Super 1000 v Pacific General Securities
[2008] NSWSC 1222
•26 November 2008
Reported Decision:
221 FLR 427
New South Wales
Supreme Court
CITATION: Super 1000 v Pacific General Securities;Bonic v Pacific General Securities [2008] NSWSC 1222 HEARING DATE(S): 27-30/11/07, 17/12/07 and written submissions received 31/01/08, 6/02/08 and 20/03/08
JUDGMENT DATE :
26 November 2008JURISDICTION: Equity JUDGMENT OF: White J DECISION: Further submissions invited from the parties. CATCHWORDS: TRADE PRACTICES – misleading and deceptive conduct – statement of opinion made on reasonable grounds – no question of principle - CORPORATIONS – directors’ duties – one company to a joint venture borrowed money on mortgage security – mortgagee company was controlled by a director of the other joint venture company – the capacity of the mortgagor company to reimburse the other joint venturer for expenses incurred was thereby prejudiced – the director stood to profit personally through his controlling interest in the mortgagee to the detriment of the joint venture company of which he was a director – equitable compensation ordered against director - TORT – intentionally inducing breach of contract – term of debentures that no other lenders were to take priority – company subsequently lent money on mortgage security – directors had relied upon legal advice as to the lawfulness of their actions – bona fide belief that this was not a breach of contract – no damage proven - REAL PROPERTY – registered mortgage – indefeasibility – whether fraud exception to indefeasibility arises – no intention to cheat where legal advice relied upon - ESTOPPEL – conventional estoppel – whether relationship conducted on the basis of a mutual assumption – no relevant transaction between debenture holder and mortgagee – mortgagee did not cause the debenture holders to adopt the assumption - CORPORATIONS – directors’ duties – term of debentures that no other lenders were to take priority – money lent on mortgage security – capacity of company to repay debentures was thereby prejudiced – director was the controlling mind of the mortgagee company – the director stood to profit personally through his controlling interest in the mortgagee to the detriment of the debenture holders – shareholders must act bona fide for the benefit of the company as a whole and not unfairly prejudice a third party in order to ratify a breach of directors’ duties – debenture holders needed to be considered given the company’s financial situation – no consent to breach of fiduciary duty - REAL PROPERTY – registered mortgage – indefeasibility – whether in personam exception to indefeasibility arises – mortgagee knowingly received property transferred in breach of a director’s fiduciary duty – mortgagee without registration would have been personally liable as a constructive trustee under the first limb of Barnes v Addy – in personam exception to indefeasibility does not extend to cases of a constructive trust under the first limb of Barnes v Addy at least in relation to proprietary claims LEGISLATION CITED: Real Property Act 1900 (NSW)
Corporations Act 2001 (Cth)
Trade Practices Act 1974 (Cth)
Fair Trading Act 1987 (NSW)
Transfer of Land Act 1893 (WA)CATEGORY: Principal judgment CASES CITED: Aberdeen Railway Co v Blaikie Bros (1854) 2 Eq Rep 1281; [1843-60] All ER Rep 249
McLeod v The Queen [2003] HCA 24; (2003) 214 CLR 230
Kalls Enterprises Pty Ltd (in liq) v Baloglow & Anor [2007] NSWCA 191; (2007) 63 ACSR 557; 25 ACLC 1094
Target Holdings Ltd v Redferns [1996] AC 421
Beach Petroleum NL v Kennedy & Ors [1999] NSWCA 408; (1999) 48 NSWLR 1
O’Halloran v RT Thomas & Family Pty Ltd (1988) 45 NSWLR 262
Barnes v Addy (1874) LR 9 Ch App 244
Greater Pacific Investments Pty Ltd (in liq) v Australian National Industries Ltd (1996) 39 NSWLR 143
Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 89; (2007) 230 CLR 89
Robins v Incentive Dynamics Pty Ltd (in liq) [2003] NSWCA 71; (2003) 175 FLR 286; 45 ACSR 244
Cook v Deeks [1916] AC 554
Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373
Warman International Ltd v Dwyer (1995) 182 CLR 544
Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (1995) 58 FCR 26
Fightvision Pty Ltd v Onisforou [1999] NSWCA 323; (1999) 47 NSWLR 473
Short v City Bank of Sydney (1912) 15 CLR 148
Assets Co Ltd v Mere Roihi [1905] AC 176
Butler v Fairclough (1917) 23 CLR 78
Latec Investments Ltd v Hotel Terrigal Pty Ltd (1965) 113 CLR 265
Bahr v Nicolay (No.2) (1988) 164 CLR 604
Bank of South Australia Ltd v Ferguson [1998] HCA 12; (1998) 192 CLR 248
Davis v Williams [2003] NSWCA 371; (2003) 11 BPR 21,313
Waimiha Sawmilling Co Ltd v Waione Timber Co Ltd [1926] AC 101
Moratic Pty Ltd v Gordon [2007] NSWSC 5; (2007) 13 BPR 24,713
Amalgamated Investment & Property Co Ltd (in liq) v Texas Commerce International Bank Ltd [1982] QB 84
Republic of India v India Steamship Co Ltd (No 2) (The Indian Grace) [1998] AC 878
Waterman v Gerling Australia Insurance Co Pty Ltd [2005] NSWSC 1066; (2005) 65 NSWLR 300 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Aust) Ltd (1986) 160 CLR 226
The Bell Group Ltd (in liq) v Westpac Banking Corporation (No. 9) [2008] WASC 239
Public Trustee v Smith [2008] NSWSC 397
Short v Crawley (No. 30) [2007] NSWSC 1322
Ngurli Ltd v McCann (1953) 90 CLR 425
Forge v ASIC [2004] NSWCA 448; (2004) 213 ALR 574; 52 ACSR 1; 23 ACLC 1010
Bamford v Bamford [1970] Ch 212
Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666
Frazer v Walker [1967] 1 AC 569
Breskvar v Wall (1971) 126 CLR 376
Salomon v A Salomon & Co Ltd [1897] AC 22
Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549
Maguire v Makaronis (1997) 188 CLR 449
Glandon Pty Ltd v Tilmunda Pastoral Co Pty Ltd [2008] NSWSC 218
Glandon Pty Ltd v Tilmunda Pastoral Co Pty Ltd (No. 2) [2008] NSWSC 441
Belmont Finance Corporation Ltd v Williams Furniture Ltd (No. 2) [1980] 1 All ER 393
Koorootang Nominees Pty Ltd v Australia & New Zealand Banking Group Ltd [1998] 3 VR 16
Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133
Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669
Re Montagu’s Settlement Trusts [1987] Ch 264
LHK Nominees Pty Ltd v Kenworthy (2002) 26 WAR 517
Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309
Baden v Société Générale pour Favoriser le Dévelopment du Commerce et de l'Industrie en France SA [1993] 1 WLR 509
Cinema Plus Ltd v ANZ Banking Group Ltd [2000] NSWCA 195; (2000) 49 NSWLR 513TEXTS CITED: J D Heydon & M J Leeming, Jacobs’ Law of Trusts in Australia, 7th ed (2006) LexisNexis Butterworths
Peter Butt “Equity, Restitution and In Personam Claims under the Torrens System” (1998) 72 ALJ 258PARTIES: Super 1000 Pty Ltd
v
Pacific General Securities Ltd & Anor;
Jamie Bonic & Anor
v
Pacific General Securities Ltd & Ors
FILE NUMBER(S): SC 3410/06; 2215/07 COUNSEL: 3410/06
Plaintiff: T G R Parker SC with M Gerace
Defendants: J Halley
2215/07
Plaintiffs: F Lever SC
1st Defendant: J Halley
2nd & 3rd Defendants: T G R Parker SC with M GeraceSOLICITORS: 3410/06
Plaintiff: Sachs Gerace Lawyers
Defendants: Graham W Howe & Co
2215/07
Plaintiffs: Martin Legal
1st Defendant: Graham W Howe & Co
2nd & 3rd Defendants: Sachs Gerace Lawyers
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
WHITE J
Wednesday, 26 November 2008
3410/06 Super 1000 Pty Ltd v Pacific General Securities Ltd & Anor
2215/07 Jamie Bonic & Anor v Pacific General Securities Ltd & Ors
JUDGMENT
1 HIS HONOUR: These proceedings were heard together. They arise from an unsuccessful development of land at 3-11 Hawkesbury Avenue, Dee Why (“the Dee Why property”). That land was acquired by the defendants in proceedings 3410/06, Pacific General Securities Ltd (“PacGen”) and Finmore Holdings Pty Ltd (“Finmore”). They held the title to the land as tenants in common. PacGen held a 65 percent interest, and Finmore a 35 percent interest. A strata plan of subdivision was registered and units were constructed. By the time of the hearing all but three of the units had been sold. The first mortgagee, ING Bank NV (“ING”) had been paid out.
2 The plaintiff in proceedings 3410/06 (“Super 1000”) holds various securities, including a registered mortgage over the lots in the subdivision. Super 1000 made advances to PacGen between 3 March 2002 and 13 April 2005 to finance the construction of the development. As at 30 June 2006, PacGen owed it $1,707,900.64 and Finmore owed it $500,000. As at the date of hearing, the net proceeds of sale paid into court totalled $1,103,353. Super 1000 agreed to provide discharges of the mortgages on condition that the net proceeds of sale be paid into court.
3 In proceedings 3410/06 Super 1000 claims, amongst other things, that it is entitled to the net proceeds of the sales of all of the units in the Dee Why property (after discharge of the mortgage to ING) in priority to any other debts owed by PacGen and Finmore. It seeks an order that the moneys paid into court be paid to it. It also contends that PacGen is in breach of an undertaking given to the court on 27 March 2007 that it would immediately market the three remaining unsold units for sale and seeks an inquiry for an account of profits derived by PacGen from the alleged breach of the undertaking and damages suffered by it as a result of the alleged breach of the undertaking.
4 Mr Russell McLay is the controlling shareholder and managing director of Super 1000. At all material times up to 17 June 2005 he was also a director of PacGen. He was chairman of the board. He was also a shareholder. By its cross-claim in proceeding 3410/06 PacGen alleges that in procuring certain of the securities which Super 1000 seeks to enforce, Mr McLay breached his fiduciary and statutory duties as a director of PacGen. One such security is a mortgage given by Finmore in favour of Super 1000 dated 28 August 2003 (“the Finmore mortgage”). Finmore mortgaged to Super 1000 its 35 percent interest in the Dee Why property. The mortgage secured an advance of $400,000. The named borrowers were Finmore and an associated company, Property and Equity Developments Pty Ltd (“PED”). PacGen contends that the advance was made to PED.
5 There was a joint venture agreement between PacGen and Finmore under which they were required to contribute to the expenses of the development in the proportions of 65 percent and 35 percent. The expenses were met by PacGen. PacGen alleges that by Finmore’s mortgaging its 35 percent interest in the Dee Why property, PacGen suffered loss as it could not recover the 35 percent contribution to expenses which Finmore was obliged to make from Finmore’s share of the net proceeds of sale of the units. PacGen alleges that Mr McLay breached his duties as a director of PacGen in procuring the mortgage from Finmore in favour of Super 1000. It also contends that by giving the mortgage, Finmore breached the joint venture agreement and that Mr McLay and Super 1000 knowingly induced the breach.
6 As well as denying that Mr McLay breached his duty as a director of PacGen, he and Super 1000 deny that Finmore breached the joint venture agreement because they say that PacGen consented to the Finmore mortgage. If there was no breach of the joint venture agreement, they cannot be liable in tort for intentionally inducing a breach of contract.
7 Another registered mortgage which Super 1000 seeks to enforce is dated 6 April 2004, although it was entered into on or about 20 April 2004. The mortgage was given by both PacGen and Finmore and was a mortgage of their interests in the Dee Why property. It was expressed to secure prior advances totalling $810,000 and future advances. The mortgage was not registered until March 2006. It was registered against the lots of the Dee Why property which were then unsold.
