Sixthcastle Pty Ltd v. Magiking Pty Ltd & Ors
[2007] QSC 104
•16 May 2007
SUPREME COURT OF QUEENSLAND
CITATION:
Sixthcastle Pty Ltd v Magiking Pty Ltd & Ors [2007] QSC 104
PARTIES:
SIXTHCASTLE PTY LTD ACN 096 384 593
(plaintiff)
v
MAGIKING PTY LTD ACN 077 715 014
(first defendant)
MM HOLDINGS (NO. 2) PTY LTD ACN 010 719 874
(second defendant)
WILD BREEZE PTY LTD ACN 076 602 885
(third defendant)
MM HOLDINGS PTY LTD ACN 010 602 507
(fourth defendant)FILE NO/S:
BS413 of 2005
DIVISION:
Trial Division
PROCEEDING:
Trial
DELIVERED ON:
16 May 2007
DELIVERED AT:
Brisbane
HEARING DATE:
3 May 2007
JUDGE:
Mullins J
ORDERS:
1. The plaintiff’s claim is dismissed.
2. It is declared that the fourth defendant is entitled to the total amount paid into court in this proceeding by Mortimore & Associates of $1,647,342.46 of which $1,624,800.07 was paid on 17 March 2005 and $22,542.39 was paid on 15 September 2005.3. The said sum of $1,647,342.46 together with accretions be paid out of court to the fourth defendant.
CATCHWORDS:
MORTGAGES – MORTGAGES AND CHARGES GENERALLY – THE MORTGAGE – LIABILITIES SECURED – where mortgagors granted a mortgage that was registered under the Land Title Act 1994 (Qld) over land to co-mortgagees – where mortgaged land was sold – where co-mortgagees handed over the release of mortgage at the settlement of the sale of the mortgaged land in exchange for the balance of the proceeds of sale – where co-mortgagees in dispute about their respective entitlements to the balance of the proceeds of sale – where co-mortgagees jointly instructed the mortgagors’ solicitors to hold the balance of the proceeds of sale in their trust account to allow the co-mortgagees to resolve their dispute – where the release of mortgage was registered – where creditors assigned debts owed by the mortgagors to one of the co-mortgagees after the release of mortgage was registered – where there was no secured property for the purpose of the mortgage after the discharge of the mortgaged property from the mortgage – where assigned debts were not secured under the mortgage
Land Title Act 1994, s 81(3)
Property Law Act 1974, s 93(1)Re Jackson (1887) 34 Ch D 732, followed
Re Miles; Ex parte National Australia Bank Ltd v Official Receiver in Bankruptcy (1988) 20 FCR 194, distinguished
Syme v The Commonwealth (1942) 66 CLR 413, consideredCOUNSEL:
RG Bain QC and MR Bland for the plaintiff
DJS Jackson QC and I Perkins for the second and fourth defendantsSOLICITORS:
QBM Lawyers for the plaintiff
Tucker & Cowen for the second and fourth defendants
MULLINS J: From 1997 the first, second and third defendants as partners and the owners of land at Hope Island (“the subject land”) were developing a resort (“the joint venture”). They granted a mortgage over the subject land on 8 May 2001 that was registered under dealing number 704791913 (“the mortgage”) to the plaintiff and the fourth defendant.
The first, second and third defendants entered into a contract to sell the subject land on 18 May 2004. The sale was completed on 14 September 2004. After payment of the debt secured by the first registered mortgage over the subject land, there were proceeds of sale available to repay the debt secured by the mortgage. The plaintiff and the fourth defendant at the time of settlement were unable to agree on how that net balance proceeds of sale should be divided between them. They agreed to those net proceeds being held in the trust account of Mortimore & Associates (“Mortimore”), the solicitors who were acting on behalf of the first, second and third defendants in the sale of the subject land, and signed and handed over the release of the mortgage that was registered on 22 September 2004 under dealing number 708076881 (“the release”).
After the commencement of this proceeding, Mortimore paid the net balance proceeds of sale of $1,647,342.46 into court. The plaintiff claims a pro rata share of the sum paid into court. The fourth defendant claims the entirety of the sum paid into court.
Relevant facts
The plaintiff and the first defendant are companies controlled by Mr RM Hill. The second and fourth defendants are companies controlled by Mr M McIvor. The second defendant was formerly named Jefferson Holdings Pty Ltd. The third defendant was a company originally controlled by Mr C Nicholl.
