Re S & D International Pty Ltd (in liq) (rec & mgr apptd)

[2009] VSC 225

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL COURT

No 7807 of 2008

IN THE MATTER OF S & D INTERNATIONAL PTY LTD (ACN 075 030 447)(in liquidation) (receiver and manager appointed)

GEOFFREY NIELS HANDBERG in his capacity as liquidator of S&D INTERNATIONAL PTY LTD (ACN 075 030 447) (in liquidation) (receiver and manager appointed) AND
S&D INTERNATIONAL PTY LTD (ACN 075 030 447) (in liquidation) (receiver and manager appointed)  

Plaintiffs

v  

MIG PROPERTY SERVICES PTY LTD

(ACN 006 657 174) & ORS

Defendants

No 6325 of 2008

PRADEEP TIWARI

Plaintiff

v

MIG PROPERTY SERVICES PTY LTD (ACN 006 657 174)
AND PAUL VARTELAS (as receiver and manager of S&D INTERNATIONAL PTY LTD (ACN 075  030 447) (in liquidation) (receiver and manager appointed)

Defendants

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JUDGE:	ROBSON J
WHERE HELD:	Melbourne
DATE OF HEARING:	4, 5, 9, 10, 11, 12 February, 20, 21, 23, 28, 29 April 2009
DATE OF JUDGMENT:	9 June 2009
CASE MAY BE CITED AS:	Re S&D International Pty Ltd (in liquidation)(receiver and manager appointed)
MEDIUM NEUTRAL CITATION:	[2009] VSC 225

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CORPORATIONS – Company in liquidation – Company trustee of unit trust – Mortgage debenture over trust assets – Receiver and manager appointed over assets and undertaking of company - First registered mortgagee of trust property - Mortgagee in possession of trust property – Mortgagee appoints agent in possession – Sale of property by agent in possession – Sale proceeds exceeds mortgagee’s debt and expenses of sale – Agent in possession fails to discharge mortgagee’s debt – Land subject to unregistered second mortgage and other equitable charges – Subsequent interest holders in dispute as to their respective entitlements - Mortgagor and agent fail to calculate surplus and pay surplus into Court – Mortgagor and agent fail to account to liquidator and subsequent interest holders for moneys applied to satisfy debt and expenses of mortgagee and agent – Whether mortgagee and agent obliged to retain surplus and pay it to subsequent equitable interest holders in accordance with their entitlement and priority under s 77(3) of the Transfer of Land Act 1958 – Whether mortgagee and agent entitled to the costs of inquiring into and determining who they should pay the surplus to as an expense against the proceeds of sale – Whether mortgagee’s debt satisfied in full on sale of land – Whether mortgagee and agent obliged to account for surplus on settlement of sale of land – Whether mortgagee and agent are entitled to any expenses incurred subsequent to settlement of sale of land

CORPORATIONS – Receiver and manager appointed out of Court – Mortgagor’s debt satisfied in full – Receiver and manager remains in possession of other assets of mortgagor – Whether receiver and manager obliged to deliver up real property in his possession to the liquidator - Whether appointment of receiver and manager is terminated.

CORPORATIONS – Whether orders against mortgagee, agent in possession and receiver and manager should be made under ss 423(1), 425, 434(1)(b), 434A and 434B(1) and (5) of the Corporations Act2001.

CORPORATIONS LAW – Lien for “salvage costs” – Whether equitable lien extends to cover expenses of liquidator in procuring mortgagee and agent in possession holding surplus moneys to pay those moneys into Court – Whether expenditure exclusively for that purpose – Application of principle in Universal Distributing.

PROPERTY LAW – Transfer of Land Act 1958 – Construction of s 77(3) – Whether surplus moneys on land sold by mortgagee held on trust for subsequent equitable mortgagees and chargees – Whether reference to subsequent mortgagees and chargees in s 77(3)(c) includes unregistered mortgagees and chargees – Whether s 77(3) should be construed subject to legal and equitable interests otherwise recognised at law – s 77(3) of the Transfer of Land Act 1958.

PROPERTY LAW – Mortgage – Whether mortgagee entitled to costs, charges and expenses beyond those “properly and reasonably” incurred.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M J Galvin	Mills Oakley Lawyers
For the First and Second Defendants	Mr D G Robertson	Comlaw
The Third Defendant	In person	In person
For the Fourth Defendant	Mr A F Hamlyn-Harris	Velos Lawyers
For the Fifth Defendant	Mr A M  Donald	Eggleston Whelan
For the Sixth and Seventh Defendants	Mr J P Tomlinson	Madgwicks

Adams v Bank of New South Wales [1984] 1 NSWLR 285

Adsett v Berlouis (1992) 109 ALR 100

Ansett Australia Ground Staff Superannuation Plan Pty Ltd v Ansett Australia Ltd (2002) 174 FLR 1

ANZ Banking Group v Evans (1992) 2 Qd R 230

Australian Securities and Investments Commission, Re Lanepoint Enterprises Pty Ltd (receivers and managers appointed) [2006] FCA 1493

Avco Financial Services v White [1977] VR 561

Australian Co-operative Development Society Ltd (in liq) [1978] Qld R 395

Avco Financial Services v Commonwealth Bank of Australia (1989) 17 NSWLR 679

Bank of New South Wales v Adams [1982] 2 NSWLR 659

Bank of New Zealand v Development Finance Corporation of New Zealand [1988] 1 NZLR 495

Banner v Berridge (1881) 18 Dh D 254

Barry v Heider (1914) 19 CLR 197

Batten v Wedgwood Coal and Iron Co (1884) 28 Ch D 317

Beddoe, Re [1893] 1 Ch 547

Beeby v Official Assignee of Pickering and Pickering [1953] NZLR 832

Bell, Re (1886) 34 Ch D 462

Bolingbroke v Hinde (1884) 25 Ch D 795

Bowesco Pty Ltd v Cronin [2008] WASC 286

Challenge Bank Ltd v Hodgekiss Unreported, NSWSC, Young J, 17 August 1995

Charles v Jones (1887) 35 Ch D 544

Colin D Young Pty Ltd v Commercial & General Acceptance Ltd (1982) NSW ConvR 56,572

Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64

Dean-Willcocks v Nothintoohard Pty Ltd (in liq) [2006] NSWCA 311

Enterprises Pty Ltd (receivers and managers Appointed) [2007] FCAFC 85

Equus Financial Services Ltd v RMBL Investments Pty Ltd (1996) 22 ACSR 744

Expo International Pty Ltd v Chant (1979) 2 NSWLR 820

F & G Nominees Pty Ltd v Coxon [2007] WASC 113

Fraser v Australian Securities & Investments Commission, In the Matter of Lanepoint [2007] FCAFC 85.

Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2) [1993] Ch 171.

Hall v Poolman (2009) 22 ACSR 139.

Hewett v Court (1983) 149 CLR 639

Hope v Hope [1977] 1 NZLR 582

Incorporated Trustees of Australian Clergy Provident Fund v Perpetual Executors and Trustees Association of Australia Ltd [1957] VR 390

Just Juice Corp Pty Ltd; James v Commonwealth Bankof Australia (1992) 37 FCR 445

Kennedy v General Credits (1982) BPR 9456

Kerabee Park Pty Ltd v Daley [1978] 2 NSWLR 222

Mangan, Re, ex parte Andrew (1983) 123 ALR 633.

Mercantile Credits v ANZ Banking Group Ltd (1988) 48 SASR 407

Moodemere Pty Ltd (in liq) v Waters [1988] VR 215

Morrison, Bennell v Smith [1962] Tas SR 337

Murrell; Ex parte Official Trustee in Bankruptcy (1984) 57 ALR 85

Price v Price (1904) 29 VLR 719

Radcliff, In re (1856) 22 Beav 201, 52 ER 1085

Regent’s Canal Ironworks Co; Ex parte Grissell (1875) 3 Ch D 411

Rottenberg v Monjack (1993) BCLC 374.

Shirlaw v Taylor (1991) 102 ALR 551

Thomson’s Mortgage Trusts, Re [1920] 1 Ch 508.

Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171

Vink v Tuckwell [2008] VSC 100

Wallis, Re; ex parte Lickorish (1890) LR 25 QBD 176.

Weld-Blundell v Synott [1940] 2 KB 107

West v Diprose [1900] 1 Ch 337.

West London Commercial Bank v Reliance Permanent Building Society (1885) 29 Ch D 954

Westpoint Finance Pty Ltd v Chocolate Factory Apartments Ltd [2002] MSWCA 287.

TABLE OF CONTENTS

INTRODUCTION.............................................................................................................................. 1

THE ISSUES BETWEEN THE LIQUIDATOR AND MIG AND MR VARTELAS.............. 7

THE ACTIONS OF MIG AFTER THE SALE OF THE FOOTSCRAY PROPERTY............ 10

THE ACCOUNTING BY MIG AND MR VARTELAS............................................................ 15

COLONEL MALHOTRA  AND MR MOND EXPENSES....................................................... 19

THE PLAINTIFFS’ ARGUMENT ON THE MORTGAGEE’S OBLIGATIONS................. 23

MIG’S AND MR VARTELAS’ ARGUMENT............................................................................ 24

THE TRANSFER OF LAND ACT 1958........................................................................................ 27

GENERAL PRINCIPLES................................................................................................................ 28

JUDICIAL AUTHORITIES............................................................................................................ 30

PRINCIPLES DERIVED FROM AUTHORITIES..................................................................... 48

FINDINGS......................................................................................................................................... 53

POSSESSION OF THE HILLSIDE PROPERTY AND REMOVAL OR RECEIVER.......... 56

MIG ACTED IN GOOD FAITH AND UPON LEGAL ADVICE........................................... 61

RELIEF UNDER THE CORPORATIONS ACT 2001................................................................ 62

MR VARTELAS AS RECEIVER AND MANAGER................................................................. 66

VARTELAS AS AGENT IN POSSESSION................................................................................ 72

MIG AS MORTGAGEE IN POSSESSION OF THE FOOTSCRAY PROPERTY AND AS MORTGAGEE OF ASSETS AND UNDERTAKING OF S&D.............................................. 74

THE LIQUIDATOR’S CLAIM TO HIS COSTS CHARGES AND EXPENSES.................. 77

ORDERS............................................................................................................................................ 88

HIS HONOUR:

INTRODUCTION

1. Each of the plaintiffs and the defendants to this proceeding claim an interest over property held on trust for the S&D International Unit Trust.  The Trust assets included a property at 580 Barkly Street, Footscray which has now been sold by the first mortgagee, MIG Property Services Pty Ltd (MIG), the first defendant, and another property at 45 Boronia Drive, Hillside which is in the possession of the receiver, Mr Vartelas, the second defendant, who was appointed by the registered first mortgagee and mortgage debenture holder MIG.

1. Previously the trustee of the unit trust,  S & D International Pty Ltd (S&D), the second plaintiff, carried on an Indian wholesale grocery business at the Footscray property known as Bharat Traders International.  The business was initially established as a partnership in 1991 by Dinesh Malhotra, the third defendant, his brother Vinod Malhotra, and Markandey Tiwari.  In 1992, Markandey Tiwari divorced his wife Sheela who then married Dinesh Malhotra.  Also in 1992, Markandey and Vinod left the partnership and Dinesh Malhotra was registered as sole proprietor of the business name.  The business was thereafter built up and conducted by Sheela Tiwari and Dinesh Malhotra.  In 1996, the unit trust was established and S&D appointed the trustee.  S&D took over the business and acquired the Footscray property in 1996.  Subsequently, in 2000, S&D as trustee purchased the Hillside property.  These properties were mortgaged to the CBA Bank along with a mortgage debenture over the assets and undertaking of S&D.  These securities are now held by MIG.

1. The two units in the unit trust were held by Sheela Tiwari.  Dinesh Malhotra resigned as a director in 1999; although he claimed that at all times he was the beneficial owner of half the units in the trust and half the shares in the trustee.  In April 2002, for reasons it is not necessary to canvass, Dinesh Malhotra was locked out of the Footscray property by Sheela Tiwari where they also resided.  He soon thereafter lodged a caveat over both properties claiming to have an estate in fee simple.

1. After Dinesh was excluded from the Footscray property, Sheela Tiwari and her son Pradeep Tiwari caused S&D to grant an unregistered mortgage to the ANZ Bank and a registered mortgage debenture in exchange for a business loan and a home loan which were used by Sheela Tiwari to buy a home at Point Cook.  The ANZ Bank lodged a caveat giving notice of its unregistered second mortgage. 

1. In August 2002, Dinesh Malhotra instituted legal proceedings in the Supreme Court of Victoria to establish his half interest in the properties and the business.  Thus began a long series of court cases which have led to the current proceedings.  Sufficient to say, Dinesh Malhotra succeeded in his initial proceedings in establishing that he was beneficially entitled to a half interest in the unit trust and its assets. 

1. Sheela Tiwari retained the firm of Velos and Davis to act for her and S&D in the proceedings instituted by Dinesh. She also caused S&D to give an equitable charge over the Footscray property and the Hillside property to secure legal fees incurred on her behalf and S&D’s behalf in the Supreme Court proceedings.[1]   Mr Bill Velos of the firm of Velos and Davis is the fourth defendant.  On 6 August 2007, Mr Velos and his partner Peter Davis obtained judgment against Sheela Tiwari for $190,708.52 plus costs in respect of fees and charges incurred in acting for her and S&D in the Supreme Court proceedings.[2]  This debt has not been paid and Mr Velos and Peter Davis claim to be entitled to the moneys in Court as a matter of priority by virtue of the equitable charges.[3]

   [1]Affidavit of Bill Velos sworn 16 October 2008, [7].