8 PacGen alleges that Mr McLay breached his duty as a director of PacGen by procuring the April 2004 mortgage. If enforceable, the mortgage gives Super 1000 priority over other persons who advanced money to PacGen for the purposes of the development in 2002 and 2003 who were given security for their advances by way of debentures. The debentures include a charging provision. Precisely what property is subject to the charge is a matter of dispute. But whatever the property is, if Super 1000 is entitled to the benefit of indefeasibility pursuant to s 42 of the Real Property Act 1900 (NSW), then it has priority over the other debenture holders, whatever might be the true nature of their security.
9 At the same time PacGen gave a further charge over all its assets and undertaking to Super 1000. No submissions were made in relation to this security. It does not have priority over the earlier charges contained in the debentures.
10 It was a term of each of the debentures that the issuer (PacGen) would not create any security ranking in priority to or pari passu with the debenture other than for certain presently irrelevant purposes. Super 1000 was itself a debenture holder in respect of advances of $500,000 made in 2002. On 11 December 2003, PacGen issued a further debenture to Super 1000 to secure advances totalling $250,000. Those advances were made between April and December 2003. Mr McLay was aware that debentures were issued on those terms.
11 PacGen alleges that Mr McLay breached his duties as a director by procuring an advantage for Super 1000, namely, obtaining priority for Super 1000’s past advances, where his interest as the managing director and controlling shareholder of Super 1000 conflicted with his duty as a director of PacGen. PacGen claims, amongst other relief, that Super 1000 holds the April 2004 mortgage and any moneys received from enforcement of the mortgage on trust for it. PacGen also claims that Super 1000 holds the Finmore mortgage and any moneys received from enforcement of that mortgage on trust for it. It also seeks a declaration that any moneys received by Super 1000 from the net sale proceeds of the Dee Why property in priority to holders of debentures are held by Super 1000 on trust for PacGen. It also seeks “equitable damages” and other relief.
12 Although Super 1000 did not plead that its title as mortgagee was indefeasible by virtue of s 42 of the Real Property Act, that issue was flagged in the opening submissions of both parties. PacGen relies on the “personal equity” exception to indefeasibility.
13 The plaintiffs in proceeding 2215/07 (“Mr Paul Heathwood” and “Mr Bonic”) were issued with debentures to secure advances they made to PacGen. Mr Paul Heathwood lent $100,000 on 28 February 2002. ($10,000 of the advance was repaid prior to 30 June 2003.) Mr Bonic advanced $200,000 on 28 April 2002. A debenture was issued to Mr Paul Heathwood at the time of his advance. There is an issue as to whether a debenture was issued to Mr Bonic at the time of his advance. No such debenture has been produced. PacGen and Mr Bonic say that it was lost and a replacement debenture was issued on or about 15 May 2007. Super 1000 says that Mr Bonic’s advance was originally unsecured and the only security taken was the debenture issued in 2007.
14 The defendants to proceeding 2215/07 are PacGen, Super 1000 and Mr McLay.
15 On 28 February 2002, a debenture was issued to a Ms Ngaere Cormack to secure a loan of $50,000. On 4 March 2002, a debenture was issued to Super 1000 to secure an advance of $500,000 made by it to PacGen. On 30 May 2002, a debenture was issued to a Mr Burt Engel in respect of loans totalling $94,904.35 made in May and July 2002. On 22 August 2003, a debenture was issued to a Mr Peter Ng in respect of a debt of $94,904.35. Mr Engel’s loan was repaid on 22 August 2003. Ms Cormack and Mr Ng were not joined as defendants to either proceeding.
16 Messrs Paul Heathwood and Bonic claim that they, and Ms Cormack and Super 1000 in respect of the loans made in 2002, have the first claim on the moneys paid into court and otherwise to the net proceeds of sale of the units. They claim that distribution is to be made to 2002 debenture holders pari passu, but in priority to the debentures and other securities issued in 2003, and in priority to the mortgage in favour of Super 1000 of April 2004.
17 Messrs Paul Heathwood and Bonic contend that PacGen breached the terms of the debentures by giving a mortgage over its interest in the Dee Why property to Super 1000 in April 2004. They allege that the registration of the mortgage was procured by fraud within the meaning of s 42 of the Real Property Act. Alternatively they contend that there is a personal equity between them and Super 1000 based on principles of conventional estoppel.
18 Messrs Paul Heathwood and Bonic also allege that Super 1000 and Mr McLay engaged in misleading and deceptive conduct by making representations to them, or causing representations to be made to them. The alleged representations were to the effect that there would not be further loans taken out in respect of the project after the 2002 mezzanine finance was secured, that all of the investors who advanced funds at the time would have their funds secured on the same terms and conditions and would be treated equally, and that when the units were sold the bank would be paid out first and the debenture holders would be repaid their money and no further security would be provided to diminish the security provided to the 2002 co-lenders. The representations were said to have been made by Mr McLay to Mr Paul Heathwood and by Mr Scott Heathwood (Mr Paul Heathwood’s son) to Mr Bonic. Mr Bonic alleges that Mr Scott Heathwood was acting as agent for Super 1000 and Mr McLay in making the representations. Mr Paul Heathwood and Mr Bonic seek damages against PacGen, Super 1000 and Mr McLay.
19 Messrs Paul Heathwood and Bonic also contend that PacGen breached the debentures issued to them by entering into the April 2004 mortgage. They claim damages from Super 1000 and Mr McLay for intentionally inducing the breach of contract.
20 Super 1000 and Mr McLay deny that the grant of the mortgage was a breach of the debentures and say in any event that there was no intention to procure a breach of contract. They contend there was no breach of the contract contained in the debentures because the debentures charged different property from that secured by the mortgage.
21 PacGen was a trustee of a trust then known as the Wealthy & Wise Residential Property Fund (“the Fund”). PacGen purportedly held a 35 percent interest in the Dee Why development beneficially and purportedly held only a 30 percent share in the project on trust for the Fund. Super 1000 and Mr McLay contend that the only assets charged by the debentures were the assets of the Fund. They submitted that the Fund’s 30/65th share was not a share in PacGen’s legal interest in the Dee Why property, but a share in a chose of action which represented the residue of the Dee Why project after payment out of all expenses of the joint venture. The expenses of the joint venture include the liability to pay interest and repay principal to the debenture holders. If the argument is correct, the debenture holders would have no security over the Dee Why property. I address this further below.
22 The 2002 debentures (other than any debenture issued to Mr Bonic) and the 2003 debenture were registered on 9 September 2005. Mr Bonic’s debenture issued on 15 May 2007 was registered on 6 July 2007. No issue arises as between Super 1000 and Mr Paul Heathwood from the registration of the debentures. Super 1000 was aware of the debenture issued to him. No issue would arise as between Super 1000 and Mr Bonic from the registration of the debentures unless it be found that a debenture was issued to Mr Bonic in 2002, but Mr McLay did not have notice of the prior charge. In that event, Super 1000 would be entitled to priority in respect of its 2002 and 2003 debentures by reason of the earlier registration of those debentures (Corporations Act 2001 (Cth), s 280).
23 Chronologically, the principal issues are:
1. what representations were made to Mr Bonic and Mr Paul Heathwood in 2001 and early 2002;
2. whether Mr Scott Heathwood was acting as agent for Super 1000 or Mr McLay in making representations to Mr Bonic;
3. whether Super 1000 or Mr McLay engaged in misleading or deceptive conduct, and, in the case of Mr McLay, whether he is liable as an accessary to misleading and deceptive conduct engaged in by Super 1000;
4. whether a debenture was issued to Mr Bonic in 2002;
5. what property was charged by the debentures;
6. whether it is possible to determine the priorities of the 2002 mezzanine lenders as between themselves in the absence of Ms Cormack and Mr Ng, and if so, whether they rank pari passu ;
7. whether Finmore breached the joint venture agreement by giving a second mortgage over its 35 percent interest in the Dee Why property;
8. if so, whether Super 1000 or Mr McLay are liable to PacGen for intentionally inducing the breach of contract;
9. whether Mr McLay breached his duty as a director of Pac Gen in causing Super 1000 to take the second mortgage from Finmore;
10. if so, whether PacGen gave its informed consent to such a breach;
11. if Mr McLay is liable for his breach of duty as a director in connection with the Finmore mortgage, to what remedy PacGen is entitled against Mr McLay and Super 1000;
12. whether PacGen breached the debentures by entering into the April 2004 mortgage;
13. if so, whether Super 1000 or Mr McLay is liable for intentionally inducing the breach of contract;
14. if so, whether Mr Bonic or Mr Paul Heathwood have established that any damages were suffered by the breach;
15. whether Mr Paul Heathwood and Mr Bonic have established the fraud exception to indefeasibility;
16. whether Mr Paul Heathwood and/or Mr Bonic can enforce a personal equity based on principles of conventional estoppel against Super 1000, as an exception to indefeasibility;
17. whether Mr McLay breached his duty as a director of PacGen in connection with the April 2004 mortgage;
18. whether PacGen gave its informed consent to any such breach;
19. whether PacGen is entitled to any remedy against Mr McLay in respect of any such breach;
20. if registration of the April 2004 mortgage was not obtained by fraud within the meaning of s 42 of the Real Property Act , whether that section precludes any remedy against Super 1000 arising from any breach of Mr McLay’s duty as a director of PacGen;
21. the effect of registration of the debentures;
23. how moneys paid into court should be disposed of and what orders should be made.22. whether PacGen breached its undertaking to the Court and if so, what remedy should be provided; and
Further Background
24 PacGen has two classes of issued shares. Mr Scott Heathwood holds three ordinary shares. Super 1000 holds 100 “A” preference shares.
25 At all relevant times up to 7 March 2002 the directors of PacGen were Mr McLay, who was chairman; Mr Scott Heathwood, managing director; Mr Paul Heathwood (Scott Heathwood’s father); Mr Richard Melki; and Mr Christopher McCaffery. Mr McCaffery resigned as a director on 7 March 2002. He was the company’s solicitor. Mr Melki resigned on 15 April 2002. Mr Melki was reappointed as a director on 28 March 2003 and resigned on 16 July 2004. Mr Peter Dixon (of PED and Finmore) was appointed as a director on 27 November 2003 and resigned on 9 June 2004. Mr Paul Heathwood resigned as a director on 9 May 2005 and was reappointed as a director on 31 May 2006. Mr McLay resigned as a director on 17 June 2005. Other directors were appointed in October 2004, November 2004 and July 2005.
Joint Venture Agreement
26 On 30 August 2001, PacGen entered into a joint venture agreement with PED, Mr Dixon and Mr Mathew Kelly. The agreement recited that Messrs Dixon and Kelly held five options to purchase properties at 3-11 Hawkesbury Avenue, Dee Why and that the parties had agreed they would join together in a joint venture for the purpose of acquiring the properties which were the subject of the options, and to develop the properties. Clause 2.2 provided that the respective interests of the participants in the Joint Venture should be PacGen as to 65 percent and PED as to 35 percent. This proportion was called the JV Proportion. Clause 2.3 provided:
“ The Participants agree that the Joint Venture Assets will be held by them as tenants in common in (and in particular, and without limiting the generality of the foregoing, all real estate held in relation to the Project) the JV Proportion. ”
27 By clause 4.2 the participants agreed to share all the profits of the project and to bear all the liabilities of the project between them in the JV Proportion. By clause 4.4 it was agreed that if a participant incurred a liability for the purposes of the joint venture to an extent greater than its obligations by reason of its interest, being a liability previously sanctioned by the other participant, then the other participant should indemnify the first participant such that the participants should share the liability in the JV Proportion. Clause 5 provided for there to be a board of management consisting of two persons nominated by PacGen and one person nominated by PED for the joint venture. Clause 7 provided that it was to be PacGen’s obligation to organise and negotiate the borrowings in respect of the project for completion of the purchases of the lots if necessary and for construction costs. PED was appointed the project manager and was entitled to be paid a management fee of $10,000 per month up to $120,000. Clause 13 provided:
“ Each Participant shall be at liberty anytime to assign the benefit of its interest under this Deed provide [sic] it shall first have given not less than seven days written notice of such assignment to the other Participant; such notice shall provide full details of the assignee of the interest. Nothing in this clause shall be deemed to derogate from the obligations imposed on a Participant by this Deed, which obligations shall remain in force regardless of any assignment of interest by a Participant. ”
28 Clause 22 provided that except as provided in the deed, neither party could encumber its interest in the joint venture or any part of it.