The original arrangement among the first, second and third defendants in respect of the joint venture was that they would make equal contributions to the joint venture of any moneys required to fund the joint venture (in addition to borrowings from third party financiers), they would be entitled to one-third of the profits of the joint venture and they would be liable for one-third of any losses.
From about December 1997 the third defendant defaulted in its obligations to make contributions to the joint venture. Mr Hill took control of the third defendant. Mr Hill negotiated with Mr S Moreland to assume control of the third defendant. There was a period during which Mr Moreland contributed funds to the joint venture on behalf of the third defendant (or contributed funds to the third defendant to spend on the joint venture) and Mr Hill consulted with Mr Moreland on decisions relating to the joint venture. Mr Moreland never formally assumed control of the third defendant and ceased his involvement with the joint venture in or about the middle of 1999. After Mr Moreland’s departure, Mr Hill and Mr McIvor agreed that the first and second defendants would fund the joint venture equally.
The joint venture ran into financial difficulties. A few weeks prior to the granting of the mortgage, Mr McIvor and Mr Hill had a discussion about the future funding of the joint venture. According to Mr McIvor, in early 2001 the second defendant’s available funds for contributing to the joint venture had “expired” and the fourth defendant had commenced making advances to the joint venture. It was common ground at the trial that a few weeks before the mortgage was granted Mr McIvor indicated to Mr Hill that he was not prepared for the fourth defendant to continue making advances to the joint venture unless it had the benefit of a mortgage to secure the advances. At the time Mr McIvor also expressed concern to Mr Hill about safeguarding funds against any future claim by Mr Moreland. Mr Hill agreed to this course. At that time Mr McIvor also conducted a legal practice. His firm prepared the mortgage (which was executed on 8 May 2001 by each of the first, second and third defendants) and attended to its registration.
Although it is apparent from the circumstances in which the plaintiff and the fourth defendant obtained the mortgage from the first, second and third defendants, that it was likely that any advances made under the mortgage would be made by the plaintiff and the fourth defendant severally, rather than jointly, there are no provisions in the mortgage of the type that would usually be found in a contributory mortgage.
The amount of the advances which the fourth defendant claims is secured by the mortgage is $2,567,354.51. That commences with payments made by the fourth defendant on account of the joint venture on 19 July 2000. The plaintiff concedes that advances made by the fourth defendant to the joint venture between May 2001 and August 2003 totalling $2,188,282 are secured by the mortgage.
The fourth defendant’s solicitors and the plaintiff’s solicitors instructed Mortimore on 14 September 2004 as to the terms of the agreement that had been reached on that day by the plaintiff and the fourth defendant to enable the sale of the subject land under the contract dated 18 May 2004 to proceed:
“As regards the proceeds of sale, Sixthcastle Pty Ltd and MM Holdings Pty Ltd have agreed as follows:-
1.The funds are to be paid into your trust account on behalf of both Sixthcastle Pty Ltd and MM Holdings Pty Ltd, and subject to the rights of Jefferson Holdings Pty Ltd, Magiking Pty Ltd and Wild Breeze Pty Ltd to assert their interest, on the basis that those funds remain in the trust account until:-
(a)the written consent of Sixthcastle Pty Ltd and MM Holdings Pty Ltd; or
(b)they are paid into Court in accordance with the provisions of the Trust Accounts Act 1973 (Qld); and
2.Sixthcastle Pty Ltd will refrain from issuing proceedings in respect of the ownership of the funds for the next 21 days while the parties endeavour to agree upon a resolution of these disputes. Failing any resolution, the parties will be at liberty to commence any proceedings that they may care to.
You should open a new file in the name of both Sixthcastle Pty Ltd and MM Holdings Pty Ltd for the purpose of the retention of funds.
The settlement statement for the sale of the subject land shows that the net balance proceeds of sale paid into Mortimore’s trust account came from the purchase moneys paid by the purchaser of the subject land. The plaintiff and the fourth defendant were prepared to hand over the release in exchange for the net balance of the proceeds from the sale of the subject land. Upon the completion of the sale of the subject land, Mortimore implemented the joint instructions of the plaintiff and the fourth defendant in relation to the net balance proceeds of sale. The plaintiff and the fourth defendant were not able to resolve the ownership of those funds.