   [2]Ibid [13].

   [3]Ibid [16].

1. Sheela Tiwari appealed the Supreme Court decision and while the matter was pending in the Court of Appeal, Sheela Tiwari and Dinesh Malhotra agreed to appoint an administrator to run the business until their dispute could be resolved.  They appointed Stirling Horne and Peter Vince, the sixth and seventh defendants, as administrators.  Despite the business being previously profitable, they, as Dinesh Malhotra alleges, with the connivance of Sheela Tiwari and her son Pradeep Tiwari, recommended that the trustee be wound up.  At that stage, the trustee owed CBA as a secured creditor approximately $240,000.  In June 2005, the creditors of S&D resolved to wind up the company and appointed Messrs Horne and Vince as liquidators.

1. Dinesh Malhotra then instituted further proceedings in the Supreme Court to terminate the winding up and to remove Messrs Horne and Vince as liquidators.  At first instance, he failed to have the winding up terminated and Messrs Horne and Vince removed as liquidators.  He successfully appealed the decision of the Court not to remove Messrs Horne and Vince.  In June 2007, Mr Handberg, the first plaintiff, was appointed as the liquidator of S&D in their stead.  In November 2004, Messrs Horne and Vince lodged a caveat against the properties notifying their claim to a lien over the assets for their unpaid fees and expenses.

1. Previously, Messrs Horne and Vince had sought to have Dinesh Malhotra’s caveats removed.  In July 2006, the Supreme Court refused their application.

1. As mentioned above, the CBA bank held securities over S & D and the properties and at about the time S & D was placed in administration, the CBA Bank called up its loan owed by S & D.  In June 2005, Dinesh Malhotra was able to arrange for the CBA to be paid out by Colonel Naresh Malhotra who took over the securities but assigned them to MIG on 11 September 2006.

1. On 25 October 2006, Mr Vartelas was appointed receiver and manager of the assets and undertaking of S&D under the mortgage debenture held by MIG.[4] In August 2007, Mr Vartelas was appointed the agent of MIG and entered into possession of the two properties.  At that time, the principal debt secured by the mortgages was $242,540.38. 

   [4]Exhibit PV-1, CBA 7, 2507.

1. On or about 19 September 2007, MIG, through its agent Mr Vartelas, sold to Tiwari Enterprises Pty Ltd,[5] a company  associated with Sheela Tiwari, the Footscray property at public auction for the total sum of $1,360,000.  Settlement of the sale occurred on 18 October 2007.[6]  On 19 October 2007, the estate agents accounted to MIG for the deposit.  At settlement, withdrawals were provided for the Dinesh Malhotra caveat, the ANZ Bank caveat and the Horne and Vince caveat.  Mr Dinesh Malhotra agreed with MIG to provide his withdrawal on the basis that MIG would pay the surplus (if any) into Court.  MIG did not pay the surplus into Court nor had it done so by the time this proceeding commenced.  At or after settlement, MIG did not account to the mortgagor or the subsequent interest holders for the moneys it was retaining in satisfaction of its secured debt.  It did not treat its mortgage and other securities as satisfied in full.  On the contrary, it retained the proceeds of sale and failed to calculate what it was owed. 

   [5]Exhibit PV- 11, CBA  7, 2614.

   [6]Affidavit of Paul Vartelas of 3 February 2009 para 19, CBA 7, 2474.

1. In September 2008, on the application of the liquidator of S&D, MIG and Mr Vartelas were ordered to pay the balance of the moneys which they still retained from the sale of the Footscray property and the receivership of S&D into Court.  MIG has still not finally accounted to the liquidator or the other encumbrancers.

1. The proceedings seek to settle the entitlement of several parties to the moneys paid into Court, their entitlement to the Hillside property and other issues related to the conduct of MIG as mortgagee and Mr Vartelas as agent for the mortgagee and receiver of S&D.

1. There are two proceedings before me.  In the main proceeding, the plaintiffs are Mr Handberg, the current liquidator of S&D, and S&D itself.  It will be necessary to examine their claims in detail later, but suffice to say the liquidator seeks an order that he has first priority to the funds in Court on the basis he has a lien over them arising out of his efforts to preserve them from misuse by MIG and Mr Vartelas.  He also seeks orders resolving the entitlements of the other defendants.  The liquidator and S&D also seek orders against MIG and Mr Vartelas challenging their conduct as mortgagee and as agent in possession and as receiver and manager of S&D respectively.

1. MIG and Mr Vartelas deny any improper conduct as mortgagee, as agent in possession or as receiver of S&D and claim that MIG and Mr Vartelas are entitled to the moneys in Court to meet its mortgage. MIG and Mr Vartelas also claim that the surplus, after being delivered back to MIG and Mr Vartelas , if any, be dealt with according to the Court’s directions.

1. Dinesh Malhotra claims that he is entitled to a half interest in the moneys in Court as he was held to be the beneficial owner of a half interest in the Footscray property in the Supreme Court proceedings.  It is not disputed that he is entitled to a half interest in the unit trust.  The trust assets, however, are subject to the trustee’s right to indemnify itself for liabilities incurred on behalf of the trust.[7]  Whether the trust should be determined and the beneficial unit holders paid out is not in issue before me.  If the trust is determined, then the trustee is to convert the trust assets into money and distribute the surplus amongst the registered holders in proportion to their unit holding.[8]  The other interested party in the unit trust, Sheela Tiwari, is not a party to either proceeding.

   [7]S&D International Trust Deed Clause 7.5, CBC, 17.

   [8]Ibid clause 20, CBC, 29.

1. The fourth defendant is Mr Bill Velos.  As mentioned above, his firm Velos and Davis acted for Sheela Tiwari and S&D in the proceedings taken by Dinesh Malhotra to establish his half interest in the trust and the trust assets.  To secure their legal fees, S&D, then under the control of Sheela Tiwari and her son Pradeep Tiwari, gave equitable charges in favour of Velos and Davis over both properties.  Mr Velos is owed some $198,000 in fees.  He has a judgment debt for the sum.  He claims he has priority next after MIG to the moneys in Court.

1. As mentioned above, the fifth defendant is Pradeep Tiwari, the son of Sheela Tiwari.    In July of 2008, the ANZ Bank assigned its unregistered second mortgage and mortgage debenture it held over the assets and the undertaking of S&D to Pradeep Tiwari.  Mr Tiwari claims that he has priority next after MIG to the moneys in Court.

1. As mentioned above, the sixth and seventh defendants are Messrs Horne and Vince.  In November 2004, they lodged caveats over the Footscray and Hillside properties claiming an equitable interest as lien holders for their costs.  They claim that they are entitled to their costs in priority to any claim that the liquidator may have to his costs.

1. The second proceeding was commenced in May 2008 by Pradeep Tiwari against MIG and Mr Vartelas seeking a declaration that, by operation of s 77(3) of the Transfer of Land Act 1958, the defendants were bound to pay to the ANZ Bank such moneys as were payable for moneys owing under or in respect of the second ranking ANZ mortgage from the sale of the Footscray property.[9]  He also sought an order that the defendants pay out the ANZ mortgage.  Pradeep Tiwari was a guarantor of the ANZ Bank loan to S&D that was used to buy the house for his mother.  Soon, after commencing the proceeding, Pradeep Tiwari paid out the ANZ Bank and took an assignment of its securities.  Pradeep Tiwari claims he is entitled to the moneys in Court next after MIG.  The issues in the second proceeding will essentially be resolved in the first and I will not address it further in this judgment.

   [9]Writ of summons dated 23 May 2008 in matter no 6325 of 2008.

1. The myriad of claims have been argued for many days before me.  The issues between the parties still have not been accurately identified.  On 29 April 2009, I ruled that certain issues raised by Dinesh Malhotra in his notice of contentions but not in his points of claim challenging the validity of the ANZ Bank securities and the Velos and Davis charges are before me.  Since my ruling, the liquidator and S&D have undertaken to pursue those or related claims on behalf of the trust against Mr Velos and Mr Tiwari.  At an earlier stage of the proceedings, they had raised them in their statement of contentions and points of claim but ceased to do so shortly after the hearing before me commenced. 

1. After hearing the then case of the plaintiffs, MIG and Mr Vartelas, but before completing the case of Mr Malhotra, or hearing the cases of Mr Tiwari, Mr Velos and Messrs Horne and Vince or hearing the final addresses of any party, Mr Robertson of counsel, who appears for MIG and Mr Vartelas, helpfully suggested that I should hear discrete issues between the parties as that did not require the attendance of all parties and would help to keep the costs down.  To that end I agreed to hear the issues outstanding between the plaintiffs and MIG and Mr Vartelas, which I have.  This judgment deals with those issues.

THE ISSUES BETWEEN THE LIQUIDATOR AND MIG AND MR VARTELAS

1. Strictly speaking, the matters raised between the plaintiffs of the one part and MIG and Mr Vartelas of the other also concern the other parties.  They have been content, however, to allow them to be argued between the plaintiffs, MIG and Mr Vartelas.  Mr Dinesh Malhotra, who is unrepresented, was informed that he could attend if he wished, but did not appear.  Only the plaintiffs, MIG and Mr Vartelas appeared to argue the issues.

1. There are two basic issues.  First, as mentioned above, the liquidator seeks an order that he has first priority to the moneys in Court as against the other parties, save the secured debt of MIG, on the basis that he has a lien over them arising out of his efforts to preserve them from misuse by MIG and Mr Vartelas. 

1. Secondly, the plaintiffs contend that MIG’s mortgage was satisfied in full on the sale of the Footscray property on 18 October 2007, or at the latest on 19 October 2007, when MIG or its agents received the balance of the sale moneys.  I will henceforth refer to the settlement date as 19 October 2007 for these reasons.  The plaintiffs also claim that MIG and Mr Vartelas were obliged to and should now account to the plaintiffs and the other subsequent encumbrancers for the moneys that they retained from the sale as at 19 October 2007; and as and from 19 October 2007, MIG and Mr Vartelas held the surplus moneys on trust for the subsequent interest holders.  Further, the plaintiffs contend that given the circumstances of this case, MIG and Mr Vartelas were obliged to pay the surplus moneys immediately into Court after settlement on 19 October 2007. 

1. The plaintiffs contend that as the debt due to MIG was satisfied in full on 19 October 2007, the receivership over the assets and undertaking of S&D should have been terminated that day or shortly thereafter.  Further, the plaintiffs contend that MIG and Mr Vartelas are not entitled to any interest, costs, fees or expenses after 19 October 2007.  The plaintiffs contend that MIG and Mr Vartelas should now compensate S&D and/or the other subsequent encumbrancers in interest for failing to pay the moneys into Court as requested by S&D and the subsequent encumbrancers.

1. The plaintiffs seek relief under sections 434(1)(b), 434B(1), 434B(5) and 1321 of the Corporations Act 2001 in respect of MIG’s and Mr Vartelas’ conduct.[10]

   [10]Points of Claim of 22 December 2008, CBB, 5. Further relief is sought in the plaintiffs’ written submissions and in oral address under sections 423(1), 424 and 425.

1. The plaintiffs contend that MIG is not entitled to include in the sum secured by the mortgage; expenses incurred in having Colonel Malhotra exercise powers as the registered mortgagee and to effect the transfer of the mortgage to MIG; and fees charged by Mr Mond, the controller of MIG, for his personal services purportedly provided to MIG.

1. MIG and Mr Vartelas dispute the claims of the liquidator and S&D, save that they admit that they should give an account, but only when they have fully satisfied MIG’s mortgage debt, fees and expenses, including those of Mr Vartelas, which they claim they have not done.

1. MIG and Mr Vartelas contend that MIG’s mortgage debt was not satisfied on 19 October 2007 and it is still not satisfied to this day.  They claim that they were and are entitled to retain the whole of the sale moneys while they made and continue to make investigations and inquiries into the merits of the subsequent interest holders.

1. MIG and Mr Vartelas contend that they were bound by s 77(3)(c ) of the Transfer of Land Act 1958 (TLA) to hold the proceeds of sale until they had determined for themselves the respective interests and priorities of the “subsequent mortgages and charges.”  They contend that they were entitled to seek the directions of the Court in determining those issues if they so wished.  MIG and Mr Vartelas contend that they should not have been ordered to pay the moneys that they still retained into Court.

1. MIG and Mr Vartelas contend that s 77(3)(c) includes unregistered mortgages and charges. The plaintiffs dispute that construction and say that the ANZ Bank’s equitable mortgage and the other equitable charges under its mortgage debenture were not to be satisfied by MIG under paragraph (c); but rather that paragraph (d) applied which required the surplus proceeds to be paid to the mortgagor or into Court.

1. MIG and Mr Vartelas contend that they were not obliged to account to the subsequent interest holders on 19 October 2007 or any date thereafter until they had completed their duties under s 77(3)(c ) of the TLA as set out above.  They contend that once they have carried out their duties under s 77(3)(c ), and not until then,  will they finally account to the subsequent interest holders.

1. MIG and Mr Vartelas contend that as the mortgage debt has not been satisfied, the receivership should not be terminated and should not have been terminated on 19 October 2007 or any date thereafter.

