derby Street Silverwater” and “Lot 129 (222) DP1005561 81-83 Derby Street Silverwater”.

10 August 2001 – Completion under contract dated 22 November 2000 by means of transfer of land in folio identifier 129/1019075.

21 August 2001 – Registration of Sunfix as proprietor of lot 129 in deposited plan 1019075.

1 November 2001 – Execution of building contract between the plaintiff and Sunfix in relation to construction work concerning “Lot No. 129 (83-85) Sub-Division Derby St, Silverwater Shire/Municiplity of Auburn”.

2 November 2001 – Execution of agreement between the Smiths and Sunfix referring to “Lot 129, 81-83 Derby Street Silverwater 2128”.

25 It is, to my mind, clear that there was never any doubt, so far as the parties to the various documents are concerned, as to the identity of the property with respect to which they contracted. To the extent that the contract for sale dated 22 November 2000 and the Sunfix-Watson documents of 26 March 2001 referred to “Lot 222”, the parties in each case had clearly in contemplation the parcel of land identified as lot 222 in a plan to which they had specific regard when they contracted, which parcel in due course became lot 129 in deposited plan 1019075. The area, dimensions and location (by reference to both Derby Street frontage and juxtaposition with lot 52 in deposited plan 652045) of “Lot 22” and lot 129 in deposited plan 1019075 were exactly the same. The reference in the agreement of 2 November 2001 between the Smiths and Sunfix to “Lot 129”, plus the street address, was unquestionably a reference to lot 129 in deposited plan 1019075. In short, all the documents to which I have referred related to, and were understood by the parties to relate to, the single parcel of land that is now lot 129 in deposited plan 1019075.

26 While the position as among the parties was in this respect entirely clear, the form of mortgage given by Sunfix to the Watsons and the form of caveat executed by them did not identify the property in a way that would have enabled the Registrar General to register the mortgage or record the caveat upon presentation at the Land Titles Office. Under s.36(1D) of the Real Property Act, the Registrar General may refuse to accept a dealing or caveat unless it recites the distinctive reference allotted to the folio of the register or to the registered dealing which it intends to affect. Having regard to the content of deposited plan 1005561, the reference in the mortgage and the caveat to “Lot 129 (222)” in that deposited plan would have left the Registrar General with no option but to exercise the s.36(1D) power of rejection. This is because there is no lot 129 or lot 222 in that deposited plan, so that the reference, viewed alone and in isolation (as it necessarily would have been, had the mortgage or caveat been presented at the Land Titles Office), has always been incapable of identifying any part of the land in deposited plan 1005561.

27 This is not a matter of any particular significance in relation to the caveat. The Watsons could at any time have executed and lodged a new caveat document referring to the correct title reference. But it is a matter of significance in relation to the mortgage document dated 26 March 2001 given by Sunfix to the Watsons. It means that that mortgage was never a mortgage in registrable form. Nor did it attain that status when the mortgagor became registered proprietor, as it did on 21 August 2001: cf Courtenay v Austin (1961) 78 WN (NSW) 1082, affirmed (1964) 110 CLR 550.

Assessment of Pelenoy’s claim

28 Pelenoy’s claim depends entirely on clauses 28 and 17(f) of the building contract. Clause 28 is a standard clause in such contracts. A brief account of its development may be found in Mr Peter Merity’s article, “Paradise Postponed: A History of Attempts to Ensure Payment in the Building and Construction Industry of New South Wales”, (2002) 18 BCL 169. As the author points out, the effectiveness of the clause was established in Griffith v Hodge (1979) 2 BPR 9474. Waddell J there held that the clause was effective to confer upon the builder “a valid equitable charge on the land” capable of supporting a caveat. Ten years later, in Gibson v Co-ordinated Building Services Pty Ltd (1989) 4 BPR 9639, Young J was able to say:

“The authorities clearly show that where a building contract has in it a clause such as the present cl. 28, the builder has an interest in the land which will support a caveat, see eg Griffith v Hodge (1979) 2 BPR 9474.”