29 Clause 26.1 provided that except as provided in clause 13 and by clause 26 itself, a participant could not transfer the whole or any portion of its interest. Clause 26.2 provided that a participant could transfer the whole or any part of its interest to a Related Entity, as defined in the Corporations Law, provided that the Related Entity covenanted with the other participants to be bound by the terms of the agreement.
Shareholdings in PacGen
30 There were three issued ordinary shares and 100 “A” preference shares in PacGen, held by Mr Scott Heathwood. Mr Scott Heathwood is the managing director of PacGen. On 12 November 2001, Mr Scott Heathwood agreed to sell the 100 “A” preference shares in PacGen to Super 1000 for $151,600. Super 1000 granted Mr Scott Heathwood a call option and he granted Super 1000 a put option in relation to the shares. PacGen was a party to the deed of sale. The other parties were Mr Scott Heathwood and Super 1000. The parties agreed that so long as the shares continued to be held by Super 1000, all expenditure in excess of $1,000 and all additional staff appointments and staff changes had to be approved in advance by Super 1000, and that Super 1000 had a right of veto in respect of any new ventures of PacGen, notwithstanding any resolution of the board to the contrary (clause 5). Whilst Super 1000 held the shares, Mr McLay was given a substantial degree of control over PacGen’s operations.
Finance for the Development
31 Finance for the Dee Why project was obtained from four sources. Unit holders in the Fund contributed $1,100,000 to the development. Loans totalling $8,505,000 were made to PacGen and Finmore by ING on first mortgage security. Mezzanine financing was provided by persons to whom debentures were issued. Super 1000 provided additional funds from April 2004 to enable the development to be completed on the security of a mortgage in registrable form from PacGen and Finmore over the Dee Why land.
32 ING made an initial loan of $2,085,000 in March 2002 for the purchase of 3, 5 and 11, Hawkesbury Avenue, Dee Why. Mr McLay and Mr Scott Heathwood provided guarantees limited to $375,000 each. On 23 May 2002, ING agreed to increase the facility to $7,705,000 to provide construction funding. Interest was capitalised up to $370,000. The limit on each guarantee was increased to $500,000. On 15 March 2004, ING increased the loan to $8,005,000. The guarantee limits remained unchanged. The term of the loan was extended to 31 May 2004 or such later date as ING agreed. Interest was to be capitalised to a maximum of $820,000 incorporating the interest already capitalised since the initial drawdown. In February 2005, ING provided a further advance of $500,000 to complete the building and allow sales of individual strata units.
33 Mr McLay deposed that Super 1000 made the following advances and received the following repayment between 3 March 2002 and 26 February 2004:
| DATE | ADVANCE BY S1000 TO PAC GEN/ WEALTHY & WISE | REPAYMENTS BY PAC GEN/ WEALTHY & WISE |
| 3 March 2002 | $500,000 | |
| 14 November 2002 | $75,000 | |
| 11 December 2002 | ($75,000) | |
| 1 April 2003 | $70,000 | |
| 2 July 2003 | $70,000 | |
| 1 August 2003 | $10,000 | |
| 11 December 2003 | $100,000 | |
| 5 January 2004 | $40,000 | |
| 26 February 2004 | $20,000 | |
| Balance as at 26 February 2004 | $810,000 |
34 In addition, on 30 May 2003 Super 1000 lent $60,000 to PacGen to be used for the payment of its outstanding tax and other debts. The advance was to be repaid on 31 October 2003 or settlement of the Dee Why project. As security for the loan, Mr Scott Heathwood gave a charge in favour of Super 1000 over his share of “profits arising from the development of the properties known as 3-11 Hawkesbury Avenue, Dee Why”.
35 From 21 April 2004 Super 1000 made further advances to PacGen. Those advances, as set out in the schedule prepared by PacGen and given to Mr McLay, attracted interest at 15 percent per annum and were in the following amounts:
21/04/2004 29/04/2004 31/05/2004 31/05/2004 30/06/2004 12/07/2004 15/07/2004 16/07/2004 14/10/2004 24/11/2004 6/12/2004 22/12/2004 5/01/2005 31/01/2005 25/02/2005 13/04/2005
36 In addition, Mr McLay’s records show advances of $60,000 on 1 April 2004 and $52,958 on 14 July 2005.
Nomination of Finmore as a Joint Venturer
37 It is admitted on the pleadings that pursuant to the joint venture deed, PED nominated Finmore to be its nominee to proceed with the development of the Dee Why property. The nomination was effected by a letter dated 28 February 2002 signed by Messrs Dixon and Kelly, the directors of PED, addressed to the directors of Finmore. The letter stated that all “interests, rights, liabilities and profit share relating to the Joint Venture” were transferred to Finmore. The transfer was said to be made pursuant to clauses 26 and 27 of the joint venture agreement. The relevant clause was clause 26.2 which permitted PED to transfer its interest in the joint venture to a related entity, provided that the related entity covenanted with the other participants to be bound by the agreement. Whilst there was no evidence of an express covenant from Finmore, it was common ground that Finmore was liable pursuant to clause 4.2 to bear its 35 percent proportion of all liabilities of the project.
38 Finmore was described by Mr Dixon as a special purpose vehicle created for participation in the joint venture to develop the Dee Why property. It was a wholly owned subsidiary of PED.
Declaration of Trust by PacGen
39 On 7 March 2002, PacGen executed a declaration of trust. It recited that it held a 65 percent share as tenant-in-common in the properties known as 3-11 Hawkesbury Avenue, Dee Why and a proposed development of those properties, which together were called “the Project”. PacGen declared that it held, and had at all relevant times held, a 30 percent share of the Project on trust for the Wealthy & Wise Residential Property Fund. It declared that it held no beneficial interest itself in such 30 percent share of the Project.
40 The parties proceeded on the basis that PacGen had a 35 percent beneficial interest in the Project. It is seriously arguable that all of its 65 percent interest in the Project was held on trust for the beneficiaries of the Fund. PacGen was in a position of conflict between its duty to the beneficiaries of that trust and its personal interest. Whilst the trust deed permitted PacGen to exercise its powers and discretions notwithstanding it had a direct or personal interest therein, I doubt that it was entitled to use the moneys contributed by investors in the Fund, or to exercise its indemnity out of the trust assets, to secure a personal benefit. However, that question was not argued and need not be decided. What is significant for present purposes is that Mr McLay and Mr Scott Heathwood proceeded on the basis that PacGen held only a 35 percent interest in the Project on trust for the investors in the Fund.
2002 Debentures
41 The minutes of a meeting of directors of PacGen held on 7 March 2002 record that the meeting was attended by, amongst others, Mr McLay, Mr Scott Heathwood, Mr Paul Heathwood and Mr McCaffery. The minutes record:
Mr C McCaffery has drawn up and issued the Debenture document for $600,000 although the charge has not yet been completed. We need to confirm a policy on what we are willing to receive. We have already received $100,000 from Mr McLay; $200,000 is expected from the UK and $100,000 has been offered by Mr B Engel. Funds are required to service the ING loan and costs until we have a builder in place.“ Property Trust
- Appreciation was expressed to Mr McLay for his efforts in rearranging the loan with ING Bank, having been let down by Westpac at the eleventh hour.
- RESOLVED: That the Trust issue a $950,000 Debenture. ”
42 The document described as a debenture for $600,000 was not in evidence. Nor did PacGen, whether solely as trustee for the Trust or otherwise, issue a single debenture for $950,000.
43 Mr McLay deposed that Super 1000 in fact made an advance of $500,000 on 3 March 2002. A debenture to secure that advance was issued on 4 March 2002. Mr Paul Heathwood advanced $100,000 on or about 28 February 2002 and on that day received a debenture as security for the loan. A Mrs Cormack also advanced $50,000 on 28 February 2002 and received a debenture as security for the loan.
Profit-Sharing Deed
44 On 28 March 2002, PacGen entered into a deed with Mr Scott Heathwood and another deed with Super 1000. After reciting that PacGen held a 65 percent share as tenant-in-common in the properties and of that share held 35 percent interest in the property on its own behalf and 30 percent in the capacity as trustee for another, and after reciting the provision of guarantees by Mr Scott Heathwood and Super 1000, (and in the case of the deed with Super 1000, the making of advances), PacGen granted to each of Mr Scott Heathwood and Super 1000 the right to one half of all profits due to PacGen from the development arising out of its 35 percent share in the project. As noted in para [34], on 30 May 2003 Mr Scott Heathwood charged his right to such profits to Super 1000 as security for the advance of $60,000. It follows that from then any profit PacGen might have derived from the development was either assigned to Super 1000 or charged to it.
Negotiations with Mr Paul Heathwood
45 In his affidavit, Mr Paul Heathwood deposed that he attended a meeting with Mr Scott Heathwood and Mr McLay and in the presence of Mr McLay, Mr Scott Heathwood asked what money he had to contribute to the raising of capital for the Dee Why project. He agreed to invest $100,000. Mr Paul Heathwood deposed that he asked what security he would receive and Mr McLay told him that “We are going to give all of the people who contribute the $900,000, 15% per annum. In exchange from [scil. for] their loans, we will give them a debenture.” According to paragraph 18 of Mr Paul Heathwood’s affidavit the conversation continued as follows:
” I said: ‘Where does this debenture rank?’
McLay said: ‘Straight after ING’s mortgage’
I said: ‘How will it work?’
McLay said: ‘After the first mortgage is paid out, the debenture holders will be paid out. After the debenture holders are paid out; the investors in the property trust will be paid and after those people are paid, the joint venturers will get their money and their share of any profits left over.’
McLay said: ‘As each sale settles, we will pay off ING and when ING is fully paid, the debenture holders will then be the next ones to get their money.’”I said: ‘What does this mean regarding the sales?’
46 Mr Paul Heathwood said that Mr McLay told him that he would be putting in $500,000 and would receive the same debenture.
47 Mr Paul Heathwood’s oral evidence was different. He said that the first occasion on which it was suggested to him that he might invest by way of debenture was during a discussion with his son Scott. He understood a debenture to be a mezzanine type funding which would be subordinate to a first mortgage but which would have next priority. He understood that the debenture would be secured against the asset comprising the property development at Hawkesbury Avenue, Dee Why. He believed at the time that PacGen would have enough funds available to complete the development and there would be no need for later further funding after $950,000 was raised as mezzanine finance. He read the proposed form of debenture, including clause 4 which he regarded as providing protection for his investment. According to his oral evidence, after his discussion with his son Scott at the offices of PacGen, he and Scott had a short meeting with Mr McLay. Mr Scott Heathwood told Mr McLay that “Dad’s prepared to lend $100,000 on the project” and Mr McLay said that he would get the debenture drawn up.
48 Mr McLay agreed with that version of events.
49 Later in his cross-examination, Mr Paul Heathwood said that he was assured by Mr McLay that the borrowings then being discussed were the only borrowings that were to take place. He said that there were no discussions about what would happen if further funds were required for the project in the future because future funding was not necessary. No such evidence was given in his affidavit, nor initially in his cross-examination when asked to recall what was said in the discussions with Mr McLay.
50 Mr Scott Heathwood gave evidence of the meeting between his father and Mr McLay in late February 2002. Mr Scott Heathwood did not corroborate the material parts of Mr Paul Heathwood’s evidence.