1. MIG and Mr Vartelas contend that the Court should not adjudicate on the issue of the appropriateness of MIG reimbursing itself from the sale proceeds for the proceedings against Colonel Malhotra or Mr Mond’s fees. They contend that this issue should be left for the taking of accounts in the traditional way, if its accounting is ultimately disputed by any of those entitled to dispute it.

1. For the reasons that follow, I have found on a preliminary basis that the liquidator is entitled to priority for the costs he incurred in preserving the fund by having it paid into Court.

1. I have found that the MIG and Mr Vartelas should have discharged the mortgage debt on 19 October 2007 and forthwith paid the surplus moneys into Court.  I have found that on 19 October 2007 they should have accounted for the allocation of the sale proceeds to the subsequent interest holders including S&D.  I have found that, as against S&D as mortgagor, MIG and Mr Vartelas are not entitled to any interest, costs, charges or expenses beyond 19 October 2007.  I have found that MIG and Mr Vartelas were not entitled to apply the sale proceeds to meet the costs of MIG incurred in relation to Colonel Malhotra and the charges claimed by MIG for Mr Mond’s personal services in dealing with the mortgage. 

1. I have found that Mr Vartelas’ appointment as receiver of S&D should have ceased on 19 October 2007.  I have found that Mr Vartelas is not entitled to any cost, charges or expenses as receiver beyond 19 October 2007.   I have found that MIG and Mr Vartelas are obliged to pay interest on the surplus moneys retained by them.  I have found that on 19 October 2007 Mr Vartelas should have delivered up to S&D the Hillside property.  I have found that it is appropriate to make orders under the Corporations Act 2001 to give effect to these findings.

THE ACTIONS OF MIG AFTER THE SALE OF THE FOOTSCRAY PROPERTY

1. Before MIG and Mr Vartelas were able to sell the Footscray property, they negotiated with the several caveators to remove their caveats.  These negotiations were extensive and took place over several months.  On 28 September 2007, the liquidator demanded that “the entire net proceeds of the sale of the land (after your reasonable fees and expenses incurred only in getting in, protecting and realizing the property) should be paid to me or into Court”.[11] 

   [11]CB 1311. 

1. MIG and Mr Vartelas informed the caveators and the liquidator that it was their intention to pay into Court the surplus moneys from the sale after satisfying MIG’s mortgage.  They agreed with Mr Malhotra that they would pay the surplus into Court.  As a consequence the caveats were removed to allow the sale to proceed.  The property was then sold for $1,360,000 and settlement took place on 18 October 2007.

1. Soon after the sale, MIG and Mr Vartelas again informed the caveators that it was still their intention to pay the surplus moneys into Court under s 77(3)(d) of the TLA once the principle, interests and all costs and expenses payable under the mortgage had been paid.  On 12 November 2007, the solicitors for MIG and Mr Vartelas told the liquidator’s solicitors that they expected to receive instructions to transfer the moneys into Court “once all accounts had been rendered and all fees and disbursements paid.”  In late November 2007, the solicitors for MIG and Mr Vartelas advised the plaintiffs, that once confirmation had been received that MIG had been paid in full, the surplus moneys would be paid into Court.  They indicated, however, that if an agreement could be reached between the claimants it would not be necessary to do so.

1. In the weeks following settlement, MIG and Mr Vartelas assert that they took steps to ascertain the amount of the secured debt including the various costs incurred by MIG and Mr Vartelas.  An incomplete accounting of the proceeds of the sale was provided to the liquidator on 27 November 2007.[12] MIG and Mr Vartelas contend that ascertaining the interest rate applicable to the loans was not a simple exercise as it depended upon ascertaining and applying the rates charged by the Commonwealth Bank over the period since the transfer of the mortgage. [13].

   [12]CB 32 – 34.  

   [13]Transcript 185.

1. In January 2008, after the plaintiffs threatened legal action unless the surplus moneys were paid into Court, MIG and Mr Vartelas took the advice of counsel as to their obligations in respect of the surplus. 

1. Mr Parncutt of counsel gave evidence by affidavit that, in or about November 2007, he was consulted by Comlaw concerning the duties of MIG and Mr Vartelas as agent for the mortgagee in possession with respect to the disposition of the proceeds of sale of mortgaged property and the obligation to account to the mortgagor and the timing of payment into court of the residue of the moneys where there were various claimants to the moneys.[14]  He says that he advised Mr Leonidas of Comlaw “that as there were a number of claimants to the surplus of the proceeds of sale, the duty of the mortgagee in possession entitled him to hold the moneys for the purpose of clarifying the claims being made to the surplus of the net proceeds of sale and to ascertain the position of interested parties in the moneys.”[15]  He advised that this was a positive duty imposed upon the selling mortgagee to deal with a subsequent mortgagee prior to paying the residue moneys to the mortgagor or into the Supreme Court under ss 77(3)(d) of the TLA.   He also advised that MIG and Mr Vartelas were not obliged to deal with the surplus moneys in accordance with any directions of the liquidator of the mortgagor.    MIG and Mr Vartelas accepted the advice.

   [14]Affidavit of Gerald John Parncutt sworn 3 February 2009, CBA 4, 1566-1569.

   [15]CBA 4, 1567.

1. Mr Parncutt says that “as it became clear that there were a number of claimants to the moneys, he advised that once the subsequent mortgagee and chargee had been paid from the surplus, the residue would necessarily have to be paid into Court, but that it would be appropriate first to ascertain whether there was any disagreement to the payment of the subsequent mortgagee or chargee prior to payment into Court, so as to avoid an erosion of the moneys by protracted proceedings.”[16] Mr Parncutt also says that unregistered mortgages fell within s 77(3)(c) based on his research of the authorities, including Ex parte Australian Co-operative Development Society Ltd (in liq),[17] which I discuss below. 

   [16]CBA 4, 1568.

   [17][1978] Qld R 395.

1. Mr Parncutt’s evidence that he was consulted in or about November 2007, is not easy to reconcile with Mr Vartelas’ evidence that he took Mr Parncutt’s advice in January 2008 and on 21 February 2008.  In any event, on 16 January 2008, the solicitors for MIG and Mr Vartelas advised the caveators that MIG and Mr Vartelas had taken advice and that they would not be paying the surplus moneys into Court as they previously said they would.  MIG and Mr Vartelas thereupon set about informing themselves on the interests claimed by the caveators. 

1. On 21 February 2008, Mr Mond and Mr Vartelas and their solicitor Mr Leonidas conferred with Mr Parncutt of counsel . Mr Parncutt was instructed of the claims made by the liquidator and that Mr Leonidas had agreed to pay the surplus moneys into Court. Mr Parncutt advised that to pay moneys into Court in disregard of s 77(3)(c) was not an appropriate course. Mr Parncutt said MIG and Mr Vartelas as agent had a “positive duty” to deal with the subsequent mortgagee prior to paying the residue moneys to the mortgagor or into Court. Mr Parncutt advised that an application could be made to Court as to how the moneys should be applied. However, he said, this did not involve payment of moneys into Court. Mr Parncutt advised that a letter should be sent to the interested parties asking them to set out their position and that information could be included in any application made to the Court.[18]

   [18]Exhibit D2.

1. By a brief dated 8 March 2008, Mr Parncutt was instructed to draw an originating motion, affidavit in support, which had been discussed at the conference on 21 February 2008, and to settle a letter which ultimately became the letter of 1 May 2008 sent by Comlaw to the interested parties.[19]  The originating motion was never issued.

   [19]Exhibit D1.

1. Eventually, on 1 May 2008, MIG and Mr Vartelas set out their understanding of the respective claims in a lengthy letter to each caveator from their solicitors, Comlaw.  The letter also sets out the substance of Mr Parncutt’s advice to MIG and Mr Vartelas given on 21 February 2008.  The letter was settled by Mr Parncutt.  They suggested to all claimants that the ANZ Bank be paid the moneys owing under its unregistered mortgage and asked for their consent to do so.

1. The ANZ Bank disagreed with the suggestion of MIG and Mr Vartelas as set out in Comlaw’s letter of 1 May 2008.  MIG and Mr Vartelas were informed by solicitors for the plaintiffs that the ANZ Bank insisted that the surplus be paid into Court under s 77(3)(d).  The ANZ Bank argued that paragraph (c) did not apply to unregistered charges.  On the other hand, the former and current liquidators and Mr Velos asserted that the surplus should be paid to the ANZ Bank.[20]  After they were informed of the ANZ’s stance on 9 May 2008, they amended their direction to MIG and Mr Vartelas and said that the moneys should be paid into Court.[21]

   [20]Letter of 9 April 2008, Mills Oakley Lawyers to Comlaw.  CBA 1, 43-44.

   [21]Letter of 9 May 2008, Mills Oakley Lawyers to Comlaw.  CBA 1, 75-76.

1. Dinesh Malhotra had stated back in September 2007 that he wanted the moneys paid into Court and only removed his caveat when MIG and Mr Vartelas agreed to do so.  The solicitors for MIG and Mr Vartelas wrote to him to seek his confirmation that he still wished the moneys to be paid into Court.  They received no response. 

1. On 20 May 2008, the ANZ Bank confirmed its position.  At that point, MIG and Mr Vartelas claimed that the mere fact that all caveators had agreed the moneys be paid into Court did not relieve MIG and Mr Vartelas of their duty to comply with paragraph (c).  The next day, however, Mr Tiwari instituted his proceedings seeking an order that MIG pay out the ANZ Bank’s mortgage.

1. By this stage, it was obvious to MIG and Mr Vartelas that they would need directions from the Court as to how they should discharge their responsibilities under paragraph (c).  On 2 June 2008, Comlaw on behalf of MIG and Mr Vartelas suggested to Mr Tiwari that his proceedings may be a suitable vehicle for the determination of the respective priority issues.[22]  Shortly thereafter, MIG and Mr Vartelas were informed that the ANZ Bank had assigned its unregistered second mortgage to Mr Tiwari on 9 July 2008.

   [22]CB Defendants, 716.

1. After 2 June 2008, little, if anything, was done by MIG or Mr Vartelas to bring the issue of MIG’s and Mr Vartelas’ responsibilities under paragraph (c) or generally to Court even though MIG and Mr Vartelas were aware that they would not be able distribute the surplus moneys to the ANZ Bank.  Eventually, on 13 August 2008, the liquidator took proceedings in his own name and in the name of S&D to resolve the issues between the parties and to have MIG and Mr Vartelas pay the moneys still held by Mr Vartelas, as agent and as receiver, into Court for safe keeping.

1. MIG and Mr Vartelas submit that they retained the sale proceeds on legal advice that they should retain those moneys until they were in a position to pay the subsequent mortgagees and chargees.  Mr Mond is a director and the person in control of MIG.  He gave evidence that he is not aware how much is still owed to MIG under the mortgage. 

THE ACCOUNTING BY MIG AND MR VARTELAS

1. As the following history will establish, despite repeated requests by the liquidator, MIG and Mr Vartelas have failed and refused to properly account to the liquidator for the moneys applied to discharge the mortgage debt. 

1. On 9 July 2007, Mr Handberg asked Mr Vartelas for details of the sum required to discharge S&D’s debt to MIG.[23]  On 30 July 2007, Mr Handberg requested that Mr Vartelas provide a report as to the affairs of S&D which included details of S&D’s liability.  Mr Vartelas responded through his solicitors, Comlaw, advising that the principal amount owed was $242,540.83, with interest and costs to be calculated.[24]   On 24 August 2007, Mr Vartelas informed Mr Handberg in a meeting that S&D owed MIG between $240,000 and $500,000 including interest and costs and that he would calculate the final payout figure to discharge S&D’s debt to MIG by the end of the following week and that this amount was likely to be in excess of $500,000.[25]

   [23]GNH-35.

   [24]GNH-82.

   [25]Affidavit of Handberg of 3 February 2009, [23], CBA 4, 1577.

1. In his report as to affairs of 9 October 2007, lodged after the property had been auctioned, Mr Vartelas estimated the amount owed to MIG as $517,382.[26]  As indicated above, the sale settled on 18 October 2007, and on 22 October 2007, Mr Handberg requested “an accounting of all amounts disbursed from the sale proceeds of the property and confirmation that the surplus has been paid into Court.”[27]  On 20 November 2007, Comlaw confirmed that Mr Handberg had requested an accounting of the proceeds and said it had been prepared.  Comlaw also said that further costs were being incurred by Mr Vartelas, which were covered by the mortgage, in making documents requested by Mr Handberg available for inspection.[28]

   [26]CBA 4, 1669.

   [27]Letter 22 October 2007, CBA 1, 354.

   [28]Letter 20 November 2007, CBA 1, 22-23.

1. On 27 November 2007, a partial accounting of the proceeds of sale was provided. Comlaw informed Mr Handberg that they were awaiting confirmation from the mortgagee itself that it had been paid in full. They said that once they had received this confirmation, they would be paying the funds into Court under s 69 of the Trustee Act 1958 and section 77(3)(d) of the TLA.[29]

   [29]Letter 27 November 2007, CBA 1, 32.

1. The account indicated that at settlement Comlaw had received the proceeds of sale and after paying the expenses of sale, had paid $350,000 to MIG, legal fees to itself and the balance of $887,476.92 to Mr Vartelas as agent for MIG, save for $15,000 which was retained by Comlaw in its trust account.