Three companies associated with Mr Hill, Heritage Waters Pty Ltd (“Heritage”), RM Hill Pty Ltd (“RM Hill”) and Midcastle Pty Ltd (“Midcastle”) claimed to be entitled to payment of certain debts identified in a deed of assignment made on 21 December 2004 between the assignors and the plaintiff. Under the deed of assignment each of the assignors assigned to the plaintiff absolutely the right, title and interest of the assignor to the debt described as:
Amount owing to Midcastle by the first defendant $690,844.46 Amount owing to Heritage by the first defendant 6,951,758.54 Amount owing to RM Hill by the first, second and third defendants 227,936.00 Total $7,870,539.00
At the trial the plaintiff and the fourth defendant had agreed on the quantum of each of the debts that were assigned by Heritage, Midcastle and RM Hill to the plaintiff which varied slightly from the above figures.
The plaintiff gave notice in writing dated 22 December 2004 of the assignment of each of the debts to each of the first, second and third defendants under cover of letter of 5 January 2005.
This proceeding was commenced on 14 January 2005.
In April 2005 the second and fourth defendants commenced proceeding BS3201 of 2005 against the first and third defendants and Mr Hill for damages and other relief arising out of the dealings between the parties in respect of the joint venture. The third defendant has subsequently been placed in liquidation.
Pleadings
The plaintiff’s claim, as pleaded in the statement of claim, is based on the characterisation of the transaction that occurred on 14 September 2004, when the release was handed over in exchange for the net proceeds of sale being paid into Mortimore’s trust account, as one that preserved the mortgage by substituting the trust fund as the security in lieu of the subject land. The plaintiff’s claim to a share of those funds is based on the allegation that the debts assigned to the plaintiff on 21 December 2004 by Heritage, Midcastle and RM Hill fell within the description of money secured under the mortgage.
The fourth defendant in its amended defence disputes that the funds held by Mortimore are secured property under the mortgage, relying on the effect of the release.
At the trial the plaintiff filed by leave an amended reply and answer. This raised an alternative claim based on an agreement alleged to have been made between Mr Hill and Mr McIvor in or about April 2001. It was alleged they agreed that the first and second defendants’ future loans to the joint venture would be repaid to them from the proceeds of the joint venture in priority to all other entitlements of the joint venturers and a mortgage would be registered over the subject land in favour of companies representing their respective interests to secure their right to such repayment. The plaintiff alleged that pursuant to that agreement the first defendant nominated the plaintiff and the second defendant nominated the fourth defendant as the companies that would represent their interests and the mortgage was executed.
The second and fourth defendants filed by leave at the trial a reply to the plaintiff’s amended answer which effectively denied the allegations that constituted the plaintiff’s alternative claim.
At the trial Mr Hill gave evidence for the plaintiff and Mr McIvor gave evidence for the second and fourth defendants. At the conclusion of the evidence, and in light of the state of the evidence, the plaintiff abandoned the alternative claim that had been pleaded in its amended answer.
The primary issue to be decided in the proceeding is therefore whether the debts assigned by Heritage, Midcastle and RM Hill to the plaintiff on 21 December 2004 after the release were debts secured under the mortgage. This requires resolution of the question as to what was the effect of the release.
The mortgage
The parties did not enter into any loan agreement which was separate from the mortgage. The mortgage was the only security document.
The mortgage is in the standard form for the purpose of the Land Title Act 1994 for a mortgage with an attached schedule which sets out the covenants of the mortgagors. Item 5 of the mortgage describes the debt or liability secured by the mortgage by reference to the definition of “Money Secured” in the schedule. Relevant definitions are set out in clause 1.1 of the schedule. “Money Secured” is defined to mean “the Financial Indebtedness of the Mortgagor … to the Mortgagee” and to include all moneys and damages covered by paragraphs (a) to (x) of the extensive definition. “Financial Indebtedness” is defined to mean “any indebtedness or other liability (whether present or future, actual or contingent) relating to any financial accommodation granted to it under any Security or otherwise…”. Paragraph (u) of the definition of “Money Secured” includes money payable:
“to the Mortgagee pursuant to any assignment by any person to the Mortgagee of a debt payable by the Mortgagor and/or the Borrower or other transaction, including, without limitation, any assignment or other transaction to which the Mortgagor and/or the Borrower is not a party and irrespective of whether the Mortgagor and/or the Borrower consented to the assignment or other transaction or whether before that assignment or other transaction the payment of those moneys was secured or unsecured, interest was payable by the Mortgagor and/or the Borrower on that debt or any other thing;”
The plaintiff relies on paragraph (r) of clause 1.1 of the schedule which specifies that if there is more than one mortgagor, the term refers to all or any of them and clause 1.2(d)(vii) of the schedule that says that a reference to a group of things or persons is a reference to any one or more of them. The plaintiff therefore relies on these definitions for the submission that the mortgage applies to a debt owed by one or more of the mortgagors which has been assigned to one of the mortgagees. The fourth defendant disputes this construction of the mortgage. For the purpose of considering the primary issue of the effect of the release, I will assume that the assigned debts could fall within the description of “Money Secured” under the mortgage.