51 In the amended statement of claim, it was not alleged that a representation was made to Mr Paul Heathwood that there would be no further funding provided. It was alleged that Mr McLay represented to Mr Paul Heathwood that all of the 2002 co-lenders would have their advances secured on the same terms and conditions as Mr Paul Heathwood’s advance and the advance of Mr McLay, and would in all other respects be treated equally. It was also alleged that Mr McLay represented that each lender would be paid interest for the duration of the loan and would be repaid principal at the end of the loan and that no further security would be provided to diminish the security provided to each of the 2002 co-lenders.
52 I have no doubt that in making his decision to lend $100,000, Mr Paul Heathwood acted in the belief that the terms of the debenture precluded PacGen from issuing later securities which would have priority over the charge created by his debenture. He also believed that debentures to be issued to all of the 2002 participants in raising mezzanine finance of $950,000 would have security for their loans enforceable against the Dee Why development ranking immediately after the first mortgagee. He formed the belief that no later securities could be provided ranking in priority to the charge to secure his advance from his reading of clause 4 of the debenture.
53 I am not satisfied that any representation was made to Mr Paul Heathwood by Mr McLay as to the rights which would be conferred by the debenture, nor that a representation was made that no further funding would be provided. Indeed, as noted above, no such representation was alleged in the statement of claim. I do not accept that Mr Paul Heathwood made his investment in reliance upon any oral representations made to him by Mr McLay.
Representations to Mr Paul Heathwood were not Misleading and Deceptive
54 In any event, the representations attributed to Mr McLay in para 18 of Mr Paul Heathwood’s affidavit were not misleading or deceptive, except potentially in one respect, which is not the subject of a claim. I deal with this one potential qualification below at [59].
55 The representations attributed to Mr McLay are representations as to how the debenture would rank. In the circumstances existing in February 2002, the representations were substantially accurate. ING as the first mortgagee was entitled to priority and was to be paid off from the proceeds of sale of units in the development. The debenture did provide that PacGen was not to create any mortgage charge or other security ranking in priority to, or pari passu with, the debenture other than in two respects which are not presently relevant. In 2002, the directors of PacGen had no intention of borrowing further funds for the project other than $950,000 by way of mezzanine finance to be secured by a debenture or debentures in the same terms. It was their intention that all such debentures would rank pari passu. It was not then considered that additional funds would need to be borrowed. The representations that the debentures would rank equally with the debentures to be issued to the “2002 co-lenders” was either an expression of opinion about the legal effect of the debentures, or a statement about PacGen’s intentions, or a representation as to a future matter. However it is characterised, the representation was not misleading and was made on reasonable grounds. It reflected the intentions of the directors of PacGen at the time.
56 The fact that in 2004 when the project was in need of further finance, PacGen granted a mortgage in registrable form in favour of Super 1000 which is claimed to have priority over the debentures may constitute a breach by PacGen of the debentures. I consider that question below. But whether or not such conduct was a breach of the debentures, it does not mean that the representations made in 2002 about the security Mr Paul Heathwood was receiving were misleading.
Negotiations with Mr Bonic
57 Mr McLay had no discussions with Mr Bonic. All such discussions took place between Mr Scott Heathwood and Mr Bonic. They had been friends for more than 30 years since they were at school together. They are related by marriage. Mr Bonic at relevant times worked in London. Mr Scott Heathwood raised the prospect of Mr Bonic’s investing when Mr Bonic was in Australia in late 2001. He said that PacGen was in the process of developing a site in Dee Why; that it was close to securing finance from a bank for about 75 percent of the total funds needed to develop the site; and that PacGen was looking for about $900,000 to $1 million. Some weeks later, after Mr Bonic had returned to London, there was further discussion between Mr Bonic and Mr Scott Heathwood. Mr Scott Heathwood said that he had discussed the matter with Mr McLay and that PacGen would offer all of the people who jointly contributed the $900,000 or $1 million the same form of security which would be in identical terms. He described that security as being a debenture, not a mortgage, and that when the units were sold the bank would be paid out first and then the debenture holders would be repaid their money. After the debenture holders were paid out, the unit holders in the trust would be paid, and after the unit holders were paid, the joint venturers would share the remaining profit. Mr Scott Heathwood told him that “Nothing will water down your security position, once you get your debenture in exchange for any money you hand over”, and that “There will not be any further loans by anyone else after this mezzanine finance is secured.” Mr Bonic said that he would not have lent money to PacGen but for the assurance that he and the other debenture holders who lent money at the same time would have priority over any later lenders. I accept that evidence. Mr Bonic also relied upon the fact that Mr McLay would be investing on the same basis. Mr Bonic was told that the interest being offered was 15 percent per annum.
Representations to Mr Bonic were not Misleading or Deceptive
58 For the same reasons as in para [55] the representations to Mr Bonic were not misleading or deceptive. They reflected the intentions of the directors of PacGen at the time, and, with one possible qualification, reflected the terms of the debenture which had been prepared.
59 The qualification is this. Although the minute of the directors’ meeting of 7 March 2002 contemplated that a single debenture for $950,000 would be prepared, that did not happen. Rather than a single debenture being issued to a trustee, to be held by the trustee for the individuals who advanced the funds, separate debentures were issued to each of the investors. Each debenture provided that no other debenture would be issued to rank pari passu with it. It would follow that unless the debentures could be rectified, they would rank in order of creation, (subject to the effects of registration), and that the “2002 co-lenders” would not rank pari passu. Mr Bonic, who advanced his funds on 23 April 2002, that is, after the other 2002 lenders, would rank behind the 2002 lenders.
60 However, it was not submitted for Mr Bonic that this was the effect of the debentures or that the representations were misleading on this ground. Rather, it was said that whilst separate instruments were issued, they should all properly be construed as being a single debenture under which the 2002 lenders ranked equally. I deal with this matter further in paras [90]-[93] below. For present purposes it is sufficient to note that this was not a ground relied upon for the claim that Super 1000 or Mr McLay engaged in misleading and deceptive conduct.
61 It was submitted by Mr Lever SC who appeared for Messrs Bonic and Paul Heathwood that:
- “ (a) It must have been clear to Russell McLay at the time that the Dee Why project could, in future require further funds; Super 1000 was the only vehicle which supplied those future funds.
- (b) Jamie Bonic and Paul Heathwood were not consulted about providing those funds or subordinating their securities.
- In the circumstances, neither Russell McLay, nor Super 1000 have adduced any credible evidence that at the time when the representations were made they had reasonable grounds for making them .”
62 This submission confuses a number of propositions. I do not accept that it was clear to Mr McLay in 2002 that it was likely that the Dee Why project would require further funds than the moneys raised at the time. It may have been clear to him as a possibility that the project “could” require further funds, but that is a possibility which would equally be known to Mr Paul Heathwood or Mr Bonic. The fact that Super 1000 was the only “vehicle” which in fact supplied the future funds does not mean that it was clear to Mr McLay at the time that Super 1000 would in fact provide further funds. The fact that Messrs Bonic and Paul Heathwood were not consulted in 2004 about the provision of those funds or subordinating their securities does not mean that the representations were misleading in 2002. In any event, the representations to Mr Bonic alleged to have been misleading did not include a representation that no further funds for the project would be required. Rather, the representations alleged were that the 2002 lenders would obtain identical securities which would rank pari passu with each other and that no further security would be provided to diminish such security. The latter representation was true at the time.
63 For these reasons, the claims of Mr Paul Heathwood and Mr Bonic based upon alleged breaches of the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1987 (NSW) should be dismissed.
Was Mr Scott Heathwood the Agent of Super 1000 or Mr McLay?
64 It follows that even if Mr Scott Heathwood made the representations to Mr Bonic as agent for Super 1000 or Mr McLay, the latter did not engage in misleading or deceptive conduct. In any event, Mr Scott Heathwood was not acting as agent for Super 1000 or Mr McLay in his discussions with Mr Bonic. Mr McLay was aware that Mr Scott Heathwood was talking to a person in London with a view to obtaining an advance of $200,000. I think it likely, notwithstanding Mr McLay’s evidence to the contrary, that he knew that the person to whom Mr Scott Heathwood was talking was Mr Bonic. However, Mr Scott Heathwood was representing PacGen in his discussions with Mr Bonic, not Mr McLay, let alone Super 1000. The fact that Mr McLay would have realised that Mr Scott Heathwood would convey to Mr Bonic the intention that the debentures would rank in priority immediately after the mortgage to ING, and that the debenture would provide that, except in limited respects, no other security would be provided ranking in priority to, or pari passu with, the debenture, does not mean that the representations made by Mr Scott Heathwood were made on behalf of Mr McLay or Super 1000.
65 Had the representations been misleading, Mr McLay may have been liable as an accessary to misleading conduct engaged in by PacGen through Mr Scott Heathwood. No such case was pleaded. Nor was such a case run at trial. It does not arise, particularly in light of my conclusion that there was no misleading conduct.
Did Mr Bonic Receive a Debenture in 2002?
66 For the reasons which follow, I accept the evidence of Mr Bonic and Mr Scott Heathwood that a debenture was issued to Mr Bonic in 2002. No such instrument was produced. I accept that it was lost by PacGen. In my view, the question is moot. It is clear that a draft of the debenture was provided to Mr Bonic. It is equally clear that there was an agreement between PacGen and Mr Bonic that his loan to PacGen would be secured by a charge in terms of the debenture. PacGen does not deny the agreement. The absence of writing does not make it unenforceable. Such an agreement to create a charge would give Mr Bonic an equitable interest as chargee. Mr McLay had notice that a debenture had been issued to Mr Bonic. The same issues of priorities arise whether the written instrument was issued by PacGen or not.
67 A draft of the debenture was forwarded to Mr Bonic prior to his arranging for the advance of $200,000. In an email of 20 February 2002 from Ms Patrick on behalf of Mr Scott Heathwood, Ms Patrick provided details of a bank account for Mr Bonic to transfer “about $200,000 for a debenture for current project (Dee Why) at 15%”. She added “If you could also sign the debenture deed that was emailed to you and send it here ... the Directors will sign it and return it to you.”
68 Mr Bonic said that in fact no debenture had previously been sent to him by email. However, he said that he recalled seeing the debenture before he sent the funds and that he signed a debenture after he sent the funds. He deposed that within a few weeks of advancing $200,000 he received the debenture document from PacGen which he signed and returned. It was in the same terms as the debenture issued by PacGen to Mr Paul Heathwood. (That was a standard form document. The debenture issued to Super 1000 was in the same terms.)
69 Mr Scott Heathwood corroborated that evidence. The evidence is also corroborated by PacGen’s register of debenture holders. This listed Mr Bonic as such a debenture holder as from 23 April 2002. Mr McLay signed a cheque requisition on 1 July 2002 which included the requisition of a cheque payable to Mr Bonic for “debenture [interest] to 30/06/02”. Correspondence to Mr Bonic from 1 July 2002 referred to payment of interest on the “Debenture loan made by you”.
70 Counsel for Super 1000 and Mr McLay submitted that it was unlikely that Mr Bonic would have signed the debenture as he deposed because the debenture made no provision for its being signed by the debenture holder. However, by the email from Ms Fitzgerald of 20 February 2002, Mr Bonic was asked to sign the debenture. In any event, even if there were sufficient reason to doubt some of the details of Mr Bonic’s recollection of events, he was unshaken in his evidence that he received the debenture document and posted it back to PacGen a few weeks after making the advance of $200,000. I accept that evidence.
What is Secured by the Debenture?
71 The relevant clauses provided as follows:
- “ PACIFIC GENERAL SECURITIES LIMITED (ACN 002 522 205) of Level 1, 7 Bridge Street Sydney NSW 2000 (the ‘ issuer ’) being the trustee of the Wealthy & Wise Residential Property Fund (the ‘ Trust’ ) will on the day specified in Pt 2 of the Schedule (the ‘ repayment date’ ) or on such earlier date as the principal moneys (as defined below) become payable under the provisions hereof pay to the person named in Pt 1 of the Schedule or to such other person who may from time to time be registered as the holder of this debenture in accordance with this debenture (and the person so named or so registered is referred to as the ‘ debenture holder’ ) the sum specified in Pt 3 of the Schedule (the ‘ the principal moneys’ ). The issuer may not repay any of the principal moneys until the repayment date except as expressly provided in this debenture.