1. Of the moneys received by Mr Vartelas, he paid a further $60,000 to MIG, remuneration and expenses to himself and held a balance of $743,256.42.  Thus, as at 27 November 20007, MIG had been paid $410,000 but had still not advised to what extent its mortgage debt had been paid.

1. On 7 January 2008, Mr Handberg repeated his demand that the balance be paid into Court and threatened proceedings unless this was done.[30]  I have set out above the events that led to the order on 25 September 2008 that the moneys held by Mr Vartelas be paid into Court.  After the order was made on 25 September 2008, and on that day, Mr Handberg sought a full and detailed account of the amount MIG claimed was secured by the debenture charge and the mortgage, the receipts and payments by Mr Vartelas and the costs and expenses incurred by MIG and Mr Vartelas.[31]

   [30]Letter 7 January 2008, CBA 1, 36.

   [31]Letter 25 September 2008, CBA 2, 862-863.

1. On 26 September and 30 September 2008, Mr Handberg sought a response to his request.  Ultimately, on 3 October 2008, Comlaw provided accounts, but again were only able to give an estimate of the amount owed to MIG, as costs were still being incurred in the proceedings.[32]  The accounts disclosed that Mr Vartelas had now paid $140,000 to MIG (making a total now of $490,000 paid to MIG) and after costs and expenses,  $625,227.59 was paid into Court.  The account also showed that additional legal fees and fees to Mr Vartelas, since the 27 November 2007 account, were some $51,000.

   [32]Letter 3 October 2008, CBA 2, `874-876.

1. An account was also provided by Mr Vartelas as receiver and manager of S&D.  It showed receipts of $93,322.01 (mainly from licensing fees) and expenses of $89,613.57.  The balance of $3,708.44 was paid into Court. 

1. At this stage, MIG had not provided any account of the application of the $490,000 paid to it, and in particular how it had been applied to principal, interest and costs.  On 7 October 2008, Mr Handberg through his solicitors sought those particulars.[33]  On 9 October 2008, Mr Handberg through his solicitors repeated his request of MIG.[34]  Although Comlaw, on behalf of MIG and Mr Vartelas, made copies of Mr Vartelas’ invoices, advises and time sheets available for inspection, MIG failed to provide any details of the allocation of the $490,000 that had been paid to it.

   [33]Letter 7 October 2008, CBA 2, 878-879.

   [34]Letter 9 October 2008, CBA 2, 909-910.

1. Mr Vartelas says that the payments to MIG were made at MIG’s request.  Mr Vartelas paid the money over without any account from MIG as to what it was owed and on what basis.  Mr Vartelas’ evidence on why he did not pay out MIG’s mortgage on receipt of the moneys is unsatisfactory.  His evidence was as follows:

You received the funds – all the settlement occurred on 19 or 18 October, is that correct?---I understand that – roughly that.

And the funds sat in Mr Leonidas’ trust account?---Yes.

There was nothing preventing you at that stage from paying the surplus moneys into court, was there?---Well, yes, there was.  I mean, I was under instructions from my appoint[or].  Plus, I couldn’t pay the surplus because at that stage I still didn’t know what the full extent of the debt to my appointor was; neither was my role completed.  My role would not have been completed until I finalized  my whole administration, prepared the final account.  It wasn’t just a simple case of me handing over money to my appointor, putting the money to court and walking away.

What did you do between October and December to ascertain what the amount due to MIG was?---I made inquiries with Mr Mond.  I had a number of meetings with --- I had a couple of meetings with his accounting staff, with the staff of David Mond & Associates.   Mr Mond had allocated one of his staff to work out the final details of these loan accounts.  As well as that I had a lot of other duties which I had to carry out in relation to my appointment as agent for the mortgagee.[35]

[35]Transcript 183-184.

1. Mr Mond of MIG said Mr Vartelas made the decisions in relation to the application of the proceeds of sale, although he agreed that he had requested the payments to MIG. [36]  Mr Mond could not explain how those payments were calculated.[37]

   [36]Transcript 220.12- 20 and 223.17-22.

   [37]Transcript 225.

1. Payments to MIG were made without Mr Vartelas being provided with finalized calculations of interest or costs and without him being able to say whether they were in payment of principal, interest or costs.  Mr Vartelas evidence was as follows:  

What inquiry did you make of MIG [in relation to the request for payment of $8,000]? --- I asked them how they arrived at that figure, and they said it was the same as the sum of $52,000, it was part of payment towards their outstanding account, loan account, until such time they advised me that the loan account was substantially higher than the amounts that they were requesting, and they would provide me with details of the loan in due course.[38]

Mr Vartelas was  vague about the instructions he received in relation to the quantum of his appointor’s debt:

It doesn’t appear anywhere in the evidence that you made any inquiry with Mr Mond as to what amount was required to pay MIG out?---No, that’s not correct.

When did you make of that inquiry?---I made inquiries with Mr Mond on a number of occasions.

What occasions were they?---Well, from the day prior to the settlement until the day after the settlement.  In fact, I communicated with Mr Mond on a number of occasions.

And when you asked him to instructions as to what amount he was owed or MIG was owed, what did you tell you?---Well, he had together his own information.  He was putting together information in relation to legal costs, he was working at his interest rate, he had given me already--- .[39]

[38]Transcript 156-157.

[39]Transcript 185.

1. It was not until the first day of the trial on 6 February 2009, that Mr Mond on behalf of MIG explained how the MIG secured debt was calculated.  Mr Mond exhibited tables calculating the interests as it accrued on the CBA home loan[40] and the CBA business loan.[41]  Mr Mond accepted that the balance owing on the loans could have been paid at any time from the proceeds of sale, so that MIG would have no further claim on the balance of the proceeds of sale or on the Hillside property, but he chose not to pay the debts.[42]

   [40]DM-32, CB Defendants 1, 236.

   [41]DM-33, CB Defendants 1, 239-247.

   [42]Transcript 229 and 280.4-15.

1. Mr Mond admits that on 29 October 2007, MIG received the sum of $350,000 from the proceeds of sale in part satisfaction of the debt owed to it.  He said that $109,600.49 was applied to S&D’s home loan and that accordingly, as at 29 October 2007, a small sum of $456.62 was left owed on that account.[43]  He offered no satisfactory explanation of why the home loan was not discharged.

   [43]Affidavit of David Mond of 6 February 2009, CB Defendants, 9.

1. On 31 July 2007, MIG had been informed of interest rates on the home loan.[44]  On the other hand, MIG did not appear to have sought the default interest rates on the business loan until October 2008.[45]

   [44]Letter 31 July 2008, CB Defendants, 232.

   [45]Email 13 October 2008, CB Defendants, 235.

1. Mr Mond said that he did not pay out S&D’s debts to MIG from the proceeds as he had been continually advised by his lawyers that there was litigation going on, that there were issues that still had to be addressed, that there was no certainty about MIG’s obligations or what MIG’s entitlements were or what might occur going forward and he was very concerned about those issues.[46]

COLONEL MALHOTRA  AND MR MOND EXPENSES

[46]Transcript 229-230 and 329-330.

1. As indicated above, MIG has charged the costs of its litigation with Colonel Naresh Malhotra against the mortgage debt.  When MIG took the assignment of the CBA securities from Colonel Malhotra, MIG did not obtain documents from Colonel Malhotra to enable MIG to be registered as the mortgagee.  Litigation was taken against Colonel Malhotra to restrain him from discharging the mortgages, to have him sign a notice to pay and ultimately, to get a registrable assignment of the securities.[47]  The expense of undertaking all these proceedings has been treated as an expense covered by the mortgage.

   [47]Transcript 290; see further exhibit MFI D 4 the Outline of Final Submissions of the First and Second Defendant [126]-[129].

1. MIG also engaged Mr Mond, practising under the name of David Mond & Associates, to carry out accounting work in relation to the amounts purportedly secured by the mortgage. [48]Mr Mond described this work as ’administration’ and ’continuous liaison.’[49]

   [48]DM-37, CB Defendants 1, 311-314.

   [49]Transcript 248.2.

1. Under the CBA mortgage, the borrower was liable for all amounts which the Bank:

(a)   is charged;

(b)  charges;

(c)  pays; or

(d)  incurs,

in connection with the establishment and continuance of any Facility or any transaction contemplated by the Contract and the exercise or enforcement of any right, claim or remedy of any kind arising out of the Contract or the Security.[50]   

[50]DM-24, CB Defendants 1, 179.

1. As to the costs referable to Colonel Malhotra, MIG submits that it is entitled to these costs as mortgagee in protecting its title as mortgagee.  MIG relies on  In re Radcliffe[51] and Bolingbroke v Hinde.[52]  In the former, the mortgagee assigned the mortgage and the assignee sought to charge the mortgagor with the costs of so doing.    He was held not to be entitled to do so.  Sir John Romilly, the Master of the Rolls said:

   [51](1856) 22 Beav 201, 52 ER 1085.

   [52](1884) 25 Ch D 795.

I do not doubt that where a mortgagee has incurred costs in relation to his security, by the acts or defaults of the mortgagor, the latter must bear them except under special circumstances.

This does not support the contention of MIG.  In Bolingbroke v Hinde[53] the head note reads:

The plaintiff in a foreclosure action is as a general rule entitled to an account of only principal and interest due to him on his mortgage, and of the costs of the action.  To entitle him to an account of any other costs he must make out a special case.  

In this case the mortgagee had been in default.  In both cases referred to the relevant factor was a default or failure by the mortgagor causing the mortgagee extra expense.  The costs incurred by MIG in respect of Colonel Malhotra were not caused by any default of S&D.  They were entirely caused by MIG’s failure to obtain a proper transfer of the mortgage.

[53](1884) 25 Ch D 795.

1. MIG also submits that MIG’s situation is comparable to that in Re Mangan ex parte Andrew[54] where Beaumont J allowed the second mortgagee its costs (against the secured property) of buying in the first mortgage on the basis that buying in the first mortgage was a reasonable step taken to protect its position under the second mortgage.  Beaumont J held that the mortgage rendered the mortgagor  liable to the mortgagee for all costs and expenses incurred by the mortgagee for the preservation of the security.[55]He said that it was a “reasonable step” for the mortgagee to buy in the interest of the first mortgagee so as to protect its position under the second mortgage. 

   [54](1983) 123 ALR 633 at 640.

   [55]Ibid.

1. MIG refers to the costs provisions of the mortgage and the debenture charge instruments and contends that they allow the mortgagee the whole of its costs on a solicitor and client basis which it might “pay incur sustain or be put to” in connection with the mortgaged property, the security, and the exercise or attempted exercise of any power conferred by the security or by statute.[56]  In addition, MIG contends that both the debenture and the mortgage expressly permit the mortgagee to assign its security.[57]  MIG submits that costs incurred in connection with such assignments are therefore within the costs clause of each of the security documents. 

   [56]See clause 12.6 of the debenture charge, CBC, 54 and clause 9.3 of the Memorandum of Common Provisions AA370, CBC 127.

   [57]Clause 12.18, CBC at 56 and 9.13,  CBC at 129.

1. Even if the costs of assignment were covered by the securities, these costs were not reasonably and properly incurred in affecting the assignment.  They were incurred because of the failure of the MIG to procure a proper assignment in the first place.

1. In my opinion, it is not reasonable or proper that the costs that arose from MIG’s failure to observe reasonable care in taking an assignment of the mortgage should be thrown against the mortgagor.

1. As to the costs charged by David Mond & Associates, MIG says that there is no reason in principle why the costs charged should not be charged to the account of S&D by MIG and Mr Vartelas.

1. The use of the name David Mond & Associates does not alter the fact that Mr Mond charged his remuneration in attending to the mortgage.  David Mond & Associates is a name that Mr Mond used as a sole practitioner.  On one view, it could be said that he was acting as the manager of MIG of which he was a director.  This raises the question whether it is reasonable and proper for a mortgagee to charge against the mortgagor remuneration of officers of the mortgagor incurred in connection with the mortgage.  Normally, remuneration would not be a cost, charge or expense paid or payable by the mortgagee in connection with the mortgage.  In this case, Mr Mond on behalf of MIG engaged himself.  The letter of engagement was signed on behalf of MIG by Betty Mond, Mr Mond’s wife and fellow director of MIG.[58]

   [58]DM-37, CB defendants 1, 311-314.

1. The plaintiffs challenge whether the fees were properly incurred and reasonable.[59]  In my opinion, Mr Mond is not entitled to charge for his remuneration for personal services in connection with the mortgage.  The mortgagor’s liability extends to costs, charges or expenses involving actual and genuine expenditure on the part of the mortgagee. 

   [59]Transcript 245-246.

1. In Re Wallis; ex parte Lickorish,[60] the Court of Appeal held that a solicitor mortgagee who acted in proceedings in respect of the mortgage was not entitled, as part of the costs, charges and expenses incurred as mortgagee, his profit costs in respect of professional services.  The Court of Appeal limited the mortgagee’s entitlements to out of pocket disbursements.  Lord Esher said:

It has been settled for many years that the rights or mortgagor and mortgagee inter se depend upon the contract between them, and that, when there is no express contract, but only the ordinary contract which arises out of the relation of mortgagor and mortgagee, the mortgagee cannot charge the mortgagor with remuneration for his own personal services in relation to the mortgage debt or the mortgage security.  This rule is not limited to solicitors, but it extends to any mortgagee who is capable of giving and who does give his own personal services in relation to the mortgage debt  or security.  This rule has been laid down with reference to the contract which arises simply out of the relation between mortgagor and mortgagee.[61]

In my view, MIG’s arrangement with Mr Mond was merely a device to seek to throw onto the mortgage compensation that would not otherwise have been reasonably or properly incurred.  I find that MIG is not entitle to throw against the mortgagor Mr Mond’s remuneration for his personal services.

