Rathner (Liquidator), in the matter of PE Capital Nominees Pty Ltd (In Liq) v Runner Investment Limited
[2023] FCA 754
•5 July 2023
FEDERAL COURT OF AUSTRALIA
Rathner (Liquidator), in the matter of PE Capital Nominees Pty Ltd (In Liq) v Runner Investment Limited [2023] FCA 754
File number(s): VID 585 of 2021 Judgment of: MCEVOY J Date of judgment: 5 July 2023 Catchwords: MORTGAGES AND SECURITIES – where trustee company legally owned land which was the subject of three registered mortgages – company defaulted and went into liquidation – application by liquidators for orders in relation to trust assets – cross claims in relation to the land by mortgagees – where first mortgagee refused to exercise power of sale under s 77 of the Transfer of Land Act 1958 (Vic) – where second mortgagee sought to exercise the power of sale – where first and third mortgagees contended that the second mortgagee could not exercise the power of sale by reason of the terms of a priority deed – whether first mortgagee could enforce the priority deed to prevent the sale of the land by the second mortgagee – whether first mortgagee had the benefit of the priority deed under a trust – validity of notice of default issued under s 76 of the Transfer of Land Act 1958 (Vic) by second mortgagee – whether first and third mortgagee entitled to discretionary relief – whether second mortgagee could validly exercise power of sale by discharging first mortgage debt from proceeds of sale – when first mortgagee's entitlement to interest ends – whether utility in granting relief – where second mortgagee would have been entitled to relief had the first mortgagee not subsequently disposed of the land Legislation: Corporations Act 2001 (Cth) s 468; Sch 2, s 90-15
Interpretation of Legislation Act 1984 (Vic) s 38
Transfer of Land Act 1958 (Vic) ss 45(2), 76, 77, 90(3), 116A
Trustee Act 1958 (Vic) s 63
Property Law Act 1958 (Vic) ss 18, 50, 56(1), 78, 86, 222
Property Law Act 1969 (WA) s 11(1)
Federal Court (Corporations) Rules 2000 (Cth) r 2.2
Federal Court Rules 2011 (Cth) r 16.05(2)
Conveyancing and Law of Property Act 1881 (UK) s 5
Law of Property Act 1925 (UK), s 56(1), 78(1), 205(ix)
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Massoud v Nationwide News Pty Ltd [2022] NSWCA 150
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Paciocco v Australia and New Zealand Banking Group Ltd [2015] FCAFC 50; (2015) 236 FCR 199
Partridge v McIntosh & Sons Ltd (1933) 49 CLR 453
Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676
Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154
Pirie v Registrar-General (1962) 109 CLR 619
Price v Spoor [2021] HCA 20; (2021) 270 CLR 450
Quadramain Pty Ltd v Sevastapol Investments Pty Ltd (1976) 133 CLR 390
Queensland Premier MinesPty Ltd v French (2007) 235 CLR 81
Re Wily as Liquidator of Anglican Insurance Ltd [2009] NSWSC 696
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Simmons v Lee [1998] 2 Qd R 671
Specialist Diagnostic Services Pty Ltd v Healthscope Ltd (2012) 41 VR 1
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Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107
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Bishop v Church (1751) 2 Ves Sen 371; 28 ER 238
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Division: General Division Registry: Victoria National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 280 Date of hearing: 27-29 September 2022 Counsel for the plaintiffs: Mr Ian Martindale KC and Mr Sergio Freire Solicitors for the plaintiffs: HDL Legal and Consulting Counsel for the first and third defendants: Mr Peter Bick KC with Mr Carl Möller Solicitors for the first and third defendants: SBA Law Counsel for the second defendant: Mr Paul Ehrlich KC and Mr Ryan Kornhauser Solicitors for the second defendant: P&B Law Counsel for the fourth defendant: The fourth defendant filed a submitting notice save as to costs Solicitors for fourth defendants: Macpherson Kelly Counsel for the second cross respondent by the second cross claim: The second cross respondent by the second cross claim filed a submitting notice save as to costs Solicitors for the second cross respondent by the second cross claim: Cornwalls Counsel for the fifth cross respondent by the second cross claim: The fifth cross respondent by the second cross claim filed a submitting notice save as to costs Solicitors for the fifth cross respondent by the second cross claim: Meerkin & Apel ORDERS
VID 585 of 2021 IN THE MATTER OF PE CAPITAL NOMINEES PTY LTD (IN LIQ) V RUNNER INVESTMENT LIMITED (ACN 615 298 201)
BETWEEN: GIDEON ISAAC RATHNER AND MATTHEW BRIAN SWEENY IN THEIR CAPACITY AS JOINT AND SEVERAL LIQUIDATORS OF PE CAPITAL NOMINEES PTY LTD (IN LIQUIDATION) (ACN 615 298 201)
First plaintiff
PE CAPITAL NOMINEES PTY LTD (IN LIQUIDATION) (ACN 615 298 201)
Second plaintiff
AND: RUNNER INVESTMENT LIMITED (A COMPANY REGISTERED IN THE REPULIC OF SEYCHELLES) (INCORPORATION NO: 224221)
First defendant
MT DUNEED INVESTMENTS PTY LTD (ACN 631 976 326)
Second defendant
JASPER MANAGEMENT LIMITED (A COMPANY REGISTERED IN THE REPUBLIC OF SEYCHELLES) (INCORPORATION NO: 216646) (and another named in the Schedule)
Third defendant
AND BETWEEN: MT DUNEED INVESTMENTS PTY LTD (ACN 631 976 326)
Cross claimant of first cross claim
AND: RUNNER INVESTMENT LIMITED (A COMPANY REGISTERED IN THE REPULIC OF SEYCHELLES) (INCORPORATION NO: 224221)
Cross respondent of first cross claim
AND BETWEEN: RUNNER INVESTMENT LIMITED (A COMPANY REGISTERED IN THE REPULIC OF SEYCHELLES) (INCORPORATION NO: 224221)
First cross claimant of second cross claim
JASPER MANAGEMENT LIMITED (A COMPANY REGISTERED IN THE REPUBLIC OF SEYCHELLES) (INCORPORATION NO: 216646)
Second cross claimant of second cross claim
AND: MT DUNEED INVESTMENTS PTY LTD (ACN 631 976 326)
First cross respondent of second cross claim
LANCE ADRIAN GODFREY KOCH
Second cross respondent of second cross claim
PE CAPITAL NOMINEES PTY LTD (IN LIQUIDATION) (ACN 615 298 201) (and others named in the Schedule)
Third cross respondent of second cross claim
ORDER MADE BY:
MCEVOY J
DATE OF ORDER:
5 JULY 2023
THE COURT ORDERS THAT:
1.The second cross claim dated 16 December 2021 be dismissed.
2.The proceeding and the second defendant’s interlocutory process be listed for case management and interlocutory hearing at 4:15pm on 6 July 2023.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
MCEVOY J:
These proceedings concern the disputed sale of a parcel of land situated at 623-645 Torquay Road, Mt Duneed (the Land). The Land was initially owned by PE Capital Nominees Pty Ltd in its capacity as trustee of the PEC Mt Duneed SPV Trust. PE Capital subsequently went into liquidation. For reasons which it is unnecessary to describe here, the Land was later transferred to the fourth defendant, Oratango Pty Ltd.
