Re Mangan; Ex parte Andrew

[1983] FCA 135

Re: ROSS ALEXANDER MANGAN
Ex parte: WILLIAM EDWARD ANDREW
No. W729 of 1981
Bankruptcy
(1983) 123 ALR 633

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
Beaumont J.

CATCHWORDS

Bankruptcy - Application by trustee for orders and directions in respect of the amount payable under a mortgage to which the bankrupt was a party - Default under mortgage - Proper amount payable on and for discharge - Acceleration of payment of principal sum upon default - Whether bankrupt mortgage liable to pay balance remaining by way of interest - Method of calculating interest owing.

Bankruptcy Act 1966 - section 135(4)

HEARING

SYDNEY

#DATE 5:7:1983

ORDER

I direct the applicant to bring in short minutes to give effect to the reasons for judgment.

JUDGE1

This is an application made pursuant to s.134(4) of the Bankruptcy Act 1966 seeking orders and directions in respect of the amount payable under a mortgage to which the bankrupt, Ross Alexander Mangan, ("the bankrupt") was a party. The application is made by William Edward Andrew as trustee of the estate of the bankrupt, a sequestration order having been made on 17 August, 1981. The respondents to the application are the mortgagee, Burrawong Investments Pty. Limited, ("the mortgagee"), the wife of the bankrupt, Olive Mangan and Mr. Andrew as the trustee of her estate. Mr. Andrew is the trustee of the estate of Mrs. Mangan under a deed of assignment dated 3 March, 1982 made under Part X of the Act. Mrs. Mangan was also a party, as mortgagor, to the mortgage the subject of this application.

By the subject mortgage, dated 14 March, 1980, the bankrupt and Mrs. Mangan, as joint tenants, mortgaged certain lands under the provisions of the Real Property Act 1900 to the mortgagee. The mortgage was a registered second mortgage. The first mortgagee was United Permanent Building Society Ltd.

The mortgage secured the repayment to the mortgagee of the principal sum of $40,000 in these terms:

"Firstly -- The mortgagor will pay to the mortgagee the principal sum, or so much thereof as shall remain unpaid, on the 14th day of March, 1990."

The mortgage then provided for the payment of interest in a lump sum of $40,000 and for the payment of principal and interest by instalments as follows:

"Fourthly -- That the Mortgagors will pay to the Mortgagee the principal sum of Forty thousand dollars ($40,000.00) together with the sum of Forty thousand dollars ($40,000.00) as interest thereon up to the date annexed hereinafter mentioned making a total sum of Eighty thousand dollars ($80,000.00) on the 14th day of March, 1990 and in the meantime by One Hundred and Nineteen (119) equal monthly payments of Six hundred and sixty six dollars and seventy five cents ($666.75) and one (1) final payment of Six hundred and fifty six dollars and seventy five cents ($656.75) on the 14th day of each and every month until the said 14th day of March, 1990 and on the said lastmentioned date a balance of the said total sum of Eighty thousand dollars ($80,000.00) which shall then be due and owing after reduction by the amount of the instalments aforesaid, the first of such instalments to be paid on the 14th day of April, 1980."

Default was dealt with, so far as material, in the memorandum annexed to the mortgage in these terms:

"6. Upon 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, or upon default being made in the observance or performance of any of the convenants contained herein or in the mortgage or implied therein by the Real Property Act, 1900, or the Conveyancing Act, 1919 the mortgagee shall . . . be at liberty to exercise all or any of the powers of a mortgagee under the said Acts immediately upon or at any time after default as hereinbefore mentioned, subject however to compliance with any requirements of the said Acts in respect of the exercise of such powers. If at any time default shall be made in the due payment of the interest on any of the days when the same respectively shall become payable or within the time thereafter mentioned in the schedule to the mortgage, or, if the power of sale given to the mortgagee under either of the said Acts shall become exercisable, then the principal sum shall immediately become due and the mortgagor will thereafter pay the same on demand."

It will be noted that no reference is made in this provision to any acceleration of the payment of interest then outstanding.

On about 22 December, 1981, the mortgagee, by its solicitor, served upon the bankrupt and his wife a notice pursuant to s.57(2)(b) of the Real Property Act, 1900 (N.S.W.) and s.111(2)(b) of the Conveyancing Act, 1919 (N.S.W.). The notice recited default in payment of a balance alleged to be owed as follows:

"Mortgage Advance $40,000.00 Interest as per Mortgage $40,000.00 $80,000.00 Less repayments $10,799.07 $69,200.93 Add Legal costs 30.00 Balance owing $69,230.93"

The notice required payment of the balance owing and notified the mortgagors that unless the requirements of the notice were complied with within one month after service, the mortgagee proposed to exercise its power of sale.