[60](1890) LR 25 QBD 176.

[61]Ibid 180.

THE PLAINTIFFS’ ARGUMENT ON THE MORTGAGEE’S OBLIGATIONS

1. The plaintiffs submit that the authors of The Mortgagee’s Power of Sale assert that the expression “subsequent mortgages and charges” in paragraph 77(3)(c) of the TLA refers only to registered mortgages and charges, because they are all that are contemplated by s 74(1).[62]  The authors say that Re Murrell[63] so held.  They distinguish Avco Financial Services v Commonwealth Bank of Australia[64] and ANZ Banking Group v Evans.[65] I discuss these authorities below.

   [62]Croft C and J Johannsson, The Mortgagee’s Power of Sale, 2nd edition (2004) at [13.4].

   [63](1984) 57 ALR 85.

   [64](1989) 17 NSWLR 679.

   [65](1992) 2 Qd R 230.

1. The plaintiffs submit that if that construction is correct, then the question of accounting to Mr Tiwari on the ANZ Bank mortgage or the Velos and Davis charge under s 77(3)(c ) did not arise, because their encumbrances are unregistered.  The plaintiffs contend that this construction is preferable to that contended by MIG and Mr Vartelas, because:

(a)    Section 74, which is contained within the same division of the TLA as s 77, provides for the creation of mortgages and charges by registration (this being the basis of the view of the authors in The Mortgagee’s Power of Sale);

(b)   The construction has the attraction of certainty.  It is unlikely that Parliament intended that first registered mortgagees should have an obligation to ascertain who to account to for any surplus, even in circumstances where such a person is not readily found or identified or where there are competing claims to the surplus.  Not only would such obligation be burdensome, but it would provide no practical assistance to the resolution of disputes; and

(c) Where the first registered mortgagee is in doubt about whom it is to account to, paragraph 77(3)(d) provides for payment into Court pursuant to s 69 of the Trustee Act 1958.

1. The plaintiffs contend that, upon settlement of the sale of the Footscray property, MIG was obliged to apply the proceeds in first satisfying the liabilities secured under the mortgage and then pay the residue moneys (if any) to the mortgagor, S & D or into the Supreme Court under the provisions so far as they are applicable of s 69 of the Trustee Act 1958 under s 77(3)(d) of the TLA.  They contend that in the circumstances of this case, it was incumbent on MIG and Mr Vartelas to pay the moneys into Court to allow the respective claimants to pursue their claims to the moneys.

MIG’S AND MR VARTELAS’ ARGUEMENT

1. MIG and Mr Vartelas contend that section 77(3)(c) of the TLA requires the selling mortgagee to pay the subsequent mortgagees whether registered or not.  It argues that section 77(3)(d) does not permit the payment of the surplus into Court, but only the residue, after the subsequent mortgagees have been paid.  They rely on the analysis of Finkelstein J of a selling mortgagee’s duty under the Western Australian Torrens statute in Fraser v Australian Securities & Investments Commission, In the Matter of Lanepoint Enterprises Pty Ltd (receivers and managers appointed).[66] They submit that they were obliged under s 77(3)(c) to pay moneys owing under or in respect of subsequent unregistered mortgages and charges in the order of their respective priorities. There were no subsequent registered mortgages or charges.

   [66][2007] FCAFC 85 at [45], [46], [53] and [54].

1. MIG and Mr Vartelas contend that the obligations under paragraph (c) were mandatory and they could not pay the residue (if any) into Court even if they wished to and all the interested parties agreed that they should.  MIG and Mr Vartelas contend that to carry out their statutory duty under paragraph (c), they were required to ascertain what were the subsequent mortgages and charges and strive to achieve consensus between them as to their entitlement, quantum and priority.  If after reasonable efforts to do so, they were not able to achieve consensus, then they should apply to the Court for directions as to what they should next do.  All the time, however, they were obliged to retain possession of the residue moneys.

1. MIG and Mr Vartelas rely on Robinson, Transfer of Land in Victoria[67] where the author cites Beeby v Official Assignee of Pickering and Pickering;[68] Re Morrison, Bennell v Smith[69] and Hope v Hope[70] as authority for the construction that “subsequent mortgages and charges” includes unregistered mortgages and charges.  In addition, MIG and Mr Vartelas rely on Ex parte Australian Co-operative Development Society Limited (in liq)’[71] Re Morrison[72] and Avco Financial Services Ltd v Commonwealth Bank of Australia.[73]

   [67]Robinson S, Transfer of Land in Victoria (1979)  319-320.

   [68][1953] NZLR 832.

   [69][1962] Tas SR 337.

   [70][1977] 1 NZLR 582.

   [71][1978] Qd R 395.

   [72][1962] Tas SR 337.

   [73](1989) 17 NSWLR 679.

1. Thus, MIG and Mr Vartelas contend that the first mortgagee was required to determine the priorities of the subsequent encumbrance holders before paying the balance if any to the mortgagor.  MIG and Mr Vartelas submit that, given Dinesh Malhotra’s claim to rank ahead of the unregistered encumbrance holders in respect of a half interest in the land, the task of MIG and Mr Vartelas as the first mortgagee and its agent in possession necessarily involved the resolution by them of that question as well.

1. MIG and Mr Vartelas contend that given the nature of the disagreements which became apparent in the period after the sale, their process of determination necessitated (practically speaking) an approach to the Court for declaratory relief unless agreement could be reached between the various competing parties.  MIG and Mr Vartelas submit they properly took steps to:

(a)    take advice on MIG’s obligations as first mortgagee with respect to the            surplus;

(b)    analyse the issues;

(c)   attempt to obtain agreement between the competing parties; and

(d)   failing that, be in a position to apply to the Court on proper material giving details to the Court of each potential claim to the surplus funds.[74]

[74]Outline of final submissions of the first and second defendants of 28 April 2009, [28].

1. MIG and Mr Vartelas submit that they acted reasonably because, having received a claim by a subsequent mortgagee to surplus moneys, they sought to ascertain as soon as reasonably possible the validity or otherwise of the claim as best they could.  MIG and Mr Vartelas assert that in the weeks following settlement on 19 October 2007, they took steps to ascertain the amount of the secured debt including the various costs incurred by them.[75]  MIG and Mr Vartelas contend that MIG and Mr Vartelas were entitled and, indeed, bound to hold the surplus money for a reasonable time pending the establishment of any claim which might be made to the money and rely on Ex parte Australian Co-operative Development Society Limited (In Liquidation)[76] to support that contention. MIG and Mr Vartelas contend that they acted on legal advice (including counsel’s advice) in their approach to their obligations under section 77(3) of the TLA.

   [75]Outline of final submissions of the first and second defendants of 28 April 2009, [32].

   [76][1978] Qd R 395 at 396 and 397.

1. They submit that an originating motion was in preparation, but the separate proceeding commenced by Pradeep Tiwari supervened They submit that proceeding, with appropriate cross-claims, would have been an appropriate vehicle for the resolution of the priority questions arising under section 77(3).

1. MIG and Mr Vartelas submit that they retained the sale moneys on legal advice that they should retain those moneys until they were in a position to pay the subsequent mortgagees and chargees.

1. I now turn to consider what MIG’s and Mr Vartelas’ obligations were on the sale of the mortgaged property. 

THE TRANSFER OF LAND ACT 1958

1. Section 77 of the TLA provides as follows:

(1)     If within one month after the service of such notice or demand or such other period as is fixed in such mortgage or charge the mortgagor grantor or other persons do not comply with the notice or demand the mortgagee or annuitant may, in good faith and having regard to the interests of the mortgagor grantor or other persons, sell or concur with any other person in selling the mortgaged or charged land or any part thereof, together or in lots, by public auction or by private contract, at one or several times, and for a sum payable in one amount or by instalments, subject to such terms and conditions as the mortgagee or annuitant thinks fit, with power to vary any contract for sale and to buy in at any auction or to rescind any contract for sale and to resell without being answerable for any loss occasioned thereby and with power to make such roads streets and passages and grant and reserve such easements as the circumstances of the case require and the mortgagee or annuitant thinks fit, and may make and sign such transfers and do such acts and things as are necessary for effectuating any such sale.

(2)     An instrument of transfer by a mortgagee or annuitant expressed to be in exercise of the power of sale and in an appropriate approved form may be accepted by the Registrar as sufficient evidence that the power has been duly exercised.

(3)     The purchase money received arising from the sale shall be applied—

(a)     firstly in payment of all costs charges and expenses properly incurred incidental to the sale and consequent on such default;

(b)     secondly in payment of the moneys which are due or owing on the mortgage or charge; 

(c)     thirdly in payment of moneys owing under or in respect of subsequent mortgages and charges in the order of their respective priorities;

(d)     fourthly in payment of the residue (if any) to the mortgagor or into the Supreme Court under the provisions so far as they are applicable of section sixty-nine of the Trustee Act 1958 and the rules referred to therein, or if the sale is made by a mortgagee and the land is charged with a subsequent annuity or if the sale is made by an annuitant, in payment of the said residue into an account on deposit at interest in an authorised deposit-taking institution within the meaning of the Banking Act 1959 of the Commonwealth in the joint names of the annuitant and the Registrar to satisfy the accruing payments of the charge and subject thereto for the benefit of the parties who are or become entitled to the residue of the deposited money.

(4)     Upon the registration of any transfer under this section all the estate and interest of the mortgagor or grantor of the annuity as registered proprietor of the land mortgaged or charged shall vest in the purchaser as proprietor by transfer, freed and discharged from all liability on account of such mortgage or charge and (except where such a mortgagor or grantor is the purchaser) of any mortgage charge or encumbrance recorded in the Register subsequent thereto except—

(a)     a lease easement or restrictive covenant to which the mortgagee or annuitant has consented in writing or to which he is a party; or

(b)     a mortgage charge easement or other right that is for any reason binding upon the mortgagee or annuitant—

and the title of the purchaser shall not be impeachable on the ground that no case had arisen to authorize the sale or that due notice was not given or that the power was otherwise improperly or irregularly exercised but any person thereby damnified shall have his remedy in damages against the person exercising the power, and for the purposes of Part III the purchaser shall be deemed to have dealt with the registered proprietor of the land.

GENERAL PRINCIPLES

1. Before seeking to construe s 77(3), it is appropriate to consider the obligations of a mortgagee under a general law mortgage. A mortgagee who exercises his power of sale holds the surplus moneys after satisfying his costs, expenses and the loan, on trust in favour of any person interested therein under any subsequent encumbrance.

1. In relation to general law land, a legal mortgage was affected by a conveyance of the land but with a right of redemption.[77]  That mortgage was enforceable by foreclosure or sale in lieu thereof.[78]  The authors of Coote’s Treatise on the Law of Mortgages[79] state that on a sale of the mortgaged property under an express or a statutory power, the mortgagee becomes trustee of the surplus proceeds for the mortgagor or for any persons interested therein under any subsequent encumbrance or other dealing with the equity of redemption of which he has notice and he will accordingly be answerable if he pays the surplus to the wrong person but in a doubtful case he can pay the money into Court or invest it for the benefit of the persons entitled (my underlining).[80]  In particular, where it is not apparent who the proper person to receive the surplus proceeds is, the mortgagee may pay the money into Court.  Unless he does so, he is bound to invest the money for the benefit of the persons who may establish their claim to it. [81]

   [77]Sykes The Law of Securities 4^th  edition (1986) 39; RL Ramsbotham (ed), Coote’s Treatise on the Law of Mortgages 9th edition (1927) 6.

   [78]RL Ramsbotham (ed), Coote’s Treatise on the Law of Mortgages 9th edition (1927).

   [79]RL Ramsbotham (ed), Coote’s Treatise on the Law of Mortgages 9th edition (1927).

   [80]Charles v Jones (1885) 35 Ch D 544 at 549-55- per Kay J; RL Ramsbotham (ed), Coote’s Treatise on the Law of Mortgages 9th edition (1927)  943 and 945; Roberts v Bell 24 LJ Ch 471.

   [81]Ibid.

1. As indicated above, where the mortgagee sells, and has a balance of moneys in his hands, he is a trustee of those moneys for the persons beneficially interested.  Any subsequent mortgage or charge over the land converts on the sale of the property to an equitable charge over the moneys.[82]

   [82]Re Murrell (1984) 57 ALR 85; Hope v Hope [1977] 1 NZLR 582.

1. On the issue of furnishing accounts, Coote’s Treatise on the Law of Mortgages says:

A mortgagee who has sold under his power, being a trustee of the surplus proceeds of sale in his hands, is bound , like any other trustee, to furnish to the person or persons entitled to receive those moneys an account, if demanded, of his claims under his mortgage in respect of principal, interest and costs, including the expenses of and incident to the sale.[83]

[83]RL Ramsbotham (ed), Coote’s Treatise on the Law of Mortgages 9th edition (1927), 945-946.