2. CHARGE...
- The issuer as trustee of the Trust charges all the undertaking of the Trust and all its property whatsoever and wheresoever both present and future including its uncalled capital and premiums with the payment of the principal moneys and all interest payable under this debenture from time to time.
4. OTHER CHARGES PROHIBITED3. The charge created under clause 2 is a fixed and floating charge on all the undertaking and property of the Trust.
- The issuer shall not create any mortgage, charge or other security ranking in priority to or pari passu with this debenture other than on the purchase of any additional lands or buildings on behalf of the Trust from time to time or other than to refinance any existing mortgages on properties owned by the Trust.
- ...
- 6. PRINCIPAL MONEYS REPAYABLE IN CERTAIN EVENTS
- The principal moneys and all other moneys owing in respect of this debenture shall become immediately repayable in any of the following events:
- (a) if the issuer makes default for fourteen days in the payment of any interest or other moneys payable under this debenture and the debenture holder before such interest or other moneys is paid by notice in writing to the issuer demands repayment of the principal moneys;
- (b) if a distress or execution is levied or issued against any of the property of the issuer or of the Trust and the same is not paid out within seven days;
- (c) if an order or an application is made or a resolution passed for winding up of the issuer or of the Trust or for the appointment of an administrator, liquidator, receiver or provisional liquidation to the issuer;
- (d) if the issuer ceases or threatens to cease to carry on its business;
- (e) if a receiver or liquidator or proficient [sic] liquidator or voluntary administrator is appointed to the issuer or the Trust.
- 7. RECEIVER AND MANAGER
- The debenture holder may at any time after the principal moneys have become payable appoint in writing a receiver or a receiver and manager of the property of the Trust upon such terms as to remuneration and otherwise as the debenture holder shall think fit and may from time to time remove any receiver and manager so appointed and appoint another in his/her stead.
- 8. POSITION AND POWERS OF RECEIVER OR RECEIVER AND MANAGER
- 8.1 A receiver or a receiver and manager so appointed shall be the agent of the issuer and shall, in addition to all other powers which are conferred upon receivers pursuant to any statute, have power:
- (a) to take possession of and get in the secured property;
- (b) to carry on or concur in carrying on the business of the issuer and for this purpose to borrow money on the security of the secured property in priority to this debenture;
- (c) to sell or concur in selling any of the secured property or otherwise deal therewith on such terms in the interest of the debenture holder as he or she shall think fit;
- (d) to make any arrangement or compromise which he or she shall think expedient. ”
72 It was submitted for Super 1000 and Mr McLay that the charge in clause 2 was only over the assets of the Trust, and that the only relevant trust asset was the right to receive a 30/65th share of profits of the joint venture.
73 Various opinions were expressed by Mr Bonic, Mr Paul Heathwood, Mr Scott Heathwood and Mr McLay as to their understanding of the property secured by the debenture. Those opinions are irrelevant to the proper construction of the document.
74 Part of the objective matrix of facts against which the document is to be construed is that the debentures were raised to provide finance for the Dee Why project.
75 The Wealthy & Wise Residential Property Fund had other interests. It also held investments in commercial properties in Bridge Street, Sydney and in residential properties in Mosman and Kensington.
76 On 7 March 2002, PacGen executed the declaration of trust referred to at para [39]. I do not consider that this document can be used to construe the debenture. It does not form part of the objective matrix of facts in relation to Mr Paul Heathwood’s debenture because it was not in existence at the time the debenture was given. Nor was it a document known to Mr Bonic. He understood that the trust held all of the Dee Why project was held on trust, as distinct from only a partial interest being held on trust.
77 As noted above, it is likely that PacGen held all its interest on trust for the Fund, and was not entitled to claim a beneficial interest for itself. However, assuming that the declaration of trust of 7 March 2002 referred to in para [39] above was operative in accordance with its terms, the assets of the trust included a beneficial interest in the Dee Why land. It was submitted for Mr McLay and Super 1000 that the only relevant trust asset was a proportion of the chose in action under the joint venture agreement to participate in profits of the joint venture. Counsel for those parties submitted that “The Trust’s 30/65th share is not a share in Pacific General’s legal interest in the Dee Why properties as such, but rather a share in the JV itself. It is a share in a chose of action, which represents the residue of the Dee Why properties after the payment out of all expenses of the JV.”
78 I do not accept that submission. Assuming, as does the submission, that the declaration of trust takes effect according to its terms, nonetheless, the relevant trust asset is not so limited. The joint venture agreement provides that the joint venture assets are to be held by the participants as tenants-in-common in the proportions of 65 percent to PacGen and 35 percent to PED. It was submitted for Super 1000 and Mr McLay that there is a distinction between the joint venture assets and the “joint venture”. That may be, but it does not follow that the only interest of PacGen’s held on trust is a chose in action to recover a share of the joint venture profits. To the contrary, PacGen declared a trust of a proportion of the joint venture assets, being the properties and the development to be carried out on the properties. PacGen’s interest as a legal owner of 65 percent of the land and improvements was held at least as to a 30/65th share on the trusts of the Wealthy & Wise Residential Property Fund.
79 As noted in paras [20]-[21], this submission would deprive the debenture holders of any security over the Dee Why project as there would be no profits to which a charge could attach until the debts owed to the debenture holders were satisfied.
80 PacGen has a personal obligation under the debenture to repay principal and to pay interest. The debenture does not limit its personal liability to the extent to which it is entitled to be indemnified in respect of that liability out of the assets of the Trust. The fact that PacGen was described as the trustee of the Trust is insufficient to exclude its personal liability or to limit its personal liability to the extent to which it can be indemnified out of trust assets (J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia, 7th ed (2006) LexisNexis Butterworths at [2103] and cases cited).
81 The key provision is clause 2. By the first part of the clause, PacGen, the “Issuer”, charged “all the undertaking of the Trust” with the payment of principal moneys and interest. By the next part of the clause, the “issuer” charged “all its property ... including its uncalled capital” with the payment of principal moneys and interest. I cannot read the words “all its property” as meaning the property of the trust. Not only would that be superfluous because the earlier part of the clause included a charge of all of the “undertaking of the Trust” which would include all its property, but it would require an impossible construction to be given to the words “all its”. “Its” is a reference to “the issuer”, namely PacGen. “All” of PacGen’s property cannot be confined to the property which PacGen holds on the trusts of the Fund. That is not all its property. The charge extends to property PacGen owns beneficially.
82 It was submitted that the word “its” refers to “the Trust” and not to “the Issuer”. I do not agree. A trust does not have separate legal personality and does not own property. In substance, the submission was that the charge was of all the undertaking of the trust and all of the property of the trust. Such a construction would render one or other of the provisions superfluous, although that is on the cards in an ill-drawn instrument. However, if the property charged is confined to the trust property, it is impossible to give content to the expression “its uncalled capital”.
83 Counsel for Super 1000 and Mr McLay relied upon clause 3, which they said demonstrated that the charge created under clause 2 was only over the property of the trust. Whilst clause 3 shows that the draftsman was prepared to use two words, “undertaking” and “property”, where one would do, I do not think it cuts down the width of clause 2. The clause does provide some support for the construction contended for by Super 1000 and Mr McLay because if the charge were to extend to property beneficially owned by PacGen, then it might be thought that clause 3 would not be confined in its operation to trust property. However, clause 3 is a nonsense. A charge is either fixed or floating. A floating charge may crystallise and then become fixed. It is usual to identify the property over which a charge is fixed and to provide that it is a floating charge over other property of the chargor; or else also to identify the property over which the charge floats. It is usual to describe the circumstances in which a floating charge will crystallise. The debenture does not do that. To say that the charge is both fixed and floating is contradictory and meaningless. Such a meaningless clause does not control the scope of clause 2.
84 Clause 7 would also be consistent with the charge being a charge only over trust property. There is no obvious reason why the power to appoint a receiver or a receiver and manager should be confined to trust property if the charge extends beyond trust property. On the other hand, in such an ill-drawn instrument, consistency is not to be expected. (The instrument was so ill-drawn that the draftsman did not notice the reference in clause 6(e) to a “proficient” liquidator. Presumably the draftsman meant provisional liquidator; if not, the clause could lead to a most invidious inquiry.)
85 Given the drafting deficiencies, I do not think that one should expect consistency. It is only if one assumes that the instrument is carefully drawn that it is legitimate to reason that if the charge in clause 2 extends to property beneficially owned by PacGen, the draftsman would not limit his description of the nature of the charge (i.e. both fixed and floating – although the concepts are contradictory) to trust property, and would not limit the property to which a receiver or receiver and manager can be appointed to trust property. Such an assumption is not well based. In my view, clause 2 should not be read down by clause 3 or clause 7.
86 It was also submitted that it was improbable that the parties would intend the debenture holders to have the power to withhold consent to the sale of the units. Hence, it was submitted, the charge should be construed as being confined to trust assets, and the relevant trust asset was a right to receive a share of profits from the joint venture. I do not accept any of the steps in the argument. I see no reason to assume that it was not intended that the debenture holders would be entitled to withhold their consent to a sale of units in the development if they were not satisfied that the sale was at a proper price. Moreover, the argument only has validity if one accepts that the trust asset was not an interest in the land and improvements, but only an interest in a chose in action being an entitlement to receive a share of profit under the joint venture agreement. For the reasons previously given, that is not so.
87 It was also submitted that if the charge extended beyond a charge over the assets held on the trusts of the Fund, then the charge would extend also to property held by PacGen as legal owner but which was held on other trusts of which it was trustee. It was submitted that this could not have been intended. I agree that such a result would not have been intended. Nor would it have arisen. The debenture does not confer a legal title to property on the debenture holder. Where PacGen held property on other trusts, the beneficiaries of the other trusts would have priority over the debenture holders.
88 PacGen has a personal liability to the debenture holders which is not limited to its right of indemnity against trust assets. There is no obvious reason as to why the charge to secure its personal liability should be confined to trust assets. For the reasons I have given, in my view the charge is not so confined. Accordingly, even if PacGen is beneficially entitled to 35/65ths of the Dee Why property, the charge extends to the whole of PacGen’s interest as tenant-in-common of the Dee Why property. It also extends to all other property beneficially owned by PacGen.
89 It follows that if the April 2004 mortgage to Super 1000 has priority over the debentures, the grant of the mortgage was a breach of the debentures. That is so whether PacGen holds all its interest in the Dee Why land on trust for the investors in the Fund or beneficially owns a 35/65th interest. It is so whether the assets charged include assets beneficially owned by PacGen or only those assets held on trust for the Fund. Even in the latter case, the relevant assets include a beneficial interest in the Dee Why land.
Do the 2002 Debentures Rank Pari Passu?
90 It was the intention of each of Messrs McLay, Paul Heathwood, Scott Heathwood and Bonic that the 2002 debentures would rank pari passu. I can infer that that was the intention of all of the directors of PacGen from the minute of 7 March 2002. However, in the absence of Ms Cormack and Mr Ng (who might be able to argue that he had the same priority as Mr Engel because the debenture issued to him on 19 August 2003 appears to have been to secure a loan used to discharge Mr Engel’s 2002 loan), it is not possible to make a declaration as to the priorities inter se of all of the debenture holders. Super 1000 accepts that its debenture issued on 11 December 2003 to secure loans totalling $250,000 made in 2003 ranks behind the 2002 debentures.
91 Because separate debentures were issued to each of the 2002 lenders, unless the instruments are rectified, the charges created by each debenture will rank in accordance with the date of its creation. Counsel for Mr McLay and Super 1000 submitted that because of the registration of the debentures it would not now be possible to achieve the pari passu treatment of the 2002 loans by orders for rectification. I am not sure that that is so. I am not sure that such a claim for rectification would be analogous to a claim for rectification of a company’s articles of association. It is not possible to determine such questions in the absence of all necessary parties which would include the other debenture holders.