In about July, 1982, the mortgagee agreed to acquire by purchase the interest of the first mortgagee in its mortgage. Pursuant to that agreement, the first mortgagee assigned to the mortgagee its interest as first mortgagee under a deed of assignment executed in about August, 1982.

The requirements of the notice given in December, 1981 pursuant to s.57(2) (b) of the Real Property Act 1900 (N.S.W.) and s.111(2) (b) of the Conveyancing Act, 1919 (N.S.W.) were not complied with. Subsequently, proceedings were taken by the mortgagee to obtain possession of the mortgaged premises. Possession was obtained in about September 1982.

Early in 1983, the mortgagee exercised its power of sale of the mortgaged premises. Completion of the contract of sale made in exercise of the power of sale took place in March 1983. Because of his limited knowledge of these events, the applicant was unable to tender evidence of the precise dates upon which certain of the events to which I have referred, occurred.

On completion of the contract for sale, a dispute arose between the mortgagee and the applicant as to the proper amount required to be paid on and for its discharge. The mortgagee claimed that the sum of $69,699.20 was payable for this purpose as at March, 1983. The applicant claimed that the amount payable for this purpose was $42,668.88 calculated as follows: "Principal sum $40,000.00 Less one half of instalments paid 5,333.78

$34,666.22 Plus on account of interest 8,002.66

$42,668.88"

The amount on account of interest was calculated as follows: "36 instalments of $666.75

payable under the mortgage

to March, 1983 $24,003.00 Less amounts paid 10,667.56 $13,336.44 Less instalments attributable to

principal repayment 5,333.78 $8,002.66"

(There are minor errors in these calculations, but it is not necessary to deal with these at this stage.)

The applicant has paid the mortgagee the sum of $43,000 on account of the discharge of the mortgage. The sum of $26,699.20, being the disputed balance, is held in an account pending the determination of the dispute.

There is in evidence a statement indicating that the net proceeds from the sale were made up as follows:

Sale Price $126,250.00 Add
One half proportion of interest on deposit $251.80 License fee 8 weeks and five days 610.00 861.80 $127,111.80 Deduct
Council rates 1983 $537.70 unpaid Vendor's allowance 29 days $42.72 Arrears and interest 1,906.14 Water rates 1982/1983 $221.53 unpaid Vendor's allowance 129.28 Arrears and meter accounts 481.54 Registration fee on Discharge $127,111.80
of Mortgage, Withdrawal of Caveats, Withdrawal of Writs $150.00
Allowance for items removed from premises 500.00
Valuation fees 200.00
Auction fees 850.00
Agents Commission 3,670.00
Amount to Discharge First
Mortgage 47,517.42
Amount paid on account of amount required to discharge second mortgage 43,000.00
Vendor's solicitors' costs and disbursements as per memorandum dated 8 March, 1983 (excluding costs and disbursements on assignment of Mortgage) 1,955.50
Additional Disbursements
Fee on special clearance of Building Society cheque 10.00 $100,412.60
Net proceeds from sale $26,699.20

In the present case, no question arises of the entitlement, if any, of a mortgagor to compel an early discharge of his mortgage. In this connection, s.93 of the Conveyancing Act, 1919 (N.S.W.) confers upon a mortgagor an entitlement to redeem the mortgaged property although the time for redemption has not arrived; but in such case he shall pay to the mortgagee, in addition to any other moneys then owing under the mortgage interest on the principal sum secured thereby for the unexpired portion of the term of the mortgage. Prior to this section, a mortgagor could neither make a good tender of the mortgage money, nor take proceedings to redeem the mortgaged property, before the time fixed for redemption by the mortgage has passed, unless the mortgage expressly gave him the right to pay off before the due date, or the mortgagee had taken steps to recover payment of the principal, by taking possession or otherwise (see Brown v. Cole (1845) 14 Sim. 427; 60 E.R. 424; Bovill v. Endle (1896) 1 Ch. 648; Hyde Management Services Pty. Ltd. v. F.A.I. Insurances Ltd. (1979) 53 A.L.J.R. 502 at 503; Stuckey, The Conveyancing Act, 2nd Ed. at p.205). Given this general rule and the requirement of s.93 that interest must be paid for the unexpired portion of the term, it is necessary, in each case, to examine the terms of the mortgage instrument in order to determine whether a right to redeem prior to the term of the mortgage is thereby conferred upon the mortgagor and, if so, the terms upon which such a right is conferred. This is a question of construction of the documentation (see Stocks & Enterprises Pty. Ltd. v. McBurney (1977) 1 BPR 9521; Branwood Park Pastoral Co. Pty. Ltd. v. Willing & Sons Pty. Ltd. (1977) 1 BPR 9534).