29 I do not understand these conclusions to be challenged in this case. The building contract was effective to create an equitable charge over lot 129 in deposited plan 1019075 in favour of Pelenoy as security for the moneys referred to in the clause.

Assessment of the Watsons’ claim

30 I have already said that the executed mortgage included in the documents received by the Watsons was not in registrable form. The Watsons were thus not armed with the means of creating a legal mortgage (by registration) at will and without assistance. The intentions of the parties are nevertheless clear. When the documents between Sunfix and the Watsons were executed on 26 March 2001, Sunfix was in the process of acquiring the Silverwater property. Contracts had been exchanged on 22 November 2000 (coincidentally the day on which deposited plan 1019075 was registered). Clause 7F of the deed of equity participation said that, pending completion of the purchase of the property, security for the Watsons was to be an unregistered second mortgage of the Asquith property; and that upon such completion Sunfix would grant to the Watsons “a registered joint second mortgage over the said development” – or, as the definition of “Security” clarified, “a joint registered second Mortgage over the Property”, that is, “Lot 222 ____ 81-83 Derby Street Silverwater NSW” which, as I have already observed, is identical with lot 129 in deposited plan 1019075.

31 Clause 7F and the definition of “Security” defined the role played by the executed mortgage document. The stated intention was that a mortgage of the Silverwater property was to be enjoyed by the Watsons only from completion of the purchase by Sunfix. Until that point was reached, their security rights were restricted to the Asquith property. The agreement contained a promise by Sunfix to give a second mortgage of the Silverwater property if and when Sunfix completed its purchase of that property. The executed form of mortgage was given in an attempt to ensure the ability of the Watsons to attain the position of registered mortgagees should their right to that position come to fruition by reason of completion of the purchase by Sunfix or, at least, to show the form and terms of the mortgage they were to have. It would, in my view, be wrong to regard the executed form of mortgage as having any capacity, before that point was reached, to be the source of any security interest. The manifested intention was that the Watsons were to have no security interest in the subject matter of the executed form of mortgage until completion of Sunfix’s purchase of the subject property. For this reason, I do not accept the submission advanced by Mr Ogborne on behalf of the Watsons that the form of mortgage operated before completion as a security over the equitable interest that Sunfix had in the Silverwater property as purchaser under the uncompleted contract. Rather, I accept the submission of Mr McNally on behalf of Pelenoy that the Watsons were to have no interest in Silverwater until the later time.

32 Given clause 7F of the deed of equity participation, the “Security” definition therein and the intention manifested by the inclusion of the executed form of mortgage in the package of documents given to them on 26 March 2001, the Watsons could have obtained from the court, immediately Sunfix completed the purchase, an order compelling Sunfix to execute a new form of mortgage in a form identical with that executed on 26 March 2001, save for correction of the property description to refer to folio identifier 129/1019075 so that the mortgage was in registrable form. There was a clear contractual promise by Sunfix to cause the Watsons to become, at that point, the holders of a registered second mortgage of lot 129 and a clear mutual intention that they should then have, and be able to obtain registration of, a mortgage in the form (as to all matters of substance) of the mortgage document executed on 26 March 2001. There is no apparent reason why the court would not have enforced the resultant rights by an order for specific performance against Sunfix at the suit of the Watsons.

33 The situation is thus one in which an equitable mortgage was created in favour of the Watsons. The documents executed on 26 March 2001, coupled with the giving of valuable consideration by the Watsons (who made the loan contemplated by those documents) and the subsequent but originally specified event of completion by Sunfix of its purchase of the land, caused the Watsons to be regarded in equity as mortgagees on the basis discussed by Mason CJ, Brennan J, Deane J and McHugh J in Chan v Cresdon (1989) 168 CLR 242 at 256-257 by reference to observations of Isaacs J in Barry v Heider (1914) 19 CLR 197 at 216 to the effect that a right to have a registrable instrument executed and registered is itself an estate or interest in the land. Equity regards as done that which ought to have been done in fulfilment of Sunfix’s promise that the Watsons were to have a registered second mortgage of the Silverwater property upon completion of Sunfix’s purchase of that property.