92 Super 1000 submitted that it would be content with orders for rectification being made so that all 2002 debenture holders ranked pari passu if all other debenture holders agreed, and orders were made requiring debenture holders to account for payments received by them in excess of what they would be entitled to on a pari passu distribution. Prima facie, such consequential orders would be appropriate if rectification were available.
93 In summary, in the absence of all necessary parties, I cannot determine the priorities of the 2002 debenture holders and Mr Ng inter se. As counsel for Messrs Bonic and Paul Heathwood submitted, that does not preclude a determination of the priorities as between those parties and Super 1000 in relation to later advances made by Super 1000. As noted above, Super 1000 does not rely on its 2003 debenture as having priority over the 2002 debentures. It does rely on its 2004 mortgage.
Finmore Mortgage of 26 August 2003
94 It is admitted on the pleadings that pursuant to the joint venture deed, PED nominated Finmore to be its nominee to proceed with the development of the Dee Why property. The nomination was effected by a letter dated 28 February 2002 signed by Messrs Dixon and Kelly, the directors of PED, addressed to the directors of Finmore. The letter stated that all “interests, rights, liabilities and profit share relating to the Joint Venture” were transferred to Finmore. The transfer was said to be made pursuant to clauses 26 and 27 of the joint venture agreement. The relevant clause was clause 26.2 which permitted PED to transfer its interest in the joint venture to a related entity, provided that the related entity covenanted with the other participants to be bound by the agreement. Whilst there was no evidence of an express covenant from Finmore, it was common ground that Finmore was liable pursuant to clause 4.2 to bear its 35 percent proportion of all liabilities of the Project.
95 Finmore was described by Mr Dixon as a special purpose vehicle created for participation in the joint venture to develop the Dee Why property. It was a wholly owned subsidiary of PED.
96 The joint venture agreement provided for PED to be the Project Manager. The joint venture agreement did not provide for the Project Manager, as distinct from each Participant, to incur expenses in connection with the joint venture. To the contrary, clause 4.10 provided that all Project Expenses other than those covered by Borrowings were to be paid for by the Participants on a pro rata basis in accordance with their respective interests. There was no evidence that PED incurred debts in connection with the Project. PED is not listed as a creditor of the joint venture.
97 On 26 August 2003, Super 1000 entered into a loan agreement with PED, Finmore and Messrs Dixon and Kelly. The agreement recited that Super 1000 had been asked to advance $400,000 to PED and Finmore, who were together called the Borrowers. Clause 2 provided that Super 1000 would forthwith advance the loan of $400,000 to the Borrowers. The loan was to be repaid on the earlier of the date upon which either of the Borrowers was entitled to receive a profit share pursuant to the joint venture deed or 26 August 2004. The amount to be repaid was $500,000, or $475,000 if the loan were repaid by 31 December 2003. As security for the loan, the Borrowers agreed that Finmore would grant a registrable second mortgage over its 35 percent interest as tenant-in-common in the Dee Why property and grant a second fixed and floating charge over all of its assets and undertaking in favour of Super 1000.
98 On the same day, Finmore executed a mortgage in registrable form of its interest in the Hawkesbury Avenue, Dee Why land to secure the sum of $400,000 plus other moneys owing, or which might become owing by it and PED to Super 1000.
99 It appears from correspondence from Mr McCaffery to Messrs Dixon and Kelly of 26 August 2003 that the loan amount of $391,991 (being $400,000 less solicitors’ costs) was paid by a cheque drawn in favour of PED. Mr McLay deposed that the loan was made to keep PED afloat as Project Manager to complete the development of the property under the joint venture. He also said that in June 2003, he became aware that Finmore was experiencing financial difficulties and was threatening to go into receivership.
100 I do not accept this evidence. It was not corroborated. As noted below at para [102], PED did not incur expenses on behalf of the joint venture. There was no explanation as to how the advance would keep PED afloat as Project Manager. Finmore was established as a special vehicle for the purposes of a joint venture for the development of the Dee Why project. Apart from its liabilities to ING, there was no evidence it incurred any debts prior to entering into the loan of 26 August 2003. Interest under the ING loan was being capitalised. It was put to Mr McLay in cross-examination that Finmore’s only substantial liabilities at the time were its liabilities to ING. He said “I believed that may be so”. Mr McLay said that the advance was not applied towards Finmore’s obligation to pay 35 percent of the Project expenses.
101 There was no evidence as to how the loan advance of $391,991 was applied. PacGen called evidence from Mr Dixon but not on this topic. Mr McLay, who could be expected to know the purpose for which PED requested the advance, did not give specific evidence as to the purpose of the advance, that is, how PED said the advance would be applied, or how Super 1000 required it to be applied. Mr Dixon was not asked any questions on that subject in cross-examination.
102 The advance was physically paid to PED. PED was not required to incur expenses on behalf of the joint venture and there is no evidence it did so. The advance was not applied towards Finmore’s obligation to pay 35 percent of the Project expenses. Although the evidence is not satisfactory, I infer that no part of the advance was used towards expenses for the Project.
103 Mr Parker SC and Ms Gerace, counsel for Super 1000 and Mr McLay, submitted that:
- “ Not only was Finmore the borrower under the loan from ING, but Mr Dixon and Mr Kelly, through one or other of their companies, were providing the project management and architectural services required for the development. Mr McLay had no prior financial relationship with Mr Dixon and Mr Kelly; his purpose, if not to assist with the development, has never been articulated. ”
104 There was no direct evidence, one way or the other, as to whether Mr McLay had any prior financial relationship with Mr Dixon and Mr Kelly. On the basis of Mr McLay’s evidence, I accept that he considered that there was a threat that a receiver might be appointed to PED, but it does not appear that that threat arose from the Dee Why development. As I have said, I do not accept that there was a threat that a receiver would be appointed to Finmore. I accept that it was a matter of concern to Mr McLay and Mr Scott Heathwood that a receiver might be appointed to PED. What PED did in its role as Project Manager was not explained. The joint venture agreement provided that management of the project would be undertaken by a board of management consisting of two persons nominated by PacGen and one person nominated by PED.
Deed of Priorities of 25 August 2003
105 Mr Scott Heathwood initially said that he was not aware of the loan from Super 1000 to Finmore, nor the granting of the security by Finmore over its interest as a tenant-in-common in the Dee Why property until September or October 2004. He did not adhere to that evidence. He was a party and a signatory for PacGen to a deed dated 25 August 2003 which regulated the priorities between ING and Super 1000. He and Mr McLay were parties to the deed because they were guarantors of ING’s loan to PacGen and Finmore. The deed provided for the registration of the mortgage to be given by Finmore to Super 1000. It provided that ING would have priority in respect of its debt of $7,705,000 plus interest, costs, fees, charges, duties and expenses and that Super 1000 would rank next for an amount of $400,000 plus interest, costs, fees, charges, duties and expenses under its subsequent mortgage, and that thereafter ING’s securities would have priority for any balance of moneys secured by its mortgage. Mr Scott Heathwood and Mr McLay witnessed the affixing of PacGen’s common seal to the deed. They both signed the deed in their personal capacities.
106 No challenge is made by PacGen to the validity of this deed even though it does not appear that it was brought to the attention of the board. Thus, Mr Paul Heathwood said that he was unaware of the transaction. There is no record of any minute of directors’ meeting resolving that PacGen enter into the deed. It is clear that Mr Scott Heathwood was aware of the transaction. Mr Scott Heathwood said that he told Mr McLay that Mr McLay could do what he liked with Messrs Dixon and Kelly but that he did not want those dealings to have any impact on the project. I cannot accept that evidence in the light of the fact that he signed the priority deed which plainly disclosed that Finmore was granting a second mortgage over its interest in the project to Super 1000.
107 Super 1000 does not dispute that Finmore would have breached the joint venture agreement by granting a second mortgage over its interest in the property if PacGen had not consented to its doing so. In my view, in the absence of PacGen’s consent, the grant of the mortgage would be a breach of clause 22 of the joint venture deed.
108 I accept that PacGen cannot maintain that Finmore breached the joint venture agreement by giving the mortgage to Super 1000 because PacGen gave its consent to that mortgage by entering into the priority deed, whose validity is not challenged.
109 It follows that Mr McLay and Super 1000 cannot be liable in tort for intentionally inducing a breach of contract.
Breach of Director’s Duties in Connection with the Finmore Mortgage
110 By granting a second mortgage over its interest in the Dee Why property as security for the advance of $400,000, Finmore’s proportion of the proceeds of sale of the units after ING’s mortgage had been discharged was not available to meet its liability to contribute to the expenses of the development until the debt owed to Super 1000 was discharged. Although Finmore was a joint borrower with PED, the advance was not made to allow Finmore to pay its share of the development expenses. By taking a second mortgage over Finmore’s interest in the Dee Why properties to secure the obligation of Finmore and PED to pay $500,000, Super 1000 was advancing its interests at the expense of PacGen’s interest. That was so because all of the joint venture expenses, to the extent they were not met from moneys borrowed from ING, were paid by PacGen. Finmore was liable to reimburse PacGen for 35 percent of those expenses.
111 Mr McLay beneficially holds 100 of the 101 shares in Super 1000. Under the agreements of 28 March 2002 and 30 May 2003 he was to receive any profits made by PacGen. But PacGen had obligations to the debenture holders and the investors in the Fund. Mr McLay had a conflict between his interest as a shareholder in Super 1000 in having Super 1000 recoup its advance to PED (for which both Finmore and PED were liable), from Finmore’s interest in the Dee Why property, and his duty as a director of PacGen. PacGen was prejudiced by Finmore’s encumbering its interest in the Dee Why properties to secure the debt of $500,000 owed to Super 1000, where the advance of $400,000 (net $391,991) (being the consideration for the debt of $500,000), was not applied towards the joint venture expenses.
201 In the same way, an accessary to a fiduciary’s breach of fiduciary duty is liable to account for profits he has received. The liability to account is a personal remedy designed to strip the recipient of the profits it is unconscionable for him to retain (Short v Crawley (No. 30) at [763] and authorities there cited; Glandon Pty Ltd v Tilmunda Pastoral Co Pty Ltd [2008] NSWSC 218 at [108]; Glandon Pty Ltd v Tilmunda Pastoral Co Pty Ltd (No. 2) [2008] NSWSC 441 at [12]).
202 Counsel for Super 1000 are correct in submitting that PacGen’s claim is by way of analogy with the first limb of Barnes v Addy at 251-252. In Barnes v Addy, Lord Selborne LC said:
- “ Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort , or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.”
203 Although Lord Selborne LC was speaking of circumstances in which persons who act as agents of trustees may become liable as constructive trustees, the passage has been given a wider application to apply generally to third parties who receive trust property with knowledge that it was transferred in breach of trust, or knowledge of facts which would indicate that circumstance to an honest and reasonable person, and to apply to third parties who assist with knowledge in a dishonest and fraudulent design on the part of the trustee. No reliance was placed on the second limb of Barnes v Addy (knowing assistance), and in Farah Constructions Pty Ltd v Say-Dee Pty Ltd, the High Court said that whilst this cause of action can include not only breaches of trust, but also breaches of fiduciary duty, any breach of trust or breach of fiduciary duty relied on must be dishonest and fraudulent (at 164-166 [179]-[186]).