The release is in the standard form. The plaintiff and the fourth defendant are identified as the mortgagee in item 4 of the release and shown as tenants in common as to one-half each. The operative provision of the release is in these terms:
“The mortgagee releases the mortgage as a charge on the land described in item 2.”
The subject land was described in item 2 of the release.
Plaintiff’s submissions
The plaintiff submits that the balance proceeds of sale of the subject land continue to represent the capital value of the mortgaged property and, despite the release, the mortgage continues to attach to the balance proceeds. The plaintiff argues that on the sale of the subject land, the net balance of the proceeds of sale that was due to be paid to the mortgagees became the cash equivalent to the subject land for the purposes of the mortgage and that the cash therefore became the secured property. The plaintiff relies on Syme v The Commonwealth (1942) 66 CLR 413 (“Syme”) and Re Miles; Ex parte National Australia Bank Ltd v Official Receiver in Bankruptcy (1988) 20 FCR 194 (“Miles”).
There is no parallel between this matter and the facts in Syme, but the plaintiff refers to dicta in Syme, such as the statement by Latham CJ at 421:
“When compensation is paid for a deprivation of interest which diminishes the mortgagee’s security, the compensation is regarded as representing the security pro tanto and it must be paid to the mortgagee or preserved to meet his claims under the mortgagee … .”
A similar statement was made in Miles by Pincus J at 200, in reliance on the dicta in Syme:
“There is authority suggesting the existence of a principle that a mortgage of property covers moneys received by the mortgagor representing a diminution in the mortgaged property... .”
The plaintiff therefore submits that the debts of the first, second and third defendants that were assigned to it in December 2004 were secured under the mortgage against the funds that were held by Mortimore.
Defendants’ submissions
It is acknowledged on behalf of the fourth defendant that as between the mortgagees and the mortgagors under the mortgage, the secured money was deemed to be owed to the mortgagees on a joint account, as there was no contrary intention expressed in the mortgage to displace the deeming provision contained in s 93(1) of the Property Law Act 1974 (“PLA”). The fourth defendant relies, however, on the presumption that in equity, as between the mortgagees themselves, the mortgagees hold the debt and mortgage security interest as tenants in common: Re Jackson (1887) 34 Ch D 732, 737. The fourth defendant submits that the circumstances were not such as to rebut that presumption.
It is submitted that the plaintiff and the fourth defendant as mortgagees under the mortgage exchanged the release for the net balance of the proceeds of sale that was paid over on behalf of the first, second and third defendants at the settlement of the sale of the subject land. By the exchange of the release for the balance proceeds of the sale, the mortgage was released in equity on 14 September 2004 and it was discharged, at law, on registration of the release on 22 September 2004.
The fourth defendant relies on s 81(3) of the Land Title Act 1994 which provides that on registration of the instrument of release, the relevant mortgage is discharged and the mortgaged land is released from that mortgage to the extent shown in the instrument of release. The extent shown in the release is that the subject land is released from the mortgage. That means that the personal covenants contained in the mortgage continue to bind the first, second and third defendants, so that the mortgagees could pursue them for any shortfall between the payment made on the settlement of the sale of the subject land to the mortgagees and the total amount of the debt that was owing under the mortgage at the date of the release.
The fourth defendant submits that the plaintiff’s debts acquired by assignment after the release were not debts in respect of which payment was made under the mortgage by the mortgagors at the settlement of the sale of the subject land or were not discharged by the payment that was made by the mortgagors on the date of settlement to obtain the release.
Decision
The difference between the positions adopted in this proceeding by the plaintiff and the fourth defendant arises from the characterisation of what occurred at the settlement of the sale of the subject land.