In my opinion, the question here is a different one. This is not a case of a mortgagor seeking to force an early redemption upon an unwilling mortgagee. Rather, it is a case of a mortgagee electing to exercise its contractual or statutory power of sale. Upon the exercise of that power, the mortgagee received, by way of net proceeds of sale, funds that were more than sufficient to discharge the principal sum of $40,000. The question for determination is whether the mortgagor is liable to pay the balance remaining of the sum of $40,000 by way of interest, notwithstanding that the principal sum has now been repaid.

Construction of the mortgage

In the first instance, it is necessary to construe the mortgage so far as it deals with the liability to pay interest. Prima facie, if the principal debt is merged in a judgment or discharged by payment or if the amount due is tendered, interest ceases to run from that date, although outstanding arrears of interest may still be claimed (see Halsbury, Laws of England 4th Ed. Vol. 32 para. 114 at p.58). Notwithstanding this presumption, does this mortgage instrument, in its terms, provide that interest is to continue to accrue for the future, despite the repayment of the principal sum upon the exercise of the mortgagee's power of sale? In my opinion, it does not.

The submissions made on behalf of the mortgagee on this aspect of the case were put in a number of ways. In one branch of the argument, it was submitted that there had been, in effect, a capitalisation of interest. In my opinion, there was no capitalisation of interest in the present case. The mortgage document clearly distinguished between principal and interest throughout. The fact that the fourth covenant required a single instalment of principal and interest to be paid monthly does not, in my view, change the character of what is interest into capital by a process of capitalisation (c.f. Dalgety & Co. Ltd. v. Beviss (1921) S.A.S.R. 252; Bank of New South Wales v. Brown (1982) 45 A.L.R. 225; Commercial Banking Company of Sydney Ltd. v. Federal Commissioner of Taxation (1982) 83 A.T.C. 4208).

Further, it was submitted that the mortgage, at all times, imposed upon the mortgagor a liability to pay a total sum of $80,000, of which the sum of $40,000 was interest. It was submitted that this liability simply remained on foot, notwithstanding the repayment of the principal sum and the discharge of the mortgage before March, 1990.

In my opinion, the argument gives no weight to the provisions of the default clause 6, which is, in my view, the relevant operative provision in the events which have happened, namely, default leading to the exercise of the power of sale. In my opinion, little assistance is to be gained, for present purposes, from the terms of the fourth covenant. It is dealing with a different situation, that is, the position that the mortgage remains on foot until March, 1990 and that instalments of principal and interest are paid over that period in accordance with its provisions. In the events that happened, this did not occur. The mortgagor having defaulted, it is appropriate, in my opinion, to give effect to the default provision, clause 6, independently of the operation of the fourth covenant.

By clause 6, it is provided that, upon default, the repayment of the principal sum is accelerated. However, there is no suggestion in clause 6 that in the event of default, there is also to be an acceleration of the liability to pay interest or, at least, so much of the interest of $40,000 as is then outstanding. Applying the ordinary principles of construction in such a case, it is proper, in my view, to infer that it was the intention of the parties that, if default should occur, there should be no acceleration of interest.

In my opinion, in the absence of any acceleration of the payment of future interest, it is extremely unlikely that the parties would have contemplated that, upon default and upon repayment of the principal sum, the mortgagor should nonetheless remain liable to pay "interest" by way of instalments until March, 1990. Certainly, the mortgage provides no machinery for such an extraordinary event: the instalments stipulated for clearly comprise principal as well as interest. Prima facie, as I have said, interest ceases to accrue upon repayment of the principal sum. In my view, there is nothing, either in the language used in the mortgage or in the surrounding circumstances, to displace that ordinary presumption.

In my opinion, on the true construction of the mortgage instrument, interest thus ceases to run upon repayment of the whole of the principal sum and the mortgagor is only liable for interest until March 1983, when the net proceeds of sale were received by the mortgagee. A separate question arises as to the method of calculation of interest owing up to that date.

Method of calculation of interest owing

The fourth covenant of the mortgage contemplated that monthly instalments of $666.75 would be paid, such instalments to be payments of both principal and interest, presumably in equal parts. However, although the fourth covenant required the payment by 14 March, 1983 of 36 instalments of $666.75 each, totalling $24,003.00, in fact, only $10,667.56 was paid by that date. (The net proceeds of sale were received shortly thereafter.) The only evidence tendered was that the total sum of $10,667.56 was paid by 14 March, 1983 so that default first occurred well before that date.