204 Liability under the first limb of Barnes v Addy extends not only to persons who receive trust property, but to persons who receive property with the requisite knowledge that the transfer is made in breach of fiduciary duty (Kalls Enterprises Pty Ltd (in liq) v Baloglow at [152]-[160]). There are many cases in which the first limb of Barnes v Addy has been applied to make a third party liable as constructive trustee where the third party receives property of a company with knowledge that the property has been transferred in breach of a director’s fiduciary duty (Belmont Finance Corporation Ltd v Williams Furniture Ltd (No. 2) [1980] 1 All ER 393 and the cases cited in Kalls Enterprises Pty Ltd (in liq) v Baloglow at [157]). A third party who takes a mortgage from a company of that company’s property with knowledge or sufficient notice that the mortgage has been obtained by a director’s breach of his fiduciary duty to the company is in an analogous position (Koorootang Nominees Pty Ltd v Australia & New Zealand Banking Group Ltd [1998] 3 VR 16).
205 In Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133, Tadgell JA said that there may be room for debate whether, under the general law system of title, a mortgagee with notice that the mortgage was given in breach of fiduciary duty would be accountable as constructive trustee, citing Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 per Lord Browne-Wilkinson at 707. However, with respect, Westdeutsche Landesbank does not cast doubt on that proposition. In my view, leaving aside for the moment the issues which arise in the case of a mortgage over Torrens Title land, the principles in the first limb of Barnes v Addy are applicable by analogy (see also the note by Professor Peter Butt “Equity, Restitution and In Personam Claims under the Torrens System” (1998) 72 ALJ 258 at 264).
206 It was not disputed that a mortgagee in the position of Super 1000 could become liable as a constructive trustee under the first limb of Barnes v Addy as a matter of principle, but subject to the Real Property Act.
207 The law in relation to what must be shown to fix a third party with knowledge of the breach of trust or fiduciary duty for the purposes of the first limb of Barnes v Addy was discussed in detail by Owen J in The Bell Group Ltd (in liq) v Westpac Banking Corporation Ltd. I accept his Honour’s analysis. His Honour concluded his review of the authorities as follows:
(a) there must be a 'trust';“ [4748] The resulting law, as I apprehend it, is that for a third party to be held liable for knowing receipt:
- (b) the trustee must have misapplied 'trust property';
- (c) the third party must have received trust property;
- (d) at the time of receiving the trust property, the third party must have known of the trust and of the misapplication of the trust property; and
- (e) the third party will be taken to have 'known' in the relevant sense if the third party:
- (i) has actual knowledge of the trust and the misapplication of trust property; or
- (ii) has deliberately shut his or her eyes to those things; or
- (iii) has abstained in a calculated way from making such enquiries as an honest and reasonable person would make, about the trust and the application of the trust property; or
- (iv) knows of facts which to an honest and reasonable person would indicate the existence of the trusts and the fact of misapplication. ”
208 The expressions “trust” and “trust property” are placed in inverted commas because, as his Honour also held, the principles of Barnes v Addy, as they have been developed, apply not only to trust property strictly so called, but to property of a company which has been misapplied by its directors in breach of their fiduciary duty.
209 Owen J also considered how a constructive trust on the principles of Barnes v Addy arises in respect of property received by the third party which is not itself trust property. His Honour cited the following passage (at [4799]) from the judgment of McLelland AJA (with whom Priestley and Meagher JJA agreed) in Greater Pacific Investments Pty Ltd (in liq) v Australian National Industries Ltd (at 153):
- “ In general, where there is a contract for the sale of property by A to B made in breach of a fiduciary duty owed to A by B (or by C in whose breach B knowingly participated), pursuant to which the legal title to the property has been transferred from A to B, the transaction is in equity voidable at the instance of A, who may (if necessary) obtain an order for rescission setting it aside. Unless and until A effectively avoids the transaction and (if necessary) obtains an order for rescission, B's property rights as a result of the transaction remain unaffected. However if A does effectively avoid the transaction and (if necessary) obtain an order for rescission, the parties will be treated in equity as if the transaction had never been effected; in other words equity will treat B as if he had held the property in trust for A, that is, as a constructive trustee, ab initio. A constructive trust arises in such circumstances as a consequence of the effective avoidance or rescission of the transaction. Where, for whatever reason, the transaction has not been and cannot be effectively avoided and rescission is unavailable, it remains effective and no constructive trust can arise: ... ”
210 Owen J continued:
“ [4801] This is not an easy area of the law and, in many respects, it remains in a state of flux. A case in which, for example, a director steals money from a company and pays it across to a third party, who receives it with the requisite notice, would raise few problems. The money remains property of the company and is trust property in the hands of the director. But if the misfeasance by the director in dealing with company property under her or his control is no more than a breach of fiduciary duty, the conceptual basis under which that property comes to be regarded as trust property is more difficult to discern.
[4803] On the other hand, it may be that the phrase 'trust property', when applied to an errant company director, is wide enough to cover dealings with trust property (strictly so-called) and also dealings with property subject to a fiduciary obligation and in respect of which it is likely that a court would eventually decree (and does eventually decree) a constructive trust. If it is other than trust property strictly so-called, avoidance of the transaction will be necessary before the court will make such a declaration. In this way, setting aside the impugned transaction becomes a constituent element of a successful cause of action. ”[4802] One way of looking at it is to say that company property with which a director deals in breach of fiduciary duty is property to which a fiduciary obligation attaches (which is the language used in Farah Constructions [166]). If the third party receives it with the requisite knowledge the conscience of the third party is sufficiently affected to justify the intervention of equity. The previous sentence is a paraphrase of In re Montagu's Settlement , at 285. In those circumstances, equity might be disposed to treat property received under those circumstances either as a species analogous to trust property or as property coming within a broadened understanding of the concept referred to by Lord Selborne. The justification for broadening the concept lies in the more recent authorities that have extended the principle to include some classes of non-trustee fiduciaries. Under this view, it is not necessary to rely on the doctrine of the constructive trust in order to characterise the property transferred away in breach of a fiduciary duty as trust property. This is not to say that, in such cases, the constructive trust is irrelevant. The intervention of the court will still be necessary to seal and fashion the remedy.
211 The significance of this for present purposes is that the constructive trust in a case such as the present would arise because Super 1000 took the mortgage with the requisite knowledge such as to affect its conscience so as to justify the intervention of equity. The trust arises because of Super 1000’s conduct and its knowledge of Mr McLay’s breach of duty. It would arise from the rescission of the mortgage (assuming that were possible) and would attach to the moneys received by Super 1000 as mortgagee prior to the rescission of the mortgage.
212 In principle, other remedies would be available which would not affect the property in the hands of Super 1000. Thus it could be liable to an account of profits, or to pay equitable compensation had PacGen suffered a loss.
213 The liability of a constructive trustee under either limb of Barnes v Addy is a personal liability, but the available remedies include proprietary remedies. A person liable under the first limb of Barnes v Addy may be liable to pay equitable compensation or account for profits even if he or she no longer holds the property. But proprietary remedies are also available and, depending upon the circumstances, the beneficiary may be entitled to trace the property and assert a beneficial interest in it or in its traceable proceeds, or may be entitled to a charge over other property to which it can be traced.
214 This is a more expansive doctrine than the principles upon which a transferee of property transferred in breach of trust, who is not a bona fide purchaser for value without notice, may hold the property on trust for the beneficiary. If the property can be traced, the beneficiary will be entitled to assert his or her beneficial interest against a purchaser of the legal estate for value if the purchaser had actual, imputed or constructive notice that the transfer was in breach of trust. A purchaser will have constructive notice of all matters which would be revealed by usual or reasonable inquiries. However, that is not sufficient to make a person liable as a constructive trustee and amenable to the personal as well as proprietary remedies available against a constructive trustee under the first limb of Barnes v Addy. The point was well made by Sir Robert Megarry V-C in Re Montagu’s Settlement Trusts [1987] Ch 264. His Lordship clearly exposed the distinction between the equitable doctrine of tracing trust property into the hands of a transferee other than a bona fide purchaser for value of a legal estate without notice, and recipient liability as a constructive trustee. This led his Lordship to distinguish between the notice sufficient to defeat a plea of bona fide purchaser for value of a legal estate, and hence entitle a beneficiary to claim that a transferee holds the property on trust for him, from the knowledge that property has been transferred in breach of trust which will render the transferee liable as a constructive trustee.
215 The principles of priorities between the holder of an equitable interest in property and a later acquirer of the legal interest have no role to play in the Torrens system. In my respectful view, it is unfortunate that that fact has influenced the course of decision on whether liability as a constructive trustee under the first limb of Barnes v Addy is inconsistent with the Torrens system.
216 In Frazer v Walker, the Privy Council said (at 585) that:
- “ ... their Lordships have accepted the general principle that registration ... confers upon a registered proprietor a title to the interest in respect of which he is registered which is ... immune from adverse claims, other than those specifically excepted. In doing so they wish to make clear that this principle in no way denies the right of a plaintiff to bring against a registered proprietor a claim in personam, founded in law or in equity, for such relief as a court acting in personam may grant. ”
217 As a claim that the defendant is liable as constructive trustee under either limb of Barnes v Addy is a claim that the defendant be personally liable as constructive trustee, and arises because of the defendant’s personal conduct which involves knowledge of a breach of duty, it might be assumed that such claims fell within the in personam exception to indefeasibility. That appears to have been the assumption until 1998. As the High Court observed in Farah Constructions Pty Ltd v Say-Dee Pty Ltd at 167 n 272, in Consul Development Pty Ltd v DPC Estates Pty Ltd, a case concerning the second limb of Barnes v Addy, it did not occur either to counsel or any of the judges who heard the matter that indefeasibility was an answer to the plaintiff’s claim, and that the plaintiff needed to establish actual fraud or moral turpitude (meaning subjective dishonesty), to avoid the application of s 42.
218 In Farah Constructions Pty Ltd v Say-Dee Pty Ltd (at 169 [193]), the High Court said that it is only certain legal or equitable causes of action against a registered proprietor which operate as an in personam exception outside the language of s 42(1). The Court referred with approval to the judgment of Tadgell JA in Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd and the majority judgments in the Full Court of the Supreme Court of Western Australia in LHK Nominees Pty Ltd v Kenworthy (2002) 26 WAR 517. The Court said (at 171 [196]) that the New South Wales Court of Appeal in Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309 ought to have followed those cases. It follows that I should do so.
219 The effect of those decisions, particularly LHK Nominees Pty Ltd v Kenworthy, is that the in personam exceptions to indefeasibility do not extend to claims arising under the first limb of Barnes v Addy. It will be necessary in due course to consider the reasoning in these cases in more detail to deduce whether it follows that no remedy, including a personal remedy for an account of profits, is available against Super 1000 because it registered its mortgage without fraud.
220 In Farah Constructions Pty Ltd v Say-Dee Pty Ltd, the High Court said (at 169-171 [193]-[195]):
“ [193] In personam exception . An exception operating outside the language of s 42(1) can exist in relation to certain legal or equitable causes of action against the registered proprietor. So far as Say-Dee was relying on Barnes v Addy , it was certainly alleging a recognised equitable cause of action. In Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd , Tadgell JA (Winneke P concurring, Ashley AJA dissenting) held that a claim under Barnes v Addy was not a personal equity which defeated the equivalent of s 42(1) in Victoria, namely the Transfer of Land Act 1958, s 42(1). Tadgell JA said (at 156):
- [H]ere it is not possible to escape the circumstance that, if there was a 'knowing receipt' by the appellant, it was a receipt by virtue of registration under the Transfer of Land Act.