1. Under s 105 of the Property Law Act 1958, express provision is made that the surplus is held by the mortgagee on trust to be applied by him, “first, in payment of all costs, charges and expenses properly incurred by him as incident to the sale or any attempted sale, or otherwise; and secondly, in discharge of the mortgage money, interest and costs, and other money (if any) due under the mortgage; and the residue of the money so received shall be paid to the person entitled to the mortgage property, or authorized to give receipts for the proceeds of the sale thereof.”

1. The authors of The Mortgagee’s Power of Sale[84] assert that, although the matter is not free from doubt, it appears that where there are subsequent encumbrances, the whole of the surplus should be paid to the encumbrancer next in point of priority.[85]  The authors say that if the mortgagee has doubts about the proper order of priority of other mortgages, the moneys are best paid into Court.[86]  The authors, after discussing whether a mortgagee should seek directions as to whom he should pay the moneys to, offer the view that the fact that “a mortgagee is an investor and subject to an involuntary statutory trust should lead the courts to conclude that the mortgagee’s duty in doubtful cases is to pay into court not, in effect, to see to the administration of the trust.”[87]

   [84]Croft C and J Johansson, The Mortgagee’s Power of Sale 2^nd edition ( 2004).

   [85]Ibid 186; citing as authority Re Thompson’s Mortgage Trusts {1920] 1 Ch 508.

   [86]Croft C and J Johansson, The Mortgagee’s Power of Sale 2^nd edition ( 2004)190.

   [87]Ibid 193; they cite as authority Re Thompson’s Mortgage Trusts  supra.

1. I now turn to the position under the TLA and in particular the judicial authorities on this question.

JUDICIAL AUTHORITIES

Beeby v Official Assignee of Pickering and Pickering [1953] NZLR 832

1. Hay J of the Supreme Court of New Zealand was called on to decide whether the surplus moneys on a sale by the registered first mortgagee of Torrens system land were payable, under section 104(1) of the Land Transfer Act 1952 (NZ), the equivalent section of s 77(3)(d) of the TLA, to the official assignee of the bankrupt mortgagor free from the mortgagor’s wife’s equitable charge over the relevant land for ₤400 which had been granted by the mortgagor to his wife prior to his bankruptcy, or whether the proceeds were payable to the official assignee of the mortgagor subject to the charge.  Section 104(1) of the Land Transfer Act 1952 (NZ) provided:

The purchase money to arise from the sale by the mortgagee of any mortgaged land, estate, or interest shall be applied –

(a) Firstly, in payment of the expenses occasioned by the sale;

(b) Secondly, in payment of the moneys then due or owing to the mortgagee;

(c) Thirdly, in payment of subsequent registered mortgages or encumbrances (if any) in the order of their priority;

(d) Fourthly, the surplus (if any) shall be paid to the mortgagor.

1. As can be seen, the statutory obligation to pay subsequent mortgages and charges was expressed to apply to registered mortgages and charges.  Hay J held that, nevertheless, the wife’s equitable charge should be recognised and that the provision under s 104 requiring payment of the surplus to the mortgagor did not abrogate the wife’s equitable interest in the proceeds.He held that the fund in Court, being the surplus moneys arising from the sale by the mortgagee of the mortgaged lands, was payable to the official assignee as property passing to him in the bankruptcy of the mortgagor subject to the charge in favour of the wife for ₤400.

Re Morrison; Bennell v Smith [1962] Tas R 337

1. The applicant represented an unregistered second mortgagee of a bankrupt mortgagor.  The first mortgagee under a registered mortgage sold the mortgaged property of the bankrupt mortgagor and paid the balance of the proceeds to the official receiver of the bankrupt.  The applicant sought a declaration that the so much   of the proceeds of sale of the property of the bankrupt, as held by the receiver, was held in trust by the receiver to pay the amount secured by the second mortgage.  Crawford J held that the fact that the land was Torrens system land made no difference to the issue before him.[88]  He observed that the enforcement of equitable rights exists for land held under the Torrens system; referring to Barry v Heider[89] where the High Court of Australia held that the Torrens system of title by registration did not deny equitable rights over the land.Crawford J held that a sale by a mortgagee constitutes the mortgagee as a trustee of the surplus proceeds in favour of the subsequent encumbrancers.  Crawford  J relied, inter alia, on Asquith J in Weld-Blundell v Synott[90] where Asquith J said “Undoubtedly a first mortgagee who sells the mortgaged property and collects the full proceeds is under some duty to encumbrancers that rank after him.  That duty is to hold the balance of the proceeds after satisfying his own debt in trust for those encumbrancers.”

   [88][1962] Tas R 337 at 343.

   [89](1914) 19 CLR 197.

   [90][1940] 2 KB 107.

1. Section 54 of the Real Property Act 1862 (Tas) governed the application of the proceeds of sale by the mortgagor of land registered under the Act.It was in similar terms to s 77(3) of the TLA, save that there was also provision for the surplus moneys to be applied in the satisfaction of the claims of all persons who had lodged caveats, after the satisfaction of subsequent mortgages and incumbrances (if any).  Accordingly, it was not in issue that the first mortgagee should have applied the surplus moneys in favour of the second mortgagee before paying the balance to the receiver in bankruptcy.  The receiver argued, however, that in the events that had happened, where the mortgagee had not satisfied the second mortgagee’s claim but paid the moneys to the receiver, the second mortgagee only had a statutory right to damages against the first mortgagee for failing to pay the surplus moneys to the second mortgagee.

1. Crawford J disagreed.  He held that the words used in the section that the money “shall be applied” did not alter the position in equity that the mortgagee is a trustee in respect of the proceeds of sale.  He held that the second mortgagee had the right to follow the moneys wrongfully applied or to which he had any right in equity into the hands of the official receiver, particularly as the receiver had notice of the existence of the second mortgage.

1. Despite the particular wording of the Tasmanian Act, the decision is authority for the principle that on the sale of the mortgaged property under the Torrens system, the mortgagee holds the surplus on trust for the subsequent unregistered mortgagees or chargees and that irrespective of how the moneys were actually applied the beneficiaries could follow the moneys and uphold an equitable interest in them.

Hope v Hope [1977] 1 NZLR 582

1. An unregistered second mortgagee of Torrens system land claimed security in the surplus moneys of land sold by the first mortgagee.  This claim was resisted by the wife of the mortgagor, who subsequently had obtained an order that security in her favour be granted over the proceeds of sale of the land to support maintenance orders made against the mortgagor in a matrimonial proceeding between the husband and wife.  The wife claimed that under s 104(1) of the Land Transfer Act 1952 (NZ), the second mortgagee had no security over the proceeds resulting from the first mortgagee’s sale.  Section 104(1) of the Land Transfer Act 1952 (NZ) is set out above in the discussion of Beeby v Official Assignee of Pickering and Pickering.[91]

   [91][1953] NZLR 832.

(c)    to release possession of the Hillside property to S&D.

[244]Plaintiffs’ points of claim, [12].

1. They submit that accounting for the residue of the proceeds of the sale of the Footscray property required that the requirements of Section 77(3)(c) of the TLA be complied with; there has been no failure to account to S&D for the residue of the proceeds as no such obligation arises until after the obligations of MIG and Mr Vartelas under Section 77(3)(c) of the TLA have been satisfied; and MIG and Mr Vartelas have always been willing to account at the proper time, that is once the enforcement of the mortgage and the defence has been completed. 

1. MIG and Mr Vartelas contend that the retention of the moneys by Mr Vartelas on behalf of MIG was required by law, as submitted above, and reasonable in light of Counsel’s advice.  

1. I reject these submissions.  In my opinion, Mr Vartelas did fail to faithfully perform his duties.  His failures were significant.  He failed to ascertain what his appointer  was owed.  He failed to take proper care to ensure he was not improperly prolonging the receivership.  He did not obtain advice from Mr Parncutt until 21 February 2008, some four months after he should have terminated the receivership.   He took inadequate steps to account to those for whom he held the surplus moneys on trust.

1. In any event, the Court has power under s 423(1)(b) to order an inquiry where a person complains to the Court about an act or omission of a controller of property of a corporation in connection with performing or exercising any of the controller’s functions and powers.  In Hall v Poolman[245]  the Full Court of New South Wales held that s 536(1)(b) [the equivalent of s 423(1)(b)] would cover complaints about incompetence or lack of diligence as well as complaints about failure to perform duties faithfully.  They said:

We see no reason to read down those words [the words in 536(1)(b)] by reference to another subparagraph expressed as an alternative to subpara (1)(b).[246]

[245](2009) 71 ACSR 139.

[246]Ibid at [90].

1. Accordingly, even if s 423(1)(a) is not activated, on the assumption Mr Vartelas has performed his functions faithfully, in my opinion the Court has jurisdiction under s 423(1)(b) to order an inquiry as a complaint has been made to the Court by the plaintiffs about acts and omissions of Mr Vartelas as a controller of property of S&D in connection with performing or exercising his functions and powers. The plaintiffs did not expressly rely on s 423(1)(b). Nevertheless, the plaintiffs did complain about acts and omissions of Mr Vartelas as a controller of property of S&D. Hall v Poolman[247] establishes that the Court has jurisdiction to inquire into the matter complained of without any formal request to the Court to institute an inquiry under 536(1)(a) and (b) which is almost identical to 423(1)(a) and (b). For the reasons referred to above, in my discretion I propose to order an inquiry into the conduct of Mr Vartelas relying on either or both s 423(1)(a) and (b).

   [247](2009) 71 ACSR 139.

1. Accordingly, I propose to order under s 434(1)(b) that within seven days of the order, Mr Vartelas renders proper accounts of and vouches his receipts and payments as receiver and manager of S&D.

1. Further, I will order and direct that the inquiry into Mr Vartelas’ conduct as receiver and manager be conducted by myself. I direct that the inquiry should be held into the amounts and sums that should have been included in the account that Mr Vartelas, as receiver and manager, should have rendered to the liquidator on the sale of the Footscray property on 19 October 2007. I direct that the liquidator submit to the Court draft short minutes for orders as to the inquiry. I will reserve the question of the costs of the inquiry. Following the inquiry, I will consider whether to make further orders under s 423(1) or otherwise.

1. The liquidator seeks an order under s 425 fixing Mr Vartelas’ remuneration as receiver of S&D.[248]  I find that the consideration of any such order should await the outcome of the inquiry.  I have already indicated, however, that Mr Vartelas is not entitled to any remuneration that is chargeable against the property of S&D after 19 October 2007.

   [248]The plaintiffs submissions, exhibit MFI P 10, [4(h)].

1. At one stage, the liquidator raised the possibility of seeking an order under s 434A for the removal of Mr Vartelas as receiver of the assets and the undertaking of S&D.[249] Before the Court may exercise its powers under s 434A, it must be satisfied that Mr Vartelas has been guilty of misconduct in connection with performing or exercising any of the controller’s functions and powers. I have already indicated that I propose to remove Mr Vartelas as receiver under s 434B(1). Accordingly, I do not consider it necessary to consider whether or not to remove Mr Vartelas for his alleged misconduct.

   [249]Letter 9 April 2008, CBA 1, 43-44.

VARTELAS AS AGENT IN POSSESSION

1. The liquidator seeks an order under s 434B(1) that Mr Vartelas forthwith cease to act as agent and that he forthwith give up possession and control of the property of S&D.[250]  The liquidator has standing to make such an application under s 434B(4).

   [250]The plaintiffs submissions, exhibit MFI P 10, [59].

1. Under s 434B(2), the Court may only make an order under subsection (1) if it is satisfied that the objectives for which Mr Vartelas was appointed, or entered into possession or took control of the property of S&D, as the case requires, have been achieved.  Under subsection (3), for the purposes of subsection (2), the Court must have regard to:

(a)    S&D’s interests; and

(b)   the interests of MIG as the holder of the charge that Mr Vartelas is enforcing; and

(c )   the interests of S&D’s other creditors; and

(d)   any other relevant matter.

1. As referred to above, I am satisfied that MIG’s securities have been satisfied in full by the sale of the Footscray property.  After taking theses matters into account, and the matters referred to in subsection (3), I am satisfied that the objectives for which Mr Vartelas was appointed have been achieved.  Accordingly, I am prepared to make the order sought.

1. The liquidator and S&D seek an order under s 423(1)(a) that the Court inquire into the performance of Mr Vartelas as agent in possession of the Footscray property.[251] The liquidator also seeks an order under s 434(1)(b) that Mr Vartelas, as agent in possession, renders proper accounts of, and vouches, his receipts and payments, and pays over to the liquidator the amount properly payable to the liquidator.[252]

   [251]The plaintiffs submissions, exhibit MFI P 10, [4(g)].

   [252]The plaintiffs submissions, exhibit MFI P 10, [58].

1. As indicated above, I am satisfied that Mr Vartelas ought to have ceased to act as agent in possession as at 19 October 2007 and in the circumstances paid into Court the surplus moneys.  Mr Vartelas failed to do so and he thereafter retained possession and control of the surplus and applied it to meet his fees and expenses, when he knew or ought to have known, that the sale of the Footscray property provided more than enough moneys to pay out the secured debts owed by S&D to MIG.

1. In those circumstances, it appears to me that Mr Vartelas as a controller of the property of S&D has not faithfully performed, or is not faithfully performing, his functions as controller.