The proceedings have been conducted on the basis that the Land was the subject of three registered mortgages to the following parties:
(a)the first mortgage to the first defendant, Runner Investment Limited;
(b)the second mortgage to the second defendant, Mt Duneed Investments Pty Ltd; and
(c)the third mortgage to the third defendant, Jasper Management Limited.
Although the liquidators of PE Capital, Gideon Isaac Rathner and Michael John Sweeny, commenced the proceedings on 13 October 2021 by way of originating process under r 2.2 of the Federal Court (Corporations) Rules 2000 (Cth) seeking to be appointed receivers of trust assets and seeking declarations and orders in relation to the Land, the real dispute has evolved and has primarily been conducted between Mt Duneed on the one hand, and Runner and Jasper on the other. The liquidators have supported Mt Duneed’s position, and indeed at the hearing indicated that they only sought relief if Runner and Jasper were successful in their claims against Mt Duneed.
Mt Duneed, by way of cross claim dated 9 December 2021, has sought to exercise a power of sale it asserted as second mortgagee under s 77 of the Transfer of Land Act 1958 (Vic) (TLA) and sell the Land for the sum of $7,400,000 to the second cross respondent, Lance Adrian Godfrey Koch, pursuant to a Contract of Sale which it entered with Mr Koch on 3 December 2021 and which, Mt Duneed says, would have settled on 20 December 2021 but for Runner’s refusal to permit the settlement. Runner and Jasper have contended, however, that Mt Duneed was not able to sell the Land by reason of a priority/subordination agreement entered into by Manda Capital Holdings Pty Ltd, Martyn Craig Barnes and Mt Duneed (the original three mortgagees of the Land), and PE Capital as mortgagor on or about 10 April 2019 to regulate and subordinate the priorities of their respective mortgages (Priority Deed). Runner and Jasper have maintained that under this Priority Deed Mt Duneed covenanted not to take any steps to enforce its mortgage while the First Mortgage Debt (as defined in the Priority Deed), which had become owing to Runner, was still outstanding. The proceedings have been conducted on the basis that the First Mortgage Debt remains due and owing.
Mt Duneed has contended that as Runner is not a party to the Priority Deed, Runner cannot rely on the deed to its benefit. If Runner can rely on the Priority Deed, Mt Duneed has said that to allow Runner and Jasper to restrain it from selling the Land would be unconscionable and contrary to established equitable principle. Thus it has been Mt Duneed’s position that the court should permit it to sell the Land and require Runner to deliver up control of the electronic certificate of title in accordance with s 116A of the TLA. Mt Duneed has sought injunctive and other relief to this end, proposing that at settlement the Land would be freed and discharged of all liability on account of Runner’s mortgage and that any proceeds of sale over and above the sum of $3,038,960.57 (the amount of the principal claimed by Runner to be owing under its mortgage) be paid into court pending a taking of accounts, and it has sought an order for a taking of accounts.
Runner and Jasper, by way of second cross claim dated 16 December 2021, have argued that the parties should be held to their bargain (as Runner and Jasper have contended it should be understood by reference to the Priority Deed). They have maintained that Runner is entitled to the benefit of the Priority Deed on its terms, or that Manda holds the benefit of the Priority Deed on trust for Runner, thereby enabling Runner to enforce the Priority Deed (or have Manda enforce it as Runner’s trustee) and prevent Mt Duneed from selling the Land. Because of the operation of the Priority Deed, Runner and Jasper have contended that Mt Duneed was not entitled to give a notice of default under s 76 of the TLA and accordingly that the notice, and the Contract of Sale that Mt Duneed subsequently entered, are of no force and effect. Thus Runner has sought declaratory relief that Mt Duneed has no power to sell the Land, that Mt Duneed’s notice pursuant to s 76 is invalid and of no effect, that the Contract of Sale is of no force or effect or is at an end, as well as injunctions restraining the completion of the sale and restraining Mt Duneed from breaching the Priority Deed. Runner has also sought an order requiring Manda to assign to it the benefit of the Priority Deed. Jasper has sought an injunction restraining Mt Duneed from completing the Contract of Sale, and an order setting it aside.
If Mt Duneed is unsuccessful in its claims against Runner, the liquidators’ position has been that they seek to sell the Land as part of the liquidation. If Mt Duneed and Mr Koch are restrained from completing the sale of the Land, PE Capital and the liquidators have sought a declaration under s 468 of the Corporations Act 2001 (Cth) that the transfer of the Land by Runner from PE Capital to Oratango is void, and, or alternatively, orders for Oratango to transfer the Land back to PE Capital, and orders that the liquidators be appointed as receivers of the Land with a power of sale under s 90-15 of the Insolvency Practice Schedule (Corporations) contained in Schedule 2 of the Corporations Act, s 63 of the Trustee Act 1958 (Vic), and the court’s general equitable jurisdiction. Runner has opposed this course and in addition has sought an order under s 90(3) of the TLA to remove a caveat lodged by PE Capital claiming an interest in the Land as chargee arising from its right of indemnity in trust assets as a former trustee, as well as a declaration that the liquidators’ equitable lien over the trust assets rank in priority behind any registered mortgage.
Oratango, Mr Koch and Manda have each filed submitting notices in the proceedings, save as to costs.
Notwithstanding the submission of Runner and Jasper that their case is entirely responsive to Mt Duneed’s case, and that Mt Duneed is effectively the moving party, the most logical starting point is the case brought by Runner and Jasper on the second cross claim. It presents the following issues for determination.
The first is whether Runner is entitled to enforce the substance of the Priority Deed, whether by reference to the deed itself, or pursuant to a trust under which choses in action contained in the Priority Deed are held by Manda as trustee for Runner as beneficiary. This involves consideration of the following questions:
(a)is Runner a “successor in title” or an “assign” of Manda having regard to the definition of “person” in cl 1.2(c) of the Priority Deed so as to be a person named in the Priority Deed?
(b)do the benefits of cll 5.1(a), 5.1(b) and 5.2(a) of the Priority Deed run with the Land by operation of s 78(1) of the Property Law Act 1958 (Vic) (PLA)?
(c)does s 45(2) of the TLA operate to transfer rights under the Priority Deed to Runner?
(d)does Manda hold the benefit of the Priority Deed on trust for Runner?
(e)does s 56(1) of the PLA operate to entitle Runner to the benefit of the Priority Deed?
For reasons I will explain, I have determined each of these questions against Runner and Jasper. That is to say, I have concluded that Runner is not entitled to rely on the Priority Deed and that Manda does not hold the benefit of the Priority Deed on trust for Runner.
Because the balance of the case advanced by Runner and Jasper is predicated on the operation of the Priority Deed in Runner’s favour, on one view it may be strictly unnecessary to give further consideration to the question of whether Mt Duneed was contractually entitled to issue the notice of default, the validity of that notice and thus the Contract of Sale, and whether there is any basis for Runner and Jasper to be granted the discretionary relief they seek: see, in this regard, DBB16 v Commonwealth of Australia [2022] FCA 783 at [17] (Raper J), citing Boensch v Pascoe [2019] HCA 49; 268 CLR 593 at 600-601 [7]-[8] (Kiefel CJ, Gageler, and Keane JJ). In the present circumstances, however, and noting that I would resolve these further questions against Runner and Jasper also, I consider that it is desirable to deal at least briefly with these further matters: see Massoud v Nationwide News Pty Ltd [2022] NSWCA 150 at [35] (Leeming JA); Gulic v Boral Transport Ltd [2016] NSWCA 269 at [7]-[8] (Macfarlan JA).