34 It was submitted by Mr McNally on behalf of Pelenoy that the Watsons never had in relation to the property more than a “mere equity” because the position they occupied was always one in which they were dependent on the assistance of the court to obtain relief in respect of the property. I do not consider that submission to be supportable: if it were correct, there could never be an equitable interest as such, since all such interests are, of their nature, the product of equity’s willingness to provide relief in personam. This is not the occasion for a search for the precise dividing line between equitable interest as such and mere equity. It is true that, in some circumstances, a person who has a right to equitable relief in a property context does not thereby enjoy an equitable interest in the particular property. In Double Bay Newspapers Pty Ltd v A W Holdings Pty Ltd (1996) 42 NSWLR 409, for example, Bryson J held that a mortgage which did not comply with the Statute of Frauds but could be enforced by resort to the doctrine of part performance gave rise only to a mere equity which did not prevail against a subsequent equitable interest. But decisions of that kind and the classifications they employ cannot detract from clearly established principles under which a contractual promise to grant a mortgage which is given in return for moneys actually advanced causes the promisee to be regarded in equity as the holder of the mortgage contracted to be given. In such a case there is what Palmer J described in Mills v Ruthol Pty Ltd (2002) 10 BPR 19381 as “a nexus of sufficient propinquity between the right and the specific property to which the right relates” to create an equitable interest.

35 The Watsons must accordingly be regarded as having become equitable mortgagees of the Silverwater property when, on 10 August 2001, completion took place under the contract between Silverwater Estate Pty Ltd as vendor and Sunfix as purchaser.

Assessment of the Smiths’ claim

36 The Smiths, like the Watsons, were the recipients of a promise by Sunfix to create in their favour a registered second mortgage of the Silverwater property upon completion of Sunfix’s purchase of that property. The Smiths advanced the contracted sum upon the faith of that contractual promise and, although they did not receive an executed mortgage document of the kind given to the Watsons, the promise itself, coupled with their giving valuable consideration, means that the Smiths also became equitable mortgagees of the property.

37 In the Smiths’ case, however, there is a difference. Although the contractual promise was that the mortgage would be given upon completion of Sunfix’s purchase, the reality was that such completion had already occurred. The agreement between Sunfix and the Smiths was made on 2 November 2001. Completion of the purchase occurred on 10 August 2001 and Sunfix became the registered proprietor of the land on 21 August 2001. It follows that the Smiths’ equitable mortgage arose immediately upon the giving by Sunfix of the relevant contractual promise by means of the agreement of 2 November 2001.

The competing interests

38 Each of Pelenoy, the Watsons and the Smiths thus attained an equitable interest in the Silverwater land, in the first case by way of equitable charge and in the second and third cases by way of equitable mortgage. The distinction between the two was described by Harper J in Crampton v French [1996] ANZ ConvR 156 as follows:

“An equitable charge over land is a creature with which the law of securities has a long familiarity. Where the land in question is under the Transfer of Land Act , an equitable charge is distinguished from an equitable mortgage in that the latter does, but the former does not, carry with it an entitlement to foreclose on default and (at lease if that were the intention of the parties) to registration on the appropriate Certificate of Title: where the relevant intention is present, and perhaps in other circumstance as well, an equitable mortgagee may compel the mortgagor to execute a legal mortgage which may then be registered pursuant to Division 9 of Pt 4 of the Act. An equitable charge, however, “is a security which does not create a legal estate, but only confers an equitable interest in the land upon the creditor”: Halsbury’s Laws of England (4th ed) volume 32, para406. It is not capable of giving rise to a registrable instrument. The legislation does not make provision for such registration.”

For present purposes, however, this distinction is unimportant. The significant point is that each of Pelenoy, the Watsons and the Smiths had an equitable interest. It therefore becomes necessary to determine the priorities of the respectable equitable interests.