1. As discussed above, even if s 423(1)(a) is not activated, on the assumption Mr Vartelas has performed his functions faithfully, in my opinion the Court has jurisdiction under s 423(1)(b) to order an inquiry as a complaint has been made to the Court by the plaintiffs about acts and omissions of Mr Vartelas as a controller of property of S&D in connection with performing or exercising his functions and powers. The plaintiffs did not expressly rely on s 423(1)(b). Nevertheless, the plaintiffs did complain about acts and omissions of Mr Vartelas as a controller of property of S&D. Hall v Poolman[253] establishes that the Court has jurisdiction to inquire into the matter complained of without any formal request to the Court to institute an inquiry under 536(1)(a) and (b) which is almost identical to 423(1)(a) and (b).

   [253](2009) 71 ACSR 139.

1. The Court in its discretion finds that it should inquire into Mr Vartelas’ conduct as the controller of property of S&D as provided in s 423(1)(a) or (b). Further, I am satisfied that Mr Vartelas, as controller of the property of S&D, was required by the liquidator of S&D to render proper accounts of, and to vouch, his receipts and payments as agent in possession, but failed to do so. Accordingly, I propose to order under s 434(1)(b) that within seven days of the order, Mr Vartelas renders proper accounts of and vouches his receipts and payments as agent in possession of the Footscray property of S&D.

1. Further, I will order and direct that the inquiry into Mr Vartelas’ conduct as receiver and manager be conducted by me. I direct that the inquiry be conducted jointly with the inquiry into Mr Vartelas’ performance as receiver and manager. I direct that the inquiry should be held into the amounts and sums that should have been included in the account that Mr Vartelas, as agent in possession, should have rendered to the liquidator on the sale of the Footscray property on 19 October 2007. I direct the liquidator to submit to the Court draft short minutes for orders as to the inquiry. I will reserve the question of the costs of the inquiry. Following the inquiry, I will consider whether to make further orders under s 423(1) or otherwise.

MIG AS MORTGAGEE IN POSSESSION OF THE FOOTSCRAY PROPERTY AND AS MORTGAGEE OF ASSETS AND UNDERTAKING OF S&D

1. The liquidator seeks an order under s 434B(1) that MIG, as the appointor of the receiver of S&D, forthwith give up possession and control of the property of S&D.[254]  The liquidator has standing to make such an application under s 434B(4).

   [254]Points of claim [I], CB 1, 5.

1. MIG has control of the property of S&D as mortgagee in possession and as the appointor of the receiver of S&D. It is therefore a controller for the purposes of s 434B(1).

1. Under s 434B(2), the Court may only make an order under subsection (1) if it is satisfied that the objectives for which MIG took possession or control of the property of S&D have been achieved.  Under subsection (3), for the purposes of subsection (2),  the Court must have regard to:

(a)    S&D’s interests; and

(b)   the interests of MIG as the holder of the charge; and

(c )   the interests of S&D’s other creditors; and

(d)   any other relevant matter.

1. As referred to above, I am satisfied that MIG’s securities have been satisfied in full by the sale of the Footscray property.  After taking theses matters into account, and the matters referred to in subsection (3), I am satisfied that the objectives for which MIG took possession or control of the property of S&D have been achieved.  Accordingly, I am prepared to make the order sought.

1. The liquidator and S&D seek an order under s 423(1)(a) that the Court inquire into the performance of MIG as a controller of property of S&D.[255]  Even if the liquidator has not formally sought an inquiry, as the plaintiffs have made complaints about MIG’s acts and omissions as a controller of the property of S&D the Court has discretion to inquire into the matter.  As discussed above, Hall v Poolman[256] establishes that the Court has jurisdiction to inquire into the matter complained of without any formal request to the Court to institute an inquiry under 536(1)(a) and (b) which is almost identical to 423(1)(a) and (b).

   [255]Transcript 784, although the matter is not as clear as it should be. MIG and Mr Vartelas contend that the plaintiffs seek no order against MIG and refer to the plaintiffs’ list of issues dated 12 February 2009 but asserts the plaintiffs seek an order under section 1321, see outline of final submissions of first and second defendants of 28 April 2009, [115].

   [256](2009) 71 ACSR 139.

1. The liquidator seeks an order under s 434(1)(b) that MIG, as mortgagee in possession, render proper accounts of, and to vouch, MIG’s receipts and payments and to pay over to the liquidator the amount properly payable to the liquidator.[257]

   [257]Points of claim [G], CB 1, 5.

1. As indicated above, I am satisfied that MIG’s secured debt was satisfied in full as at 19 October 2007 and in the circumstances, MIG ought to have paid into Court the surplus moneys.  MIG failed to do so or failed to cause Mr Vartelas to do so.  MIG failed to account for the moneys paid to it by its agent in possession.  MIG applied the moneys in purported satisfaction of interest, where interest had ceased to accrue and in the payment of expenses not properly charged against the proceeds.  MIG knew that the sale of the Footscray property provided more than enough moneys to pay out the secured debts owed by S&D to MIG.

1. In those circumstances, it appears to me that MIG as a controller of the property of S&D has not faithfully performed, or is not faithfully performing, its functions as controller. Even if s 423(1)(a) is not activated, the plaintiffs have complained to the Court about the acts or omissions of MIG as a controller of property of S&D and s 423(1)(b) is activated as discussed above. The Court in its discretion finds that it should inquire into the MIG’s conduct as a controller of S&D’s property, as provided in s 423(1)(a) or (b). Further, I am satisfied that MIG, as controller of the property of S&D, was required by the liquidator of S&D to render proper accounts of, and to vouch, its receipts and payments as controller, but failed to do so. Accordingly, I propose to order under s 434(1)(b) that within seven days of the order, MIG render proper accounts of, and to vouch, its receipts and payments as agent in possession of the Footscray property of S&D.

1. Further, I will order and direct that the inquiry into MIG’s conduct as mortgagee in possession be conducted by me. I direct that the inquiry be conducted jointly with the inquiry into Mr Vartelas’ performance as receiver and manager and agent in possession. I direct that the inquiry should be held into the amounts and sums that should have been included in the account that MIG should have rendered to the liquidator on the sale of the Footscray property on 19 October 2007. I direct that the liquidator submit to the Court draft short minutes for orders as to the inquiry. I will reserve the question of the costs of the inquiry. Following the inquiry, I will consider whether to make further orders under s 423(1) or otherwise.

1. The liquidator also seeks an order under s 434B(5) that MIG, as the holder of a charge over the property of S&D, be prohibited from appointing a person as receiver of the property of S&D under its charge, from entering into possession, or taking control, of such property for the purpose of enforcing the charge, or from appointing any person to enter into possession or take control of such property (whether as agent for the charge or for his corporation).[258]  In the circumstances, where MIG has ignored the rights of S&D, I am prepared to so order.

   [258]Points of claim [J], CB 1, 5.

1. Whether any amount is payable to the liquidator or into Court by Mr Vartelas or MIG will depend on the outcome of the inquiries or further order.  Whether or not any interest is payable will likewise depend on the outcome of the inquiries or further order, as will the question of the costs of the inquiries.

THE LIQUIDATOR’S CLAIM TO HIS COSTS CHARGES AND EXPENSES

1. The Liquidator seeks a declaration that he is entitled to be indemnified out of the fund in Court in respect of his costs, expenses and remuneration for and incidental to procuring payment into Court, including his costs, charges and expenses of and incidental to:

(a)     investigations and enquiries into the existence and quantum of such fund;

(b)   any demands for, or work undertaken for the purposes of procuring the

payment of such fund into Court; and

(c )     his costs, charges and expenses of this proceeding.

1. Further, the liquidator seeks a declaration that his right of indemnity is secured by an equitable charge or lien over the fund in Court.  The liquidator seeks a declaration that such an equitable lien is a first charge on the fund in Court and that the said costs, charges and expenses of the liquidator are liable to be paid in priority to any other claims on the fund.  The liquidator seeks a consequential order that the amount of such costs, charges and expenses be paid to the liquidator out of the fund in Court.[259]

   [259]The plaintiffs’ points of claim of 22 December 2008, CBB 1,  5-6.

1. In his written submissions, the liquidator claims that the costs and expenses referred to in (a) and (b) above are “salvage” costs and constitute an equitable lien over the fund in favour of the liquidator.  He claims that he is entitled to them in priority to all secured creditors, S&D and the beneficiaries of the unit trust, save for the claim of the secured creditor, MIG.  The liquidator concedes that Mr Vartelas is entitled to recover the costs of realizing the Footscray property and the liquidator does not claim he played any role in that realization process.

1. The liquidator says that he has incurred costs and expenses (as referred to above) of a “Universal Distributing” nature, by reason of having taken steps to compel the payment of the surplus proceeds into Court and thereby preventing any further erosion of them.

1. Even though the liquidator does not seek to obtain any priority against the secured debt of MIG, this issue was argued between the plaintiffs and the first and second defendants.  The liquidator laid claim to these costs and expenses in priority out of the fund in Court, on the basis that MIG and Mr Vartelas have already received all that they are entitled to receive.

1. Despite the fact that other interested parties were not heard on this issue, I will make a preliminary determination of the issue and invite those who may have an interest and have pleaded it, or otherwise raised it, to make further submissions, if they so wish, before I finally determine the issue.  I will only deal at this stage with the so called “salvage” costs and expenses.

1. The accepted starting point of this principle is the decision of Dixon J, sitting as a judge alone in Canberra, in Re Universal Distributing Co Ltd (in liq).[260]   Dixon J held that a secured creditor must bear the expenses incurred on the realization of the fund affected by the security.  He said:[261]

The debenture-holders are creditors who have a specific right to the property for the purpose of paying their debts.  But if it is realized in the winding-up, a proceeding to which they are thus parties, the proceeds must bear the cost of the realization just as if they had begun a suit for its realization or had themselves realized it without suit (cf In re Regent’s Canal Ironworks Co;[262] Ex parte Grissell; per JamesLJ, at p. 427; and see Batten v Wedgwood Coal and Iron co.[263]

[260](1933) 48 CLR 171.

[261]Ibid at 174.

[262](1875) 3 Ch D 411 at 427 per James LJ

[263](1884) 28 Ch D 317 at 325 per Pearson J.

1. Dixon J included within the principle that those expenses reasonably incurred were those in “the care, preservation and realization of the property.”[264]He said:

In applying this principle, only those expenses appear to have been thrown against the fund belonging to the debenture-holders which have been reasonably incurred in the care, preservation and realization of the property.  In the present case the liquidator has employed a material part of his time and energies in recovering moneys, both uncalled capital and debts, which enures for the debenture-holder, and in so far as these services increase the remuneration he receives, I see no reason why the burden should not be thrown upon the proceeds.  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 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.[265]

[264](1933) 48 CLR 171 at 174.

[265]Ibid at 174-175.

1. Dixon J speaks of the expenses as being “thrown against the fund.”  The equitable claim is against the fund irrespective of those claiming an interest in the fund.  The expenses incurred must have contributed to the funds realization, care or preservation.  Dixon J recognised that this right against the fund is independent of any conduct of others laying claim to the fund which might otherwise have given rise to some claim as between the parties.

1. In re Regent’s Canal Ironworks Co; Ex parte Grissell,[266] referred to by Dixon J, the entitlement of the liquidator to costs of his liquidation, in priority to the secured creditor, was at issue.  The company carried on a business as an iron manufacturer.  It made an arrangement with its previous owner, Grissell, that he should carry on the business on behalf of the company, advance moneys for the business to be carried on and repay himself out of its receipts.  Previously, the company had issued mortgage debentures.  Ultimately the company went into liquidation and the business was carried on thereafter by Grissell with the agreement of the liquidators.  The debenture holders were not consulted on this arrangement.  The assets and undertaking were ultimately sold and the money in dispute comprised the proceeds of sale of the leaseholds and the machinery, all subject to the debentures.  The case concerned whether Grissell had priority, as against the debenture holders, to the proceeds to meet his costs of running the business.  It was held that he was not.  The liquidators also sought priority  for their costs and remuneration incurred during the period the business was conducted by them prior to the sale of the leasehold and machinery.

   [266](1875) 3 Ch D 411.

1. James LJ, with whom Baggallay JA and Brett J agreed, held that the costs of keeping the business going could not be recovered by the liquidators in priority to the mortgagees.  He said:

The debenture holders are the creditors to whom the property belonged; they were creditors of the company independently, but besides being creditors of the company they had a specific right to the property for the purpose of paying their debts.  If the property is realized in the proceedings to which they are parties they must pay the costs of the realization, just as they would have had to pay them if they had their own suit for the purpose of realizing it, or if they had employed a person out of doors.  Those are charges to be deducted out of the proceeds of the property, and they are only  entitled to the net proceeds of the property.

No doubt, as I said before, it has been argued that there were costs of preservation, which means that by keeping the thing going for some years the property ultimately realized more for the debenture holders than it would have otherwise realized.  But this is merely a surmise which we cannot adopt, and even if it were true it would really make no difference whatever.  The services rendered in that way affected the mortgagors, and though continuing the business might ultimately tend to make the property fetch more, it cannot create a charge against the mortgagee.  The only costs for the preservation of the property would be such things as have been stated, the repairing of the property, paying rates and taxes, which would be necessary to prevent any forfeiture, or putting a person in to take care of the property.  It is quite clear from all that we know in this case here that these liquidators never paid anything of that kind.  The property which is the subject-matter of these proceedings, that is to say, the leaseholds, machinery, and plant, never has been the subject of expenditure on the part of the liquidators.”[267]

In this passage, the Court of Appeal recognises that the lien would include the costs of preservation, such as expenditure on the care and repairing of the property.