It is then necessary to turn to Mt Duneed’s case on the first cross claim, which involves consideration of the following questions:
(a)does Mt Duneed have the power to sell the Land under s 77(1) of the TLA?
(b)if so, can Mt Duneed validly exercise that power by discharging Runner’s mortgage at settlement from the proceeds of sale rather than by tendering the amount necessary to discharge Runner’s mortgage prior to settlement of the Contract of Sale?
(c)is there utility in granting relief to Mt Duneed in circumstances where Runner and Jasper maintain that Mr Koch may not have been able to complete the Contract of Sale?
(d)if Mt Duneed is entitled to relief, does Runner’s entitlement to continue to capitalise interest on its own mortgage debt end as at 20 December 2021, the date the Contract of Sale would have settled had it not been for Runner’s refusal to permit the settlement?
For reasons I will explain, I have resolved each of these questions in favour of Mt Duneed.
Subject to certain significant developments which have apparently occurred since the hearing of the competing claims and while judgment has been reserved, this leaves only the liquidators’ applications which are the subject of their originating process and their interlocutory application of 22 November 2021, together with the responses of Runner and Jasper to those applications. As has been mentioned, it was submitted on behalf of the liquidators that their applications were only pressed in the event that Mt Duneed and Mr Koch were restrained from completing the Contract of Sale. Having regard to the resolution of Mt Duneed’s case in its favour, the liquidators’ applications and the responses of Runner and Jasper to them would seem to fall away.
Were it not for the further matters which I now describe, it would have been appropriate for Mt Duneed to have had, substantially, the orders sought on its cross claim. However, on 26 June 2023, shortly before judgment was to be delivered, Mt Duneed filed an interlocutory process seeking orders, amongst other things, for leave to file and serve an amended cross claim in the proceedings – in effect to re-open its case.
It did so because, as an affidavit filed in support of its application on 26 June 2023 by a Mr Paul Turner (the director of Mt Duneed) attests, Runner has now transferred the Land to South Reeve Pty Ltd. It is alleged by Mt Duneed in a proposed amended cross claim that the Land has been sold for $4,820,000, being $2,580,000 less than the $7,400,000 payable under the Contract of Sale with Mr Koch, which sale represents a breach of Runner’s obligation to exercise its power of sale in good faith and having regard to the interests of Mt Duneed pursuant to s 77(1) of the TLA. Mt Duneed’s interlocutory process accordingly seeks to amend the claim and the relief sought by Mt Duneed in the proceedings.
After usual court hours in the afternoon of 26 June 2023 I conducted a case management hearing in relation to Mt Duneed’s interlocutory process filed that day. Upon the court’s indication that it would shortly deliver judgment on the claims in the terms which they had been agitated by the parties at the hearing on 27-29 September 2022, senior counsel for Mt Duneed accepted that the hearing of his client’s interlocutory process and the formulation of any amended claims and consequential relief should be adjourned pending publication of these reasons for judgment.
Accordingly, what follows should be understood as the court’s determination of only those matters raised by the first cross claim of 9 December 2021 and the second cross claim of 16 December 2021. In light of what has apparently occurred it would seem that it is unlikely to be appropriate to make the orders sought by Mt Duneed on the first cross claim in its present form. It will be necessary to hear from Mt Duneed on the form of its proposed amended cross claim and related matters, and from the parties more generally on the future conduct of the litigation. The second cross claim dated 16 December 2021 will be dismissed.
RELEVANT BACKGROUND
PE Capital was incorporated on 12 October 2016, and on 17 October 2016 the Trust was established by deed (Trust Deed). Pursuant to the Trust Deed, PE Capital was appointed the initial trustee of the Trust.
On 15 May 2017, Mr Barnes was appointed director of PE Capital, and since 17 July 2018 Mr Barnes has been the sole director of PE Capital. The sole shareholder of PE Capital is Barnes Capital Projects Pty Ltd.
From 19 February 2018 to 6 August 2021, PE Capital was registered as the sole proprietor of the Land. It would seem, by reference to the fact that PE Capital’s books and records show that substantial funds were advanced to it in its capacity as trustee of the Trust by at least three lenders on the security of mortgages over the Land, that PE Capital held the Land in its capacity as trustee of the Trust. The Land was acquired and developed as a 34-lot subdivision by PE Capital through a special purpose vehicle. As to certain of the underlying circumstances see ASIC v PE Capital Funds [2022] FCA 76 at [4], [21]-[23] (Cheeseman J).
In early 2019 PE Capital (as trustee) entered into several loan agreements on the security of registered mortgages over the Land. The details of these loans are outlined below. They are described in order of their current priority; that is, by the date of registration of the relevant mortgage, rather than the date the initial loan agreement was entered into.
First loan
On 9 April 2019 a loan agreement was entered into between Manda as trustee for Torquay Road Mount Duneed Unit Trust (as lender), and PE Capital as trustee for the Trust (as borrower) (Manda Loan Agreement). Under the Manda Loan Agreement, Manda agreed to lend PE Capital $2.7 million at an interest rate of 19.5 per cent per annum (with a discount rate of 12.5 per cent per annum), repayable on 9 April 2020.
This loan was provided on the security of a first registered mortgage over the Land, registered on 10 April 2019 in favour of Manda. PE Capital and Manda also entered into a General Security Agreement on 9 April 2019, whereby PE Capital granted Manda general security for the payment of all money owing in respect of the loan. Specifically, PE Capital granted a security over all of its present and after acquired personal property, including its right to be indemnified over the trust assets and a fixed charge over all of its present and after acquired property that is not personal property.
On 12 January 2021, Manda served a Notice of Default under s 76 of the TLA demanding repayment of the amount of $2.74 million.
By transfer of mortgage registered on 13 April 2021, the first mortgage was transferred from Manda to Mr Barnes for a stated assignment fee of $3,038,960.57. By transfer of mortgage registered on 14 April 2021 the first mortgage was, in turn, transferred from Mr Barnes to Runner.
PE Capital remains in default of the First Mortgage Debt, and consequently interest has been accruing at a rate of 19.5 per cent per annum capitalised on a compounding monthly basis, subject to the outcome of this litigation. It should be observed that of the three relevant loans, the first loan was made last; but the mortgage by which it was secured was registered first. As will be seen, the Priority Deed gives this loan first priority, which is why Manda (now Runner) is referred to as the “first mortgagee” in the Priority Deed and in these proceedings.
Second loan
On 8 March 2019 a loan agreement was entered into between Mt Duneed (as lender) and PE Capital as trustee for the Trust (as borrower). Under the loan agreement Mt Duneed agreed to lend PE Capital $2 million at an interest rate of 30 per cent per annum and repayable on 31 March 2020. The loan was provided on the security of a second registered mortgage over the Land, registered on 2 February 2021 in favour of Mt Duneed. It should be observed that of the three relevant loans, this loan was made second in time; but the mortgage by which it was secured was registered last. This is why Mt Duneed is referred to as the “third mortgagee” in the Priority Deed. The Priority Deed gave this mortgage second ranking priority, which is why Mt Duneed has come to be referred to as the “second mortgagee” in these proceedings.