39 Before that task is undertaken, two potentially complicating factors may be recognised as irrelevant. First, my finding that the form of mortgage in favour of the Watsons was not in registrable form means that questions arising under s.43A of the Real Property Act (and, more particularly, the question whether the Watsons’ interest is to be regarded as a legal interest) may be left to one side. Second, Pelenoy was the only one of the three parties with which I am currently concerned to lodge a caveat. But its caveat 8613537J is dated 20 May 2002 and was lodged some time after that day, having been duly stamped on 21 May 2002. That caveat was accordingly not recorded on the title when the Watsons and the Smiths entered into relevant contracts with Sunfix or when their equitable interests arose. Any potential that the existence of a caveat may have to represent a source of notice relevant to assessment of competing priorities therefore need not be considered.

40 There is no suggestion that any of Pelenoy, the Watsons and the Smiths acted otherwise than in good faith in acquiring the relevant equitable interest. Nor has it been shown that any of them had, at any time before acquiring an interest, either actual or constructive notice of the interest of any of the others of them. That being so and the competing interests being unregistered interests which are equitable only, the competition among them falls to be resolved simply by reference to the maxim qui prior est tempore potior est jure.

41 The equitable interests accordingly take priority according to the dates of respective creation. The Watsons’ interest was earliest in time. On the view I have taken as to its nature, that interest arose on 10 August 2001 when Sunfix’s purchase of the Silverwater property was completed, the source of the interest being the documents of 26 March 2001. Pelenoy’s interest arose next. It was created by the building contract of 1 November 2001. Sunfix was the registered proprietor of the land at that point. Pelenoy’s equitable interest arose immediately the building contract was made. The Smiths’ interest was the last to arise, having been created by the agreement with Sunfix dated 2 November 2001.

42 It follows that the equitable interest of the Watsons ranks in priority to the interest of Pelenoy and the interest of the Smiths; and that the interest of Pelenoy ranks in priority to the interest of the Smiths.

What is secured by the Watsons’ equitable mortgage?

43 If, as I consider to be the case, the executed but unregistrable form of mortgage dated 26 April 2001 is accepted as a comprehensive statement of the terms of the Watsons’ equitable mortgage, one further question needs to be addressed. The form itself does not say what the mortgage secures. It does, however, purport to incorporate “the provisions set out in annexure A/memorandum No Q860000 filed in the Land Titles Office”. Memorandum Q860000 is in evidence. It, however, does not contain any covenant to pay (apart from a covenant by the mortgagor in clause 6 to pay certain costs and expenses related to default), although it does deal in the abstract with the situation of “default being made in payment at the respective times and in the manner shown in the mortgage of the principal sum or any part thereof, or of the interest thereon or any part thereof”. The executed form of mortgage itself does not specify any “manner” of payment of anything and, in the absence of something relevant in memorandum Q860000 just referred to, it becomes necessary to see whether the annexure A referred to in the form of mortgage defines the moneys secured.

44 The immediate difficulty here is that the form of mortgage itself has no annexure A or, at least, there is nothing readily identifiable as its annexure A. A similar difficulty confronted Campbell J in Vrkic v Otta International Pty Ltd [2003] NSWSC 433, another case concerning parties who had advanced funds for the purposes of the Silverwater development and another development undertaken by a company controlled by Mr Bradshaw. The claims in that case were claims to security over the Asquith property but the scheme of the documentation was similar to that involving the Watsons in the present case. In particular, the relevant lender (Otta) received a package of documents which included a deed of equity participation (which his Honour called “the Otta Deed”) and two executed forms of mortgage, one in relation to the Silverwater property and the other in relation to the Asquith property. In each such form of mortgage, there was, as in the present case, reference to “the provisions set out in annexure A/memorandum No Q860000 filed in the Land Titles Office” but nothing identified as annexure A was attached.

45 Campbell J began his search for the annexure A by quoting the observation of Gleeson CJ, Gummow J and Hayne J in Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 that interpretation of a written contract involves:

“… the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”.