[267]Ibid 427.

1. In Batten v Wedgwood Coal and Iron Co,[268] the issue was whether a solicitor should be paid his costs and remuneration out of funds paid into Court in priority to those holding security over the funds.  A receiver was appointed by the Court and was a Court officer, but resigned before a coal mine owned by the company was sold.    After the receiver resigned, the plaintiff‘s solicitor incurred costs in completing the sale of the coal mines the subject of the debenture.  Pearson J said that  the solicitor was entitled to his costs of completing the sale in priority to the receiver.  He said:

The property must be realized by someone in order that it may be distributed, and whoever has realized it and brought the proceeds under the control of the Court, has really constituted the fund which has to be distributed for the benefit of the receiver and everyone else who is entitled.  These costs must therefore be paid in priority to the receiver.[269]

In this case, the Court held that the lien was enforceable even though the funds were no longer in the solicitor’s hands.

[268](1884) 28 Ch D 317.

[269]Ibid at 325 per Pearson J.

1. In Hewett v Court[270] Deane J addressed the nature of an equitable lien generally.  He said:

An equitable lien is a right against property which arises automatically by implication of equity to secure the discharge of an actual or potential indebtedness…Though called a lien, it is, in truth, a form of equitable charge over the subject property …in that it does not depend upon possession and may, in general, be enforced in the same way as any other equitable charge, namely, by sale in pursuance of court order or, where the lien is over a fund, by an order for payment thereout…(citations omitted)[271]

Importantly, for this case, these principles confirm that the liquidator may assert a lien even though he is not in possession of the fund and may enforce it by an order for payment out.

[270](1983) 149 CLR 639.

[271]Ibid at 663.

1. In Moodemere Pty Ltd (in liq) v Waters[272] the Full Court of the Supreme Court of Victoria followed and applied the principle laid down by Dixon J in Re Universal Distributing Co Ltd.[273]Murphy J said:

The emphasis in all of these cases is that the costs of realising assets, and creating a fund from which to satisfy a secured debt are payable out of the fund so created before the debt itself is satisfied.

I think it follows that where a company charges its assets, and a default occurs so that the creditor becomes entitled in equity to the assets charged, a person, validly appointed to realise the assets so as to provide a fund to satisfy the debt, is entitled to look to the fund itself to reimburse his proper costs, charges and expenses of realisation and his just remuneration attendant on the realisation, before even the creditor is paid his secured debt out of the fund. [274]

Tadgell J (with whom Kaye J agreed) canvasses the authorities and analyses the legal principles underlying the rights of the secured creditor and, in that case, the receiver who had realized the assets.

[272][1988] VR 215.

[273](1933) 48 CLR 171.

[274](1988) VR 215 at 221.

1. The liquidator relies on Shirlaw v Taylor,[275] a decision of the Full Court of the Federal Court of Australia.  At issue was whether a provisional liquidator had an equitable lien over the moneys of the company he had caused to be paid into court for the company.  The liquidator of the company argued that the provisional liquidator was bound to deliver up the proceeds to him and then prove in the liquidation as an unsecured creditor. The Court (comprising Sheppard, Burchett and Gummow JJ) referred to equity’s recognition of equitable liens that may arise out of general considerations of justice or upon the principle that he who seeks the aid of equity in enforcing some claim must admit the equitable rights of others directly connected with or arising out the  same subject matter.  They said:

Thus, where a party has by his efforts brought into court a fund in the administration of which various parties are interested, his costs and expenses should be a first claim upon the fund: Batten v Wedgwood Coal and Iron Co;[276] Re Universal Distributing Co Ltd (in liq)[277] per Dixon J.

[275](1991) 102 ALR 551.

[276](1884) 28 Ch D 317 at 324-325 per Pearson J.

[277](1933) 48 CLR 171 at 174-175 per Dixon J.

1. In Commonwealth Bank of Australia v Butterell,[278] Young J of the Supreme Court of New South Wales considered the position of an administrator who had sold the stock of the company.  The stock sold included stock that was subsequently claimed by the company Selleys to belong to it under a Romalpa clause.  After the sale of the stock, a receiver was appointed by a secured creditor.  At issue was whether or not the administrator was entitled to a lien over the proceeds of the sale of the stock that belonged to the company for the reasonable costs and expenses he had incurred in resisting a claim by Selleys for damages for conversion by innocently selling the stock of Selleys.  Young J referred to authorities such as Batten v Wedgwood Coal & Iron Co,[279] Re Universal Distributing Co Ltd (in liq)[280]and Moodemere Pty Ltd (in liq)  v Waters[281] and said those authorities:

...make it clear that in the current situation one has to make a distinction between the costs and expenses of realisation, the general costs of the administration and the costs of preservation of the property.  If something falls within the general costs of administration because its sole purpose was not to preserve the property or to realise the property, then the secured creditor takes in priority to the person whose efforts brought about the production of the fund.[282]

[278](1994) 35 NSWLR 64.

[279](1884) 28 Ch D 317.

[280](1933) 48 CLR 171.

[281][1988] VR 215,

[282](1994) 35 NSWLR 64 at 71.

1. Young J then considered whether meeting the claims from Selley’s (the stock supplier) was an expense covered by the lien.  He cited the decision of Scott v Nesbitt[283] where Lord Eldon said of the expenses incurred by a person managing an estate in Jamaica:

….the concerns of the estate could not be carried on without consignees; and all moral justice requires, that for what in the fair discharge of their duty they became liable to in respect of the management of the estate they should be indemnified, with priority to the claim of those, who have interests in the estate, to be so managed, before any person can have the benefit from it.[284]

Young J concluded:

It seems to me in the instant case that where an administrator acts in good faith and sells property producing a fund and he is attacked for an innocent conversion in the course of bringing about the fund, then the reasonable costs and expenses of the administrator in resisting the claim and the cost of settling it or meeting it if need be is a matter in respect of which he is entitled to an equitable lien.[285]

[283](1808) 14 Ves 438; 33 ER 589.

[284]Ibid at 444; 591.

[285](1994) 35 NSWLR 64 at 71.

1. Young J then considered the issue of the administrator’s remuneration after the receiver was appointed.  He held that the remuneration would not fall under the equitable lien unless the administrator’s time was “exclusively devoted” to the realization of the fund which was passed over to the receivers.  He said that the administrator was not entitled to be remunerated for time spent on statutory duties and time spent on a heterogeneous group of problems, including the transfer of assets. [286]

   [286]Ibid 72-73.

1. The Court of Appeal of the Supreme Court of Victoria have referred, with approval, to the decisions in Re Universal Distributing Co Ltd (liq)[287] in Lockwood v White[288] without qualifying any of the principles so far referred to. 

   [287](1933) 48 CLR 171.

   [288](2005) 11 VR 402.

1. In Dean-Willcocks v Nothintoohard Pty Ltd (in liq),[289] the New South Wales’ Court of Appeal considered in detail the nature of an equitable lien claimed by a receiver, appointed by a registered second mortgagee, over the proceeds of sale of land realized by the first mortgagee.  The second mortgagee, Preslands, held a second registered mortgage debenture over the assets and undertaking of company Nothintoohard.  The second mortgagee appointed the appellants as receivers and managers over the assets and undertakings of Nothintoohard.  The receivers and managers incurred costs and expenses in preparing for the sale of the company’s land at Mascot, over which Preslands also held a registered second mortgage, including  in preparing legal contracts and obtaining a valuation.

   [289][2006] NSWCA 311.

1. Before the receivers and managers could affect a sale, Sovereign, the first mortgagee under a registered first mortgage over the land, exercised its power of sale under the mortgage.  The Court found that the costs and expenses incurred by the receiver and manager did not in any way assist Sovereign in exercising its power of sale, nor did it save Sovereign any costs in the sale process.  The Court was not asked to consider any costs incurred by the receivers and managers in protecting the property.   The Court also found that there was no agreement or consent by Sovereign to the actions taken by the receivers and managers. 

1. Beazley JA held that the authorities established that, in an appropriate case, a receiver by order of court or out of court may recover costs and, if applicable, be paid remuneration for undertaking the work or management of a fund, business or property.  She held that the receiver’s entitlement would depend on the usual principles of priority, which may also include circumstances where the court would recognise a form of a salvage claim.  In this case, where Sovereign held a first registered mortgage and its conduct had not otherwise created an equitable right to priority, the issue fell to be decided on the principles of salvage. 

1. She held that the appellants’ conduct did not create the fund from which they sought to be reimbursed, nor could the moneys they spent be said to have protected or preserved the property, or enhanced its value, in a way that produced incontrovertible benefit that ultimately enured to the advantage of Sovereign and the sale Sovereign affected.  For this reason, the circumstances which might give rise to an equitable lien or the doctrine of salvage were not present.[290]  McColl JA agreed with Beazley JA but preferred to reserve the question of whether the receiver otherwise had an equitable lien for remuneration, costs and expenses. 

   [290]Ibid at [109].

1. Spigelman CJ agreed with Beazley JA.  He said that an equitable lien arises in the case of expenditure with respect to “the care, preservation and realisation of the property” as stated by Dixon J in Re Universal Distributing Company Ltd (in liq).[291]  He noted that there had been such expenditure in this case to protect the land, such as providing security guards, but the appellant had made no claim to a lien for the cost of “care and preservation” but only for costs of  “realisation”.  The fact that the moneys were never in the hands of the receivers, but were in the hands of the first mortgagee, was not held to be a relevant fact to disentitle the receiver to raise an equitable lien.

   [291](1933) 48 CLR 171 at 174

1. From these authorities the following principles referrable to a liquidator may be stated:

(a)     At equity, an equitable lien arises in favour of a liquidator over the funds realised from the sale of company property for the costs he incurs for the care, preservation and realisation of the property in priority to those otherwise interested in the fund. In re Regent’s Canal Ironworks Co. Ex parte Grissell;[292] Re Universal Distributing Company Ltd (in liq);[293] Commonwealth Bank of Australia v Butterell[294] and Dean-Willcocks v Nothintoohard Pty Ltd (in liq).[295]

[292](1875) 3 Ch D 411.

[293](1933) 48 CLR 171 at 174

[294](1994) 35 NSWLR 64.

[295][2006] NSWCA 311.

(b)     The costs include those that the liquidator fairly incurs in the discharge of his duty to care, preserve and realise the property.  Commonwealth Bank of Australia v Butterell.[296]

[296](1994) 35 NSWLR 64.

(c)     The lien may arise whether or not the ultimate sale is affected by the liquidator and entitles the liquidator to be paid in priority out of the fund whether or not he is in possession of the fund. Commonwealth Bank of Australia v Butterell[297] and Dean-Willcocks v Nothintoohard Pty Ltd (in liq).[298]

(d)     The costs and expenses secured by the lien must be incurred exclusively for the care, preservation or realisation of the property and not otherwise expended in the general administration of the mortgagor.  Re Universal Distributing Company Ltd (in liq)[299] and Commonwealth Bank of Australia v Butterell.[300]

(e)     The costs and expenses include the liquidator’s reasonable remuneration. Re Universal Distributing Company Ltd (in liq);[301] Moodemere Pty Ltd (in liq) v Waters[302] and Commonwealth Bank of Australia v Butterell.[303]

[297](1994) 35 NSWLR 64.

[298][2006] NSWCA 311.

[299](1933) 48 CLR 171 at 174

[300](1994) 35 NSWLR 64.

[301](1933) 48 CLR 171 at 174

[302][1988] VR 215.

[303](1994) 35 NSWLR 64.

1. In this case the liquidator did not realize the fund.  It was realized by MIG and Mr Vartelas.  On the other hand, I find that but for the fund being paid into Court; it would probably have been dissipated and lost by the unauthorised actions of MIG and Mr Vartelas in accessing and applying the moneys to the claimed mortgage debt and expenses.  This assumes that the fund in Court represents a surplus over and above the moneys otherwise due to MIG and Mr Vartelas.  Naturally, if MIG and Mr Vartelas had taken moneys of S&D that they were not entitled to, the trustee may have had a claim in damages against MIG and Mr Vartelas for the moneys so taken.  However the fund in specie would have been lost.

1. Accordingly, I hold that the costs and expenses of the liquidator directed exclusively towards recovering the funds out of the hands of MIG and Mr Vartelas and delivering them into the safety of the Court do constitute a lien over the fund, in priority to all other claimants to the fund (save for MIG and Mr Vartelas).  In this case, those costs will be limited to the costs of and incidental to the application taken in this Court up until the Court order made in September 2008 was complied with, including the liquidator’s reasonable remuneration incurred exclusively for that purpose.

1. I do not consider that the prior actions of the liquidator in investigating and making inquiries into the quantum of the fund and general correspondence with MIG, Mr Vartelas and their solicitors, to be included within the lien.   This expenditure did not “preserve” the fund.  This conduct merely sought to identify the fund and was part of the liquidator’s general administration duties.

ORDERS

1. I direct that the plaintiffs bring in short minutes of orders to settle that will give effect to this judgment.  I reserve the question of costs until I complete the resolution of the other outstanding issues in the two proceedings.

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[106][1978] 2 NSWLR 222 at 228.