Third loan
On 23 July 2018 a loan agreement was entered into between Mr Barnes (as lender) and PE Capital as trustee for the Trust (as borrower). Under this loan agreement Mr Barnes agreed to lend PE Capital $7.5 million at an interest rate of 1 per cent per week on the principal sum (and a default interest rate of 4 per cent per week on the principal sum commencing on the repayment date), and repayable on 20 August 2018.
This loan was provided on the security of a third mortgage over the Land, registered on 2 February 2021, in favour of Mr Barnes. By deed of assignment of debt and mortgage, this third mortgage was transferred from Mr Barnes to Jasper on 8 April 2021 and was registered on 14 April 2021. Once again, it should be observed that this loan was made first in time, and the mortgage by which it was secured was registered second. This is why Mr Barnes is referred to as the “second mortgagee” in the Priority Deed. The Priority Deed gave this mortgage third ranking priority, which is why Mr Barnes (and now Jasper) has come to be referred to as the “third mortgagee” in these proceedings.
The Priority Deed
As has been mentioned, on or about 10 April 2019 Manda, Mr Barnes and Mt Duneed (the original mortgagees) entered into the Priority Deed, which regulates the priorities between their respective security interests.
Clause 3 of the Priority Deed deals with the question of priority. Clause 3.1(q) is in the following terms:
The Securities will rank and operate at law and in equity so as to confer:
(i)First priority of [Manda’s] Securities over [Mr Barnes’] Securities and [Mt Duneed’s] Securities up to the amount specified Item 5 of the Schedule ("First Mortgagee's Priority") reduced by the net proceeds received by [Manda] upon any partial discharge of [Manda’s] Securities;
(ii)Second priority of [Mt Duneed’s] Securities over [Manda’s] Securities up to and including the amount specified in Item 7A of the Schedule ("Third Mortgagee's Priority");
(iii)Third priority of [Mr Barnes’] Securities over [Manda’s] Securities up to and including the amount specified in Item 7 of the Schedule ("Second Mortgagee's Priority");
(iv)Fourth priority of [Manda’s] Securities for the balance of money thereby secured, if any.
It will be necessary to return to other terms of the Priority Deed, in particular cl 5 which concerns the subordination of Mt Duneed’s mortgage.
Liquidation of PE Capital
On or about 30 April 2021 Mt Duneed served on PE Capital a creditor’s statutory demand in respect of its loan, although this was subsequently withdrawn and re-issued on 7 May 2021. Wollert Project Investment Pty Ltd, another creditor of the PE Capital, also served a creditor’s statutory demand on PE Capital on 7 May 2021 in respect of money advanced by it to PE Capital.
On 20 May 2021 the liabilities of PE Capital as trustee of the Trust far exceeded PE Capital’s assets and PE Capital was clearly insolvent. On that same date Barnes Capital Projects, by its director Mr Barnes, and in its apparent capacity as the sole unit holder in the Trust, removed PE Capital as trustee of the Trust pursuant to cl 88 of the Trust Deed and appointed Oratango as a new trustee pursuant to cl 85 of the Trust Deed, with immediate effect. There is some question about the validity of this appointment, but nothing seems to turn on it for present purposes.
On 4 August 2021 the Supreme Court of Victoria made an order to wind up PE Capital in insolvency, an application for this relief having been made by Wollert on 6 July 2021. Orders were also made for the appointment of the liquidators.
Transfer of the Land to Oratango
Clause 89 of the Trust Deed provides that upon liquidation PE Capital’s appointment as Trustee is automatically terminated. Further, cl 90 requires that the former trustee must immediately hand over the property of the Trust to the new trustee, and do everything necessary to vest the assets of the Trust in the new trustee.
On 6 August 2021, in purported exercise of the power of attorney incorporated by reference into its mortgage, Runner caused the Land to be transferred from PE Capital to Oratango as the new trustee of the Trust. SBA Law, which at that time acted for PE Capital, executed and registered the transfer of Land on PE Capital’s behalf. It is the liquidators’ positon that this was not done with their authority or consent.
On 21 September 2021 the liquidators lodged a caveat over the Land to secure PE Capital’s right of indemnity over assets of the Trust. They claimed an interest in the Land as chargee arising from the former trustee’s right of indemnity from trust assets.
Appointment of Mr Yeo as receiver
On 11 November 2021 the liquidators received an offer for sale for the Land in the amount of $7,050,000 and informed the other parties of this offer the following day. Mt Duneed advised that it supported the proposed sale, whereas Runner and Jasper, through their solicitors, requested further information.
On 17 November 2021 Runner appointed Mr Andrew Yeo of Pitcher Partners as receiver of PE Capital’s right of indemnity from the Trust and its equitable lien over the assets of the Trust. It was in response to this that on 22 November 2021 the liquidators filed the interlocutory application which has been mentioned, seeking orders that they be appointed receiver of PE Capital’s right to be indemnified from the assets and property of the Trust with the power to sell the Land.
Sale of the Land to Mr Koch
On 3 December 2021 Mt Duneed served on PE Capital a Notice of Default and Demand under Mortgage and s 76 of the TLA, pursuant to which it demanded repayment of the amount then secured by the second mortgage, being $4,420,122.78. As has been mentioned, on the same day Mt Duneed entered into the Contract of Sale for the Land with Mr Koch, for a purchase price of $7,400,000 and with a settlement date of 20 December 2021. Subsequently, on 16 August 2022, a Deed of Variation of the Contract of Sale was entered into by Mt Duneed and Mr Koch providing that settlement would only take place 20 days after Runner delivered up control of the electronic certificate of title.
The Contract of Sale provided for the satisfaction of the First Mortgage Debt. Special condition 1(c) is in the following terms:
settlement is conditional upon the property being freed and discharged from all liability on account of the first mortgage and the Balance due at settlement shall be applied in first instance (subject to any court order permitting said monies, or part thereof, to be paid into court) in full satisfaction of the first mortgage and thereafter in accordance with section 77(3) of the Transfer of Land Act 1958 (Vic).
Special condition 3 is in the following terms:
The obligation of the vendor to settle the sale of the land pursuant to this contract is conditional upon the vendor’s power of sale becoming exercisable at the expiration of the notice period specific in the section 76 notice (condition).
As has been mentioned, the liquidators have supported the sale of the Land to Mr Koch on the terms and conditions of the Contract of Sale. If they had been permitted to do so they would have sold the Land to Mr Koch on the same terms and conditions.
Against this background it is necessary to turn to the case advanced by Runner and Jasper. The first and critical aspect of this is whether Runner can rely on the Priority Deed or otherwise take the benefit of it even though it is not named, explicitly, as a party to it.
CAN RUNNER RELY ON THE PRIORITY DEED?