46 His Honour continued:

“A contact is read in a way which will result in a sensible and businesslike meaning: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109; Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288 at 300 per Isaacs J; Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 437; Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VR 834 at 843-8. If a contract is open to two constructions it will receive that construction which will avoid consequences which are capricious, unreasonable, unjust or inconvenient; TCN Channel Nine Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130, at 146. A fundamental principle is ‘… that the intention of the parties is to be ascertained from the instrument as a whole and that this intention when ascertained will govern its construction’ : Fitzgerald v Masters (1956) 95 CLR 420 at 437 per McTiernan, Webb and Taylor JJ. In the course of construing an instrument as a whole in this fashion, the court can engage in ‘… the rejection of repugnant words, the transposition of words, and the supplying of omitted words’ : ibid.”

47 Campbell J then stated his conclusion with respect to the matter before him:

“Applying these principles I do not accept the argument that there is no document which should properly be regarded as ‘annexure A’ to the form of mortgage over the Asquith property given to Otta on 15 February 2001. If the argument of the second defendants in this respect were right, the entry into of the form of mortgage over the Asquith property on 15 February 2001 would be close to futile. (It would not be completely futile, because the mortgage would secure the amounts which the mortgagee paid on default by the mortgagor in observing covenants.) That is not a result that ought readily be arrived at. Rather, in my view, as a matter of construction the Otta Deed executed on 15 February 2001 is ‘annexure A’ referred to in the mortgage. To the knowledge of both parties to the mortgage, the Otta Deed was handed to Mr Terei at the same time as the mortgage form, with both documents already executed by Entervin. Both the mortgage form, and the Deed, bear the same date. There is no other document which is a possible candidate for being ‘annexure A’ to the RPA mortgage form. The Otta Deed and the mortgage form concerning Asquith are both, commercially, part of the same transaction, whereby Otta provided money for investment in the Silverwater development and, considering the documentation as a whole, it is fairly clear that Entervin and Otta intended that Otta would have an equitable mortgage over the Asquith property.”

48 The same conclusion is even more clearly justified in this case. The form of mortgage given to the Watsons in respect of the Silverwater property formed part of the bound booklet that also contained the deed of equity participation carrying the same date as the form of mortgage. The two were obviously intended to be read together. Here, as in the case before Campbell J, application of the relevant principles concerning interpretation of contracts leads to the result that the deed of equity participation was intended by the parties to be annexure A to the form of mortgage.

49 It follows that the executed but unregistrable form of mortgage dated 26 April 2001 in respect of the Silverwater property must be taken to have been intended to operate as a security for payment of the moneys owing by Sunfix to the Watsons under the deed of equity participation.

The liquidator’s position

50 The liquidator of Sunfix contends that he is entitled to a lien on the funds in court to recoup some of his costs and expenses in relation to the property and of the present proceedings. He bases his claim on the principle stated by Dixon J as follows in Re Universal Distributing Co Ltd (1933) 48 CLR 171:

“If a creditor whose debt is secured over the assets of the company come in and have his rights decided in the winding up, he is entitled to be paid principal and interest out of the fund produced by the assets encumbered by his debt after the deduction of the costs, charges and expenses incidental to the realization of such assets. The security is paramount to the general costs and expenses of the liquidation, but the expenses attendant upon the realization of the fund affected by the security must be borne by it.
…
The question is not whether moneys available for unsecured creditors should be relieved at the expense of the security. In such a case it may be said that the service of collecting enough to discharge the debenture must in any event be performed in order that a surplus may then arise in which the unsecured creditors may participate. The question in the present case is whether the liquidator can charge against the fund passing through his hands as between himself and the person to whom it is payable, so much of the remuneration fixed for work done in the winding up as is referable to the calling in and conversion of the assets producing the fund. I see no reason why remuneration for work done for the exclusive purpose of raising the fund should not be charged upon it.” [citations omitted]

51 None of the other parties who appeared took issue with the notion that the liquidator should have an appropriate sum for costs and expenses in priority to the claims of those parties upon the funds. There is, however, the question of quantification. When the matter was heard, it seemed that the parties might be able to agree an amount. If that is not possible, the appropriate course will be for the question of quantification to be referred to a registrar.