Prima facie, the fourth covenant contemplates that the monthly instalments will comprise equal portions of principal and interest (c.f. Pannam, The Calculation of Interest at a Rate "Per Cent Per Annum" (1967) 40 A.L.J. 376 at p.379; Pannam, The Law of Money Lenders in Australia and New Zealand (1965) at pp.259, 269; Moneylending Act, 1941 (N.S.W.), s.3(3)). On the other hand, if default in payment were to occur, different considerations may apply. Where the debtor claims to be discharged by reason of payments which were not specially made in respect of either the principal or the interest of the mortgage, the rule is that a general payment shall be applied in the first place to sink the interest, before any part of the principal is discharged (see Fisher & Lightwood's Law of Mortgage, 9th Ed. p.543). In Falk v. Haugh (1935) 53 C.L.R. 163, Rich, Dixon, Evatt and McTiernan, JJ. said (at p.173):

"It has long been a rule that when payments are received generally on account of a debt, which is in part interest and in part principal, they are treated as applicable to interest in priority to principal. In Crisp v. Bluck a bond creditor received some payments, and afterwards recovered judgment. It was decreed that the payments ought to go in discharge of the interest first. The rule was again enunciated by Lord Keeper Wright in Chase v. Box. It has, however, been little discussed. The most recent statement of the rule is contained in Venkatadri Appa Row v. Parthasarthi Appa Row. There Lord Buckmaster said:

'There is a debt due that carried interest. There are moneys that are received without a definite appropriation on the one side or the other, and the rule which is well established in ordinary cases is that in those circumstances the money is first applied in payment of interest and then when that is satisfied in payment of capital. That rule is referred to by Rigby L.J. in the case of Parr's Banking Co. v. Yates in these words:

"The defendant's counsel relied on the old rule that does, no doubt, apply to many cases, namely, that, where both principal and interest are due, the sums paid on account must be applied first to interest. That rule, where it is applicable, is only common justice. To apply the sums paid to principal where interest has accrued upon the debt, and is not paid, would be depriving the creditor of the benefit to which he is entitled under his contract."'

(See to Bamundoss Mookerjea v. Omeish Chunder Raee.) This rule affords only a presumption in the absence of any actual or express appropriation by the debtor or the creditor. But it is treated by text writers as a rule governing the application of payments in respect of mortgage moneys (Fisher on Mortgages, 6th Ed. (1910), para. 1514, p.770; Coote on Mortgages, 9th Ed. (1927), vol. II, ch.54, sec. 6, p.1237)."

It is, however, the right of the debtor, in the first instance, to declare upon what he pays the money. When he has so declared, the destination of the payment cannot be changed (see Fisher & Lightwood, op. cit. at p.543; Re Walsh; Ex parte Deputy Commissioner of Taxation (1982) 42 A.L.R. 727).

This aspect of the matter will be dealt with, if necessary, by the taking of accounts (see below).

Penalty

The applicant further submits that, by dint of the reasoning in Wanner v. Caruana (1974) 2 N.S.W.L.R. 301 and in O'Dea v. Allstates Leasing System (W.A.) Pty. Ltd. (1983) 57 A.L.J.R. 172, the additional interest claimed by the mortgagee was a penalty and thus unenforceable. Having regard to the conclusion I have reached that there was no acceleration of any liability to pay interest, no question of penalty could arise nor, in my opinion, for similar reasons, could it be said that the mortgagee is seeking to clog the equity of redemption (see Citylands & Property (Holdings) Ltd. v. Dabrah (1968) Ch. 166; Sykes, The Law of Securities, 3rd Ed. (1978) at p.61).

Costs on assignment of first mortgage

The applicant further submits that the mortgagee is not entitled to debit the mortgagor with professional and other costs and expenses incurred in taking the assignment of the first mortgage. Clause 5 of the memorandum annexed to the mortgage renders the mortgagor liable to the mortgagee for all costs and expenses incurred by the mortgagee for the preservation of the security. In my opinion, in the absence of special circumstances (and none exist here), it was a reasonable step for the mortgagee, as a second mortgagee, to buy in the interest of the first mortgagee so as to protect its position under the second mortgage. In my opinion, the mortgagee is entitled to the costs and expenses incurred in that connection (c.f. Bolingbroke v. Hinde (1884) 25 Ch. D. 795).

Form of Relief

I direct the applicant to bring in short minutes to give effect to these reasons. I note that counsel for the mortgagee has indicated that, if necessary, the taking of accounts may be ordered (see Bankruptcy Act, 1966, s.30(2)).