In its written submissions Runner says that it is entitled to enforce the Priority Deed on the following four bases:
(a)that the definition of “person” in cl 1.2(c) is such that its provisions extend to “successors in title” and “assigns” of Manda;
(b)that cll 5.1(a), 5.1(b) and 5.2(a) of the Priority Deed are covenants that “touch and concern” or “relate to” the Land and accordingly run with the first mortgage, by way of the operation of s 78(1) of the PLA;
(c)by reason of s 45(2) of the TLA, the rights under the Priority Deed, specifically cll 5.1(a), 5.1(b) and 5.2(a), were transferred to Runner; and
(d)that Manda holds the benefit of the Priority Deed on trust for Runner.
It should also be mentioned that Runner made reference in its written submissions to s 56(1) of the PLA. Whilst in terms Runner’s written submissions were limited to the four bases noted above, it is not apparent how the reference to s 56(1) of the PLA could have been relevant unless Runner meant to advance it as a fifth basis for asserting that it is entitled to the benefit of the Priority Deed. In this respect s 56(1) does not appear to be a condition precedent to the establishment of an entitlement to enforce the Priority Deed on any of the four bases expressly mentioned by Runner in its submissions. Nonetheless, I will also consider the significance of s 56(1) as a basis for Runner’s submission that it is entitled to enforce the Priority Deed.
Plainly, and as Mt Duneed submits, Runner bears the onus of proving that it is entitled to enforce the Priority Deed: Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154 at [54] (Beazley, Basten and Campbell JJA); Winterton Constructions Pty Ltd v Hambros Australia Limited (1991) 101 ALR 363 at 370-371 (Gummow J); and McLellan v Sharantelli Pty Ltd [2000] VSC 174 at [9] (Warren J). With this in mind I turn to the first of Runner’s arguments that it is entitled to rely on the Priority Deed.
Ground one: is Runner a “person” named in the Priority Deed?
It is uncontroversial that Manda was a party to the Priority Deed at the time of its execution. Runner submits that by reason of the extended meaning of “person” in cl 1.2(c) of the Priority Deed, which includes “an individual, a body corporate and a government and includes that person's trustees, executors, administrators, successors in title and assigns”, Runner is itself a person named as a party to the Priority Deed and is entitled to enforce its covenants, including those found in cll 5.1(a), 5.2(b) and 5.2(a). Runner submits that because of the assignment of the first mortgage from Manda to Mr Barnes, and then from Mr Barnes to Runner, Runner is an “assign” from Mr Barnes who was an “assign” from Manda, and references to the “First Mortgagee” in the Priority Deed should be regarded as references to Runner not Manda. Further, and in the alternative, Runner contends that it is a “successor in title” to Manda because it enjoys the same proprietary interest that Manda had under the first mortgage.
Runner submits that this construction is supported by cll 4.2(c), 5.2(c) and 10.2 of the Priority Deed. These clauses provide that a mortgagee that transfers, assigns or otherwise deals with its mortgage cannot do so without causing the transferee, assignee or other party “to enter into a deed by which it undertakes to be bound by the terms of this deed.” It is said that the additional deed contemplated would ensure that the assignee or successor in title is subject to the obligations under the Priority Deed, especially given that it would be entitled to enforce the Priority Deed as a “person” named as a party (by virtue of cl 1.2(c)).
I do not accept that Runner is relevantly a successor in title or an assign of Manda and thus a “person” for the purposes of cl 1.2(c) of the Priority Deed. As Mt Duneed submits, the deeds of assignment of security (dated 1 April 2021 and 13 April 2021) of the First Mortgage and First Mortgage Debt from Manda to Mr Barnes and then from Mr Barnes to Runner did no more than assign Manda’s right, title and interest in the debt and securities (see cl 2.1 of the 1 April 2021 deed and cl 2.2 of the 13 April deed, and noting the entire agreement clauses in both deeds). They did not assign the benefits and burdens of the Priority Deed itself. The benefits and burdens of the Priority Deed are distinct from the mortgages to which it relates and, absent a separate assignment, a transferee of the mortgage is not automatically entitled to the covenants of the Priority Deed. As Mt Duneed submits, cl 1.2(c) does not operate to give the benefit of the Priority Deed to a person who would not otherwise have it.
Further, and as Mt Duneed also submits, the construction of “successors in title” and “assigns” in the definition of “person” in cl 1.2(c) of the Priority Deed must be considered in context. The context here is the definition of each party being concerned with the Priority Deed and those who succeeded to or received an assignment of the benefits and burdens of the Priority Deed. On its proper construction a person will only be a “person” named in the Priority Deed if, relevantly, they are an assignee of Manda’s right, title, and interest in the Priority Deed or a successor in title of Manda in respect of the Priority Deed. It is not sufficient for a person merely to be a successor in title or an assign of the first mortgage or the First Mortgage Debt.
It follows from this that I reject Runner’s submission that cll 4.2(c), 5.2(c) and 10.2 of the Priority Deed support its construction. I accept, as Mt Duneed submits, that these clauses do no more than permit a mortgagee, who is also a party to the Priority Deed, to assign or transfer its mortgage so long as the mortgagee first procures the agreement of the assignee or transferee to be bound by obligations in the same terms as those created by the Priority Deed.
It should also be noted that Runner’s submissions that it is a “person” named in the Priority Deed and can take the benefit of the covenants contained within it sit uncomfortably with the repeated, and unsuccessful, attempts made by Runner’s solicitor, to persuade Manda’s solicitors that Manda should assign the benefit of the Priority Deed to Runner in the period 11 December 2021 to 16 December 2021 (see the relevant emails exhibited to the affidavit of Mr Nicholas Witherow affirmed 3 August 2022).
Ground two: do cll 5.1(a), 5.1(b) and 5.2(a) of the Priority Deed run with the Land by operation of s 78(1) of the PLA?
Runner contends that Manda’s rights under the Priority Deed were transferred to Runner because cll 5.1(a), 5.1(b) and 5.2(a) of the Priority Deed are all covenants which “relate to” the Land and as such are deemed to be made with Manda and its successors in title pursuant to s 78(1) of the PLA. It submits that these clauses are covenants that “touch and concern” Manda’s interest in the Land, and accordingly run with the first mortgage.
As the parties accept, it is convenient to deal with these points together as a covenant “relating to” land for the purposes of s 78(1) of the PLA is one which “touches and concerns” the land at common law: Federated Homes Ltd v Mill Lodge Properties Ltd [1980] 1 WLR 594; (1980) 1 All ER 371 at 378 (Brightman LJ, with Browne LJ and Megaw LJ agreeing); Simmons v Lee [1998] 2 Qd R 671 at 674 (McPherson JA, with Thomas and Dowsett JJ agreeing).
The requirement for two estates in land as a condition precedent to the operation of s 78(1)
It is axiomatic that for the benefit of a restrictive covenant to run with a particular piece of land (whether running by annexation, assignment, a scheme of development or a statutory mechanism such as s 78(1) of the PLA or s 45(2) of the TLA), there must be two estates in land the subject of the covenant, one of which is burdened by the covenant and one of which is benefitted by the covenant: Formby v Barker [1903] 2 Ch 539 at 542-543, 551-552 (Vaughan Williams LJ), 554 (Romer J) and 555 (Stirling LJ); London City Council v Allen[1914] 3 KB 642 at 654 and 660 (Buckley LJ), 664 and 672 -673 (Scrutton J). In the Australian context see: Quadramain Pty Ltd v Sevastapol Investments Pty Ltd (1976) 133 CLR 390 at 408-413 (Jacobs J); Pirie v Registrar-General (1962) 109 CLR 619 at 627 (Kitto J); Toohey v Gunther (1928) 41 CLR 181 at 202-203 (Higgins J); Deguisa v Lynn [2019] SASCFC 107 at [167]-[168] and [228]-[229] (Peek J); Clarke v Burnie City Council [2008] TASSC 75 at [17] (Blow J); Midland Brick Company Pty Ltd v Welsh [2006] WASC 122; (2006) 32 WAR 287 at 326-330 [205]-[222] (Hasluck J); Fitt v Luxury Developments Pty Ltd [2000] VSC 258 at [152]-[156] (Gillard J).