Form of relief

52 Leaving to one side the orders sought by the liquidator of Sunfix as just outlined (draft short minutes of which were handed up by Mr Golledge), the main claims formally before the court are, first, Pelenoy’s claim for declarations that it had a valid and subsisting charge over the Silverwater property and that that charge is the source of an entitlement to payment of the secured moneys out of the sale proceeds remaining after satisfaction of the first defendant’s debt and, second, Sunfix’s claim for orders precluding each of the twenty cross-defendants (or groups of cross-defendants), including the Watsons (fifth cross-defendants) from bringing any action against the first defendant in respect of the proceeds of the sale of the Silverwater property.

53 In light of the conclusions I have reached, it is appropriate that an order in terms of paragraph 2 of Sunfix’s cross-claim should be made in respect of all cross-defendants with the exception of the Watsons and the Smiths. In addition, there should be a declaration in terms of paragraph 1 of the summons confirming the existence of Pelenoy’s charge (or, more precisely, equitable charge), although modified to recognise that the interest no longer subsists in the property but relates to the balance of the sale proceeds. The second declaration sought by Pelenoy cannot, however, be made since, on my findings, Pelenoy’s equitable charge ranks, in point of security, behind the Watsons’ equitable mortgage. There is not formally before the court any claim by either the Watsons or the Smiths but I do not think that matters, given that Sunfix seeks in the cross-claim:

“Such orders and directions as the Court thinks fit for the determination of all matters in dispute between the Cross Defendants in respect of the said monies.”

That represents a sufficient basis for making declarations recognising equitable mortgages of the Watsons and the Smiths having the priorities to which I have referred.

54 There should be a declaration that the Watsons had an equitable mortgage in the property and specifying its ranking in relation to the other interests. The declaration should specify the amount for which that equitable mortgage operated as security and include a direction that that amount be paid to them from the moneys in court. The relevant amount is their Principal Sum of $200,000 plus the Fixed Fee of $60,000, together with interest on the aggregate $260,000 at the Court rate from 26 April 2002, being the due date for payment of the Principal Sum and Fixed Fee. There should be a like declaration in respect of the Smiths’ equitable mortgage with a statement of the amount secured calculated in the say way (although the quantification will be somewhat academic as the prior ranking securities of the Watsons and Pelenoy will absorb the whole of the moneys in court). The ranking of the Smiths’ equitable mortgage should also be stated.

55 As regards Pelenoy’s equitable charge ranking after the Watsons’ equitable mortgage, it will again be appropriate that the declaration include a statement of the amount secured. In the course of the hearing, some doubts emerged about the meaning and effect of certain of Pelenoy’s financial records but, in the end, I am satisfied that there was owing at 22 October 2002 the sum stated in the written submissions handed up on behalf of Pelenoy as extracted from Mr Ward’s affidavit of that date that is $363,808.49, being $254,570.51 for work done and materials supplied and $109,237.09 by way of interest under clause 17(f). Further interest has obviously accrued since 22 October 2002.

56 The matters to which I have referred are, of course, in addition to orders generally in accordance with the short minutes handed up by Mr Gollege as to the lien for costs and expenses of the liquidator.

57 I direct that Sunfix, Pelenoy and the Watsons, by their respective counsel and solicitors, co-operate to prepare draft short minutes of orders giving effect to the above and submit them to the Smiths for such comment as they may wish to make. The Smiths must realise, however, that, while the court has concluded that they had an equitable mortgage of the Silverwater property, that mortgage ranked after the securities of both the Watsons and Pelenoy whose debts are of such a size that, despite the finding in their favour as to the existence of an equitable mortgage, the Smiths will receive no part of the moneys in court. The Smiths’ approach to the draft they receive must recognise this.

58 I also direct that such short minutes as may be agreed within 28 days from today (or, in default of such agreement, a statement that there are no agreed short minutes) be filed within 35 days from today. I shall then make such orders or directions as I consider necessary in respect of substantive relief. I shall hear the parties on costs at a time to be fixed.

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Last Modified: 02/05/2004