Although Mortimore which was acting for the first, second and third defendants in the sale of the subject land ended up holding the net balance of proceeds of sale in its trust account, those funds were held on account of the plaintiff and the fourth defendant as a result of the instructions given jointly by the plaintiff and the fourth defendant on 14 September 2004. The first, second and third defendants were not parties to the agreement between the plaintiff and the fourth defendant made on 14 September 2004 about the holding of those funds by Mortimore. The acknowledgment in those instructions that the funds being held by Mortimore on behalf of the plaintiff and the fourth defendant were subject to the rights of the first, second and third defendants “to assert their interest” was an acknowledgment that the first, second and third defendants may seek to assert an interest in the funds, but did not alter the position that it was the instructions of the plaintiff and the fourth defendant that were to determine the dealings by Mortimore with those funds.
The facts in Miles were unusual. The mortgagors had mortgaged their newsagency business to the bank. It was a condition of sale of the newsagency that a specific amount from the sale proceeds would be paid to the Newsagency Council in accordance with the rule of the Council to enable creditors of the mortgagors who were members of the Council to be paid. The bank agreed to this condition, even though it meant that its debt would not be fully repaid, because the licence of the newsagency that gave the business its value would otherwise be in jeopardy. The bank therefore released the specific amount from its mortgage and paid it to the Council. Most of these funds were used to pay debts owed to members of the Council. The sum of $7,308.91 was not required and was paid by the Council to the mortgagors who in the meantime had presented their bankruptcy petitions. They paid the sum to their trustee in bankruptcy. It was held that the sum of $7,308.91 which was in excess of the amount needed for the purpose for which the bank had released those funds from the mortgage were subject to a resulting trust in favour of the mortgagors, but the bank’s security at all times attached to the mortgagors’ beneficial interest in that sum. The principle that was applied in Miles depended on the facts that the release of the sum from the mortgage was for a specified purpose which ultimately failed in respect of the sum of $7,308.91 and it was the mortgagors who received back the fund of $7,308.91 that otherwise represented the mortgaged property.
The plaintiff’s characterisation of what occurred at the settlement of the sale of the subject land could be accurate only if the moneys held in Mortimore’s trust account were being held on behalf of the first, second and third defendants. The first, second and third defendants had paid over those funds to obtain the release and the moneys in the trust account of Mortimore were held to the account of the plaintiff and the fourth defendant, pending resolution of the dispute between themselves as to the ownership of the moneys held in trust or earlier payment of the funds into court, in accordance with the agreement made by the plaintiff and the fourth defendant. That distinguishes this matter from the facts in Miles. The funds were paid to the plaintiff and the fourth defendant in exchange for the release which had the effect of discharging the subject land from the mortgagee. There was no substitution of any other property as security, as the mortgage was released. The debts assigned to the plaintiff in December 2004 were not secured under the mortgage, as there was no secured property by the time the debts were assigned to the plaintiff.
It was not disputed by the plaintiff that the plaintiff and the fourth defendant held their interests under the mortgage as tenants in common in equity. Section 93(1) of the PLA facilitates dealings by mortgagors with mortgagees and does not regulate the relationship between the mortgagees. The presumption that in equity mortgagees hold their interests in the mortgage as tenants in common is not rebutted where the mortgagees contribute differential amounts by way of advances under the mortgage.
The entitlement of the plaintiff and the fourth defendant to the net proceeds from the sale of the subject land that were paid to obtain the release is determined by the amounts owing as at the date of the release by the first, second and third defendants under the advances made by each of the plaintiff and the fourth defendant and secured under the mortgage. The fact that the release showed the plaintiff and the fourth defendant as tenants in common in equal shares does not determine the extent of their equitable interests under the mortgage. In fact, as the mortgage was registered without any express interests being attributed to the plaintiff and the fourth defendant as mortgagees, the description given to the interests of the plaintiff and the fourth defendant as mortgagees in item 4 of the release was surplusage.
The only moneys outstanding under the mortgage as at the date of the release were advanced by the fourth defendant. Whether it is the amount as conceded by the plaintiff or the amount as claimed by the fourth defendant, either amount exceeds the net proceeds of sale paid to Mortimore that have been paid into court by Mortimore. That means that the fourth defendant is entitled to the total amount paid into court by Mortimore together with accretions.
Orders
It follows that the following orders should be made:
1. The plaintiff’s claim is dismissed.
2. It is declared that the fourth defendant is entitled to the total amount paid into court in this proceeding by Mortimore & Associates of $1,647,342.46 of which $1,624,800.07 was paid on 17 March 2005 and $22,542.39 was paid on 15 September 2005.
3. The said sum of $1,647,342.46 together with accretions be paid out of court to the fourth defendant.
I will hear submissions from the parties on what orders for costs should be made.
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