The converse of this principle is that there can be no restrictive covenant on land (i.e. a covenant capable of running with the land as opposed to being merely an in personam covenant) where the covenant does not generate a benefit to one estate in land and a correlative burden to another; and that is the case even if the restrictive covenant in question concerns a (singular) piece of land.
Allen was a case which involved a private individual covenanting with a local council. The local council covenanted to give the individual statutory permission to build a new road on his property in exchange for the individual covenanting not to build on a plot of land which fell at the end of the proposed street. The council, however, did not have any estate in land adjacent to, or nearby, the property to which the restrictive covenant was to apply. The individual later sold the land to a third party, who took with notice of the covenant. The third party built homes on the land without the consent of the council. In disposing of the case, Buckley LJ relevantly said the following at 654:
In the present case we are asked to extend the doctrine of Tulk v Moxhay [[1848] EWHC Ch J34; (1848) 41 ER 1143] so as to affirm that a restrictive covenant can be enforced against a derivative owner taking with notice by a person who never has had or who does not retain any land to be protected by the restrictive covenant in question. In my opinion the doctrine does not extend to that case. The doctrine is that a covenant not running with the land, but being a negative covenant entered into by an owner of land with an adjoining owner, binds the land in equity and is enforceable against a derivative owner taking with notice. The doctrine ceases to be applicable when the person seeking to enforce the covenant against the derivative owner has no land to be protected by the negative covenant. The fact of notice is in that case irrelevant.
(Emphasis added.)
Formby concerned a purchaser who, upon the sale of the entirety of a plot of land, covenanted with the vendor so as to restrict the purchaser’s use of the land. An assign of the purchaser acted in a way contrary to the covenant and the administrator and beneficiary of the vendor’s estate sought injunctive relief against the assign.
In dismissing the plaintiff’s claim, Vaughan Williams LJ observed at 550-553:
It becomes necessary, therefore, to see whether an action for an injunction can be brought, upon the principle established by the judgment of Lord Cottenham L.C. in Tulk v Moxhay. Now in the marginal note of that case it is said: “A covenant between vendor and purchaser, on the sale of land, that the purchaser and his assigns shall use or abstain from using the land in a particular way, will be enforced in equity against all subsequent purchasers with notice, independently of the question whether it be one which runs with the land so as to be binding upon subsequent purchasers at law.” But at the beginning of the Lord Chancellor’s judgment he said: “That this Court has jurisdiction to enforce a contract between the owner of land and his neighbour purchasing a part of it, that the latter shall either use or abstain from using the land purchased in a particular way, is what I never knew disputed.” These words do not cover the present case, because the land company did not purchase a part only of the vendor’s land, but the whole of it. It becomes necessary, therefore, to ascertain whether the principle of Tulk v Moxhay applies to a case in which the vendor sells his whole estate. I have not been able to find any case in which, after the sale of the whole estate in land, the benefit of a restrictive covenant has been enforced by injunction against an assignee of the purchaser at the instance of a plaintiff having no land retained by the vendor, although there are cases in which restrictive covenants seem to have been enforced at the instance of plaintiffs, other than the vendor, for the benefit of whose land it appears from the terms of the covenant, or can be inferred from surrounding circumstances, that the covenant was intended to operate. In all other cases the restrictive covenant would seem to be a mere personal covenant collateral to the conveyance. It is a covenant which cannot run with the land, either at law or in equity, and therefore the burden of the covenant cannot be enforced against an assignee of the purchaser.
But it is said that the doctrine of Tulk v Moxhay is independent of the question whether there is in law or in equity a covenant running with the land, and that the doctrine is based upon obligations on the conscience of a person taking an estate with notice of a restrictive covenant binding it. The answer, I think, is to be found in a passage in the judgment of Collins L.J. in Rogers v Hosegood [[1900] 2 Ch. 388, 407]. He said: “These authorities establish the proposition that, when the benefit has been once clearly annexed to one piece of land, it passes by assignment of that land, and may be said to run with it, in contemplation as well of equity as of law, without proof of special bargain or representation on the assignment. In such a case it runs, not because the conscience of either party is affected, but because the purchaser has bought something which inhered in or was annexed to the land bought. This is the reason why, in dealing with the burden, the purchaser’s conscience is not affected by notice of covenants which were part of the original bargain on the first sale, but were merely personal and collateral, while it is affected by notice of those which touch and concern the land. The covenant must be one that is capable of running with the land, before the question of the purchaser’s conscience and the equity affecting it can come into discussion.”
It seems to me that in the passage I have just read Collins L.J. assumes that the doctrine of Tulk v Moxhay will not apply to a contract which is merely personal and collateral. In my judgment, the covenant in the present case is merely personal and collateral; it has not been entered into for the benefit of any land of the vendor, or of any land designated in the conveyance; it is a covenant which, in my judgment, would not pass to the heirs of the vendor, notwithstanding the words of the covenant are, “covenant with the said R.H. Formby, his heirs, executors, and administrators.” There is no land designated to which the word “heirs” can be applied. R.H. Formby could have sued the purchasers for breaches in his lifetime, and I think that his executrix could have sued the purchasers for breaches after his death, but I do not think that the executrix can sue the assignee of the purchasers. There is no contractual privity and no relation of “dominancy” and “serviency” of lands which will enable an action to be brought against a person not a party to the original contract, nor do I think that the benefit of this covenant could be dealt with by a devise.
[His Lordship then quoted a passage from Jessel MR in South Western Railway Co v Gomm (1882) 20 CH D 562 at 583, before concluding:]
I think that in both these paragraphs Jessel M.R., whether describing the doctrine of Tulk v Moxhay as an extension of Spencer’s Case [(1583) 5 Co Rep 16a] or of the equitable doctrine of negative easements, regards it as something arising from the relation of two estates one to the other.
(Emphasis added.)
In the present case there is only one relevant parcel of land – the Land itself; and we are only concerned with one estate in the Land. There is no other estate in land (whether in the Land itself or in another parcel of land) which is said to be burdened by any benefit which is said by Runner to be attached to the Land and, therefore, to have run with the mortgage interest in the Land which is now held by Runner.
Accordingly, the submission that any benefit under the Priority Deed has passed with the interest of the First Mortgage from Manda to Mr Barnes and then to Runner, by the relevant covenant “touching and concerning” the Land by operation of s 78(1) of the PLA should be rejected. It is sufficient to say that there is no second estate in land to which the burden of the covenant has been attached such that the benefit is capable of flowing with the correlatively benefitted counterpart estate in land.
For these reasons it may be accepted that the covenants in the Priority Deed invoked by Runner are not covenants of the kind to which s 78(1) of the PLA applies.
The meaning of “relating to any land” in s 78(1) of the PLA
Runner’s argument that the relevant covenants under the Priority Deed are ones “relating to any land” for the purposes of s 78(1) of the PLA must fail for much the same reasons as those advanced above in relation to the requirement for there to be two estates in land. Nonetheless, it is necessary to consider the statutory regime carefully.
Section 78(1) of the PLA provides that:
A covenant relating to any land of the covenantee shall be deemed to be made with the covenantee and his successors in title and the persons deriving title under him or them, and shall have effect as if such successors and other persons were expressed.
(Emphasis added.)
As has been observed, the words “relating to” in s 78(1) are to be read as if the words “that touches and concerns” were substituted for them. As much is clear from understanding s 78(1) of the PLA in light of its history and context, rather than reading the words “relating to any land” devoid of context.
Runner’s argument (assuming, wrongly, that there was a covenant on the Land the benefit of which could run with the Land) is that the words “relating to any land” are such that they capture the relevant covenants in the Priority Deed. This is said to be because those covenants deal with regulation of a series of interests which, in turn, are tied to the Land; and the definitions of “land” in s 18 of the PLA and in s 38 of the Interpretation of Legislation Act 1984 (Vic) (Interpretation Act) seem to support a view that “land” includes interests in land. However, this is not correct.
Section 18 of the PLA is relevantly as follows:
land includes land of any tenure, and mines and minerals whether or not held apart from the surface, buildings or parts of buildings (whether the division is horizontal, vertical or made in any other way) and other corporeal hereditaments; and also a rent and other incorporeal hereditaments, and an easement, right, privilege, or benefit in, over, or derived from the land and also an undivided share in land; and mines and minerals include any strata or seam of minerals or substances in or under any land, and powers of working and getting the same.
Before proceeding further, it is important to note that the wording of s 78(1) of the PLA is derived from s 78(1) of the Law of Property Act 1925 (UK) (LPA), which latter provision is in the following relevant terms:
A covenant relating to any land of a covenantor or capable of being bound by him, shall, unless a contrary intention is expressed, be deemed to be made by the covenantor on behalf of himself his successors in title and the persons deriving title under him or them, and, subject as aforesaid, shall have effect as if such successors and other persons were expressed.
The definition of “land” in the LPA (as originally enacted) was even more expansive than that to be found in s 18 of the PLA. Section 205(ix) of the LPA in its original terms provided:
"Land" includes land of any tenure, and mines and minerals, whether or not held apart from the surface, buildings or parts of buildings (whether the division is horizontal, vertical or made in any other way) and other corporeal hereditaments; also a manor, an advowson, and a rent and other incorporeal hereditaments, and an easement, right, privilege, or benefit in, over, or derived from land; but not an undivided share in land; and "mines and minerals" include any strata or seam of minerals or substances in or under any land, and powers of working and getting the same but not an undivided share thereof; and "manor" includes a lordship, and reputed manor or lordship; and "hereditament" means any real property which on an intestacy occurring before the commencement of this Act might have devolved upon an heir[.]
This version of s 205(ix) of the LPA was the version which was in force at the time of the enactment of the Property Law Act 1928 (Vic) and was the version which remained in force at the time of the enactment of the PLA in 1958. The PLA replaced the 1928 Victorian Act. The original English version provided the basis for the definition of “land” as it appeared in both the 1928 and 1958 Victorian Acts.
Notwithstanding the broad definition of “land” in the LPA (which definition is broader than the definition of “land” in s 18 of the PLA), the words “relating to any land” in s 78(1) of the LPA have consistently been interpreted in the English cases as if they were statutory shorthand for the phrase “touches and concerns the land”, as that phrase existed in the general law prior to the enactment of the LPA. In this regard, Brightman J in Federated Homes Ltd v Mill Lodge Properties Ltd [1980] 1 WLR 594; (1980) 1 All ER 371 at 378 said:
There is in my judgment no doubt that this covenant [being the one there under consideration] ‘related to the land of the covenantee’, or, to use the old fashioned expression, that it touched and concerned the land …
The breadth of the definition of the word “land” was not, therefore, taken to expand the operation of the words “relating to any land” (in s 78(1) of the LPA) such that the benefit of a restrictive covenant was taken to be capable of attaching to an interest in land as opposed to an estate in land. The phrase “relating to any land” was simply read as synonymous with “touches and concerns the land”; however, as mentioned, a condition precedent to even asking the question of whether the relevant restrictive covenant on land “touched and concerned the land” remained whether there were two estates in land (one benefitted, and one burdened, by the relevant covenant).
Whilst it does not appear that any substantive judicial consideration has been given to the ambit of the words “relating to any land” as they appear in s 78(1) of the PLA in the Victorian context, it can be assumed that the Victorian Parliament must have been cognisant of the relevant English authorities when it enacted s 78(1) of the PLA. It must follow, therefore, that the words “relating to any land” in s 78(1) of the PLA were intended to have the same meaning as those in the English provision (as explicated by the relevant English authorities). Those words are properly to be read as synonymous with the phrase “touches and concerns the land”, rather than denoting any broader meaning.
In this context it is relevant to observe further that in Gumland Property Holdings Pty Limited v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237 at 264-265 [74], the High Court accepted the English test of “touches and concerns the land” as applicable in the context of restrictive covenants on land. Referring to the observations of Lord Oliver of Aylmerton in P & A Swift Investments v Combined English Stores Group Plc [1989] AC 632 at 642, the High Court set out the relevant matters for consideration on the question of whether a covenant touches and concerns the land as follows:
“(1) the covenant benefits only the reversioner for time being, and if separated from the reversion ceases to be of benefit to the covenantee; (2) the covenant affects the nature, quality, mode of user or value of the land of the reversioner; (3) the covenant is not expressed to be personal (that is to say neither being given only to a specific reversioner nor in respect of the obligations only of a specific tenant); (4) the fact that a covenant is to pay a sum of money will not prevent it from touching and concerning the land so long as the three foregoing conditions are satisfied and the covenant is connected with something to be done on, to or in relation to the land.”
(Emphasis added.)
See also McDonald's Australia Limited v Bendigoand Adelaide Bank Limited and Benalla Retail Investments Pty Ltd [2014] VSCA 209 at [74] (Hansen JA, with Garde AJA and Beach JA agreeing) and Specialist Diagnostic Services Pty Ltd v Healthscope Ltd (2012) 41 VR 1 at 35 [177] (Buchanan, Mandie and Osborn JJA).
Mt Duneed submitted that because Runner has wrongfully and inequitably sought to defeat repayment of the mortgage for its own profit, it should be disqualified from any entitlement to interest during such time as the debt has thereby remained unsatisfied. It was said that it would be unjust for the court to allow Runner to profit from its own wrongdoing by making Mt Duneed “pay” the capitalised interest from 20 December 2021.
Although Runner and Jasper did not address the issue of interest in their submissions directly, they did question whether Mr Koch would have been able to settle the Contract of Sale on 20 December 2021. For the reasons given above, however, I have rejected their submissions on this point.
Speaking in the analogous context of the relationship between a mortgagee and mortgagor, I accept that it is the usual position that, where a mortgagor wishes to pay out the mortgagee and redeem the property and the mortgagee resists that course, the mortgagee becomes disentitled to interest upon satisfaction of the two following conditions: (i) that the mortgagor provides a proper tender of the funds necessary to discharge its debt to the mortgagee; and (ii) that the mortgagor holds the amount in question available despite it having been refused by the mortgagee: Devon Nominees at 484; Bishop v Church (1751) 2 Ves Sen 371; 28 ER 238 at 239; Gyles v Hall (1726) 2 P Wms 378; 24 ER 774 at 774.
There are, however, exceptions to the usual position just described. They generally involve circumstances in which the mortgagee, through its own failure to produce documents of title, prevents a mortgagor (willing to tender funds to discharge the debt) from tendering the relevant funds: LordMidleton v Eliot (1847) 15 Sim 531 at 726-727; 60 ER 725; James v Rumsey [1879] 11 Ch D 398 at 402-404. See, also, Devon Nominees at 484-486 for a useful summary of the usual position and its exceptions, with McMullin J explaining at 485 that the exceptional cases like Lord Midelton and James v Rumsey turned on a willingness of the mortgagor to pay the amount owing and that, in that context:
To have allowed the mortgagee subsequently to set up a lack of tender by the mortgagor so as to continue his liability for interest would have enabled the mortgagee to take advantage of his inability to perform his part of the settlement namely to hand over the title deeds
It may be observed, however, that these cases involved the accrual of interest under a contractual obligation as between parties related as mortgagor and mortgagee. That is a different position to the present case, in which the effect of the interest accrual pursuant to the first mortgage affects Mt Duneed not directly via a contractual obligation but, rather, impacts upon Mt Duneed’s equity in the Land as the interest accumulated under the First Mortgage continues to grow.
There are, however, clearly established equitable obligations which regulate the relationship as between mortgagees of the same property, even if there is, in fact, no contractual basis for their obligations inter se. The observation of Beach J in Jacobson that it is strongly arguable that the only duty a first mortgagee owes to a second mortgagee is a duty to protect the second mortgagee’s financial interest in the property is relevant in this regard. As has been emphasised, a mortgagee’s interest in a mortgage is limited to securing repayment (at any given moment) of the funds which are due under the mortgage, subject to whatever contractual entitlement to interest may exist.
In the present case the effect of Runner opposing the sale to Mr Koch (if it is assumed that the interest continued to accrue pursuant to the First Mortgage) has been that Mt Duneed’s equity in the property has been reducing (because of the priority of Runner’s mortgage) for the entire period that Runner has opposed the completion of the Contract of Sale. I have determined that there was no legal or equitable basis for Runner to take this position.
In these circumstances, and because it was Runner which prevented the completion of the Contract of Sale, it would have been unjust for Mt Duneed to be required to bear the burden of Runner’s interest throughout that period, diminishing Mt Duneed’s equity until such time as the court determined that the sale to Mr Koch (or some other party) should proceed. Mt Duneed has not been responsible for the delay of the performance of the Contract of Sale; responsibility lies with Runner.
Beyond that injustice, it is of course the case that the Contract of Sale, had it been performed, would have caused Runner to be repaid in full. This would have satisfied its only interest in the First Mortgage. Accepting that a first mortgagee has an equitable duty not to sacrifice the financial interests of puisne mortgagees, by opposing the performance of the Contract of Sale in a situation where its accrual of interest has significantly diminished Mt Duneed’s equity in the Land Runner has breached that duty. Equity would not permit such a result and, accordingly, would restrain a first mortgagee who opposes a legally permissible sale of a property subject to multiple mortgages from claiming interest from the date at which the relevant puisne mortgagee would have been able tender the funds in question.
Insofar as Runner has said “there must be an actual tender” of the relevant funds (in the sense of an attempt to tender the funds) and that the mortgagor must, upon refusal of that tender, keep the funds available, and that Mt Duneed did not have the funds to tender at any time, and that this creates an impediment to Mt Duneed’s claim that the interest under the First Mortgage stopped accruing at some time around 20 December 2021, I would make the following observations.
First, the line of cases which include Devon Nominees, Bishop, and Gyles involves the relationship between mortgagee and mortgagor, which relationship is conditioned by the mortgage contract. No such contractual relationship exists as between Runner and Mt Duneed.
Secondly, and critically, to hold that Mt Duneed must have actually had the funds to pay out Runner’s mortgage in full in order for Runner’s interest accrual to be paused would be contrary to the principle that a second mortgagee is entitled to sell the mortgaged land free of the first mortgage and buy the first mortgagee out from the proceeds of sale, as outlined in Kaolim. Such a finding would also be contrary to the approach to s 77(1) of the TLA which I have taken above in light of the principle expressed in Kaolim. Section 77(1) permits a second mortgagee to sell a property and pay out the first mortgage from the proceeds of sale. It would be inconsistent with that statutory power of sale for an equitable rule (especially one regulating the relationship between a mortgagee and a mortgagor) – that a mortgagor must actually have funds to make a tender for that tender to disentitle the mortgagee to further accrual of interest under the mortgage – to condition an analogous scenario as between a first mortgagee and a second mortgagee.
Having regard to my conclusion that there was an extant Contract of Sale between Mt Duneed and Mr Koch as at 20 December 2021 I accept that Runner would have had its mortgage debt repaid in full as of that date, and ought not be entitled to accumulate interest from that date.
THE LIQUIDATORS’ CLAIMS AND THE CLAIMS AGAINST THE LIQUIDATORS
The liquidators expressly acknowledged in their written submissions and orally that their claims (and defences to Runner’s claims against them) are conditional upon Mt Duneed being restrained from completing the Contract of Sale with Mr Koch. Given that the liquidators’ substantive application in the proceeding has been entirely contingent upon the court restraining the completion of the Contract of Sale, and having regard to the circumstances which have apparently unfolded, it will be necessary to hear from the liquidators as to the status of their applications. In circumstances where Mt Duneed and Mr Koch would have been permitted to proceed with the Contract of Sale if Runner had not sold the Land, it has been unnecessary to give further consideration to the liquidators’ applications.
ORDERS
As has been indicated, the cross claim brought by Runner and Jasper will be dismissed. I will hear the liquidators as to their position more generally in light of these reasons for judgment. Having regard to Mt Duneed’s interlocutory application of 26 June 2023 to re-open its case and amend its cross claim in the face of the alleged sale of the Land by Runner, I will hear the parties on that application and the future conduct of the proceeding, as well as on the question of the costs of the matters litigated to date.
I certify that the preceding two hundred and eighty (280) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice McEvoy. Associate:
Dated: 5 July 2023
SCHEDULE OF PARTIES
VID 585 of 2021 Respondents
Fourth respondent:
ORATANGO PTY LTD (ACN 646 517 615)
Respondents by second cross claim
Fourth cross respondent by second cross claim:
GIDEON ISAAC RATHNER AND MATTHEW BRIAN SWEENY IN THEIR CAPACITY AS JOINT AND SEVERAL LIQUIDATORS OF PE CAPITAL NOMINEES PTY LTD (IN LIQUIDATION) (ACN 615 298 201)
Fifth cross respondent by second cross claim:
MANDA CAPITAL HOLDINGS PTY LTD (ACN 168 795 088)
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