He continued (at 156-157):
- The argument for the respondent appears to assume that the acquisition by a mortgagee, in that capacity, of a proprietary interest following registration of a forged instrument of mortgage in respect of property that is subject to a trust amounts to a receipt by the mortgagee of trust property. If it were so, it might be possible to treat the holder of the registered proprietary interest as a constructive trustee arising from 'knowing receipt' of trust property. As it seems to me, however, there is neither room nor the need, in the Torrens system of title, to do so. If registration of the mortgagee's interest is achieved dishonestly then the registration, and with it the interest, are liable to be set aside not because, on registration, the registered holder became a constructive trustee but because s 42(1) recognises that fraud renders the interest defeasible. If, on the other hand, the registration is not achieved by fraud the Act provides, subject to its terms, for an indefeasible interest. Those terms allow, it is true, a claim in personam founded in equity against the holder of a registered interest to be invoked to defeat the interest; and a claim in personam founded in equity may no doubt include a claim to enforce what is called a constructive trust … [T]o recognise a claim in personam against the holder of a mortgage registered under the Transfer of Land Act , dubbing the holder a constructive trustee by application of a doctrine akin to 'knowing receipt' when registration of the mortgage was honestly achieved, would introduce by the back door a means of undermining the doctrine of indefeasibility which the Torrens system establishes. It is to be distinctly understood that, until a forged instrument of mortgage is registered, the mortgagee receives nothing: before registration the instrument is a nullity. As Street J pointed out in Mayer v Coe [1968] 2 NSWR 747 at 754 … the proprietary rights of a registered mortgagee of Torrens title land derive 'from the fact of registration and not from an event antecedent thereto'. In truth, I think it is not possible, consistently with the received principle of indefeasibility as it has been understood since Frazer v Walker [1967] 1 AC 569 and Breskvar v Wall (1971) 126 CLR 376 to treat the holder of a registered mortgage over property that is subject to a trust, registration having been honestly obtained, as having received trust property. The argument that the appellant is liable as a constructive trustee because it had 'knowingly received' trust property should in my opinion fail.
[194] That reasoning, with which four judges in the Full Court of the Supreme Court of Western Australia agreed in LHK Nominees Pty Ltd v Kenworthy (2002) 26 WAR 517 at 549 [186] per Murray J, 555 [210] per Anderson and Steytler JJ, 568–572 [273]–[299] per Pullin J (see also White v Tomasel [2004] 2 Qd R 438 at 455 [72] per McMurdo J ), and with which Davies JA agreed in Tara Shire Council v Garner [2003] 1 Qd R 566 at 568 [34], applies here. In that latter case, however, Atkinson J (McMurdo P concurring), in deciding whether a claim was arguable on the pleadings, disagreed with Davies JA and with the majority in Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd . Atkinson J and McMurdo P preferred the dissenting judgment of Ashley AJA in that case, the dicta of Hansen J in Koorootang Nominees Pty Ltd v Australia and New Zealand Banking Group Ltd [1998] 3 VR 16 at 105 where the indefeasibility point was not argued , (at 75) and where in any event there was dishonesty; and the dicta of de Jersey J in Doneley v Doneley [1998] 1 Qd R 602 where indefeasibility was not argued either ( Tara Shire Council v Garner [2003] 1 Qd R 566 at 568–569 [36] and 584 [88] n 94).
[195] The essential point on which Ashley AJA differed from the majority in Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd was put thus (at 166):
- The proposition that an equity may be recognised and enforced so long as it involves no conflict with the indefeasability [sic] provisions has not prevented the High Court from imposing constructive trusts so as to recognise equities in cases where the transfer of real property was effected at different stages in the course of events giving rise to the equities.
- He referred to Bahr v Nicolay (No 2) (1988) 164 CLR 604, Muschinski v Dodds (1985) 160 CLR 583 and Baumgartner v Baumgartner (1987) 164 CLR 137. Earlier, Ashley AJA had said (at 162) that the ‘necessary balance’ between personal equities and indefeasibility was ‘disclosed by the judgment of Wilson and Toohey JJ in Bahr v Nicolay (No 2) ’((1988) 164 CLR 604 at 637–638. He also referred to Mason CJ and Dawson J at 613 and Brennan J at 653–655, to Baumgartner v Baumgartner (1987) 164 CLR 137 at 147–149 per Mason CJ, Wilson and Deane JJ and 151–153 per Toohey J, and to Muschinski v Dodds (1985) 160 CLR 583.) However, as Pullin J pointed out in LHK Nominees Pty Ltd v Kenworthy (2002) 26 WAR 517 at 571 [289], in those cases ‘the defendant was the primary wrongdoer, attempting to ignore an obligation to share or convey the land with or to the plaintiff. In none of those cases was the defendant a party who merely had notice of an earlier interest or notice of third party fraud.’ There is no analogy between the constructive trusts involved in those cases and that which can arise from application of the first limb of Barnes v Addy.”
221 Mr Halley for PacGen relied on the quotation in Farah Constructions Pty Ltd v Say-Dee Pty Ltd at [195] from the judgment of Pullin J in LHK Nominees Pty Ltd v Kenworthy where his Honour distinguished the earlier High Court authorities from a case where the defendant was a party “who merely had notice of an earlier interest or notice of third party fraud”. Mr Halley submitted that Super 1000 did not merely acquire the PacGen mortgage for value when on notice through Mr McLay of an equity to set aside the transaction for breach of Mr McLay’s director’s duties. He submitted that Super 1000 was “necessarily involved in the breaches of fiduciary duty through the actions and conduct of its alter ego Mr McLay as a director and shareholder of Super 1000.” However, I do not understand the High Court to be saying that liability under the first limb of Barnes v Addy cannot be relied upon as an in personam exception to indefeasibility only where the defendant merely has notice of an earlier interest or notice of third party fraud. LHK Nominees Pty Ltd v Kenworthy was not such a case. Moreover, in Farah Constructions Pty Ltd v Say-Dee Pty Ltd, the High Court would appear to have held (had it been necessary so to decide) that indefeasibility of title would be a defence not only to Mrs Elias and her daughters, but also to Mr Elias and Lesmint (see 140 [110], 167-168 [190] and 171 [197]). That was so notwithstanding that Mr Elias controlled Farah Constructions which was alleged to have breached its fiduciary duty and Lesmint was his “alter ego”. Mr Elias was “in the same position” as Farah Constructions (at 140 [110]).
222 Had Mr McLay taken the mortgage in his own name, there would be no difficulty in PacGen having recourse to all available remedies in respect of his breach of fiduciary duty. The in personam exception would clearly apply. It seems surprising, with respect, that the position should be otherwise because Mr McLay arranged for the funds to be advanced and the mortgage taken by a company he controls, so that in the absence of agency, which is not established, the company has an accessorial liability under the first limb of Barnes v Addy. However, the High Court’s endorsement of the reasoning of Tadgell JA in Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd, and of the majority of the Full Court of the Supreme Court of Western Australia in LHK Nominees Pty Ltd v Kenworthy compels that conclusion. In so saying, I am mindful of the fact that this part of the High Court’s reasoning was obiter. Nonetheless, it would not be proper for a trial judge not to follow the considered dicta of the High Court.
223 The essential reasoning of Tadgell JA in Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd is set out at 169-170 [193] of the High Court’s judgment in Farah ConstructionsPty Ltd v Say-Dee Pty Ltd quoted above. That was a case in which a solicitor (Mr Kandy) forged a mortgage in favour of Macquarie bank over land held by a company on trust for members of a family with which Mr Kandy was related by marriage. It was an important part of Tadgell JA’s reasoning that because the mortgage was forged, the bank received no property, trust or otherwise, on the receipt of the instrument. Because the mortgagee derived the title by virtue of registration under the statute, it could not be said to have received trust property, and therefore could not be liable whatever its knowledge of the circumstances in which the mortgage was given, unless there was fraud.
224 This reasoning has no direct application to the present case. This was not a case of the registration of a void instrument. Super 1000 acquired rights under the unregistered mortgage. The fact that its title to the mortgage now arises from registration does not detract from the fact that it only acquired a registered title because of the actions of Mr McLay in procuring the execution of the mortgage in breach of his fiduciary duty.
225 However, the reasoning of the majority of the Full Court of the Supreme Court of Western Australia in LHK Nominees Pty Ltd v Kenworthy is directly in point. There were differences between the majority judges on the facts. However, on the facts found by three of the five judges (Wallwork J, dissenting, and Anderson and Steytler JJ), the position was as follows. The property in question was owned by the appellant company, LHK Nominees, as trustee of a trust, the beneficiaries of which were Mr Kenworthy’s sons of a former marriage. They were also the directors of the trustee. Notwithstanding that he was not an appointed director, Mr Kenworthy was in effective control of the trustee at all material times (at 524 [21], 557-558 [221]-[222]). Mr Kenworthy instructed his sons to execute a transfer of the property to him and they did so (at 522 [8]-[11]; 559 [228]-[229]). The land was transferred to Mr Kenworthy at a gross undervalue (at 526 [34]; 558 [223]). At the time the transfer was lodged for registration Mr Kenworthy knew that the consideration was less than half the true value of the land (532 [71]-[72]). Mr Kenworthy told his sons that the property was being transferred into his name because, as a pensioner, he could obtain a discount on rates. He promised to transfer the land back to the trustee (at 524 [22]; 559-560 [230]). At the time of Mr Kenworthy’s death, the property was registered in his name.
226 It was not alleged that Mr Kenworthy himself owed a fiduciary duty to the beneficiaries of the trust or the trustee company (at 554 [205]).
227 None of their Honours held that Mr Kenworthy was guilty of fraud for the purpose of s 68(1) or s 134 of the Transfer of Land Act 1893 (WA), (which are the equivalents of ss 42(1) and 43(1) of the Real Property Act 1900 (NSW)). The fact that Mr Kenworthy had not taken any steps to transfer the property back to the trust or to its beneficiaries prior to his death did not mean that he lacked the intention to do so at the time of the transfer.
228 On these findings, it was a strong case for Mr Kenworthy’s being found to be liable as a constructive trustee under the first limb of Barnes v Addy, knowing, as he did, of the breach of fiduciary duty owed by the trustee company and its directors (his sons) in agreeing to transfer the property to him for what he knew was an undervalue. The fact that he promised to retransfer the land would suggest a further personal claim available to the trustee. However, the majority held that the claim under the first limb of Barnes v Addy was not available because the transfer was registered. Anderson and Steytler JJ held (at 555 [210]) that because the registration of title was not dishonestly obtained, it was not possible, consistently with the received principle of indefeasibility, to treat the holder of the registered title to property that was subject to a trust as having received trust property.
229 I confess to having difficulty in understanding this reasoning. The land was trust property. It was received by Mr Kenworthy. That he derived his title from the registration of the transfer, that is by the effect the statute gives to registration, does not alter those facts. It is true that the consequence of a registered proprietor’s deriving title by registration is that, unless a relevant statutory exception applies, the holder of a prior interest cannot trace his interest into the property in the hands of the new registered proprietor. But liability under the first limb of Barnes v Addy does not depend upon principles of tracing. In other words, the fact that the interests of the beneficiaries could not be traced into the land of which Mr Kenworthy became registered as proprietor does not, without more, explain why the registration of the transfer was an answer to the Barnes v Addy claim.
230 Pullin J did not add to the reasoning of Tadgell JA in Macquarie Bank Ltd v Sixth-Fourth Throne Pty Ltd that it was not consistent with received principles of indefeasibility to treat the holder of a registered mortgage over property that was subject to a trust, registration having been honestly obtained, as having received trust property. As noted in Farah Constructions Pty Ltd v Say-Dee Pty Ltd, Pullin J pointed out that cases relied on by Astley AJA in Macquarie Bank Ltd v Sixth-Fourth Throne Pty Ltd were cases where the registered proprietor was the principal wrong-doer. Whilst that is true, it does not, with respect, explain why liability under either limb of Barnes v Addy, which is a personal liability, is not within the “personal equity” exception to indefeasibility.
231 Anderson and Steytler JJ said (at 556 [214]) that the claim under the second limb of Barnes v Addy requires dishonesty which would be fraud for the purposes of ss 68(1) and 134 of the Transfer of Lands Act (see also to the same effect, Murray J at 549 [185] and Pullin J at 567 [272]). That, with respect, is not correct. In Farah Constructions Pty Ltd v Say-Dee Pty Ltd (at 163-164 [174]-[177]), the High Court held that its earlier decision in Consul Development Pty Ltd v DPC Estates Pty Ltd established that any of the first four of the five categories of knowledge set out in Baden v Société Générale pour Favoriser le Dévelopment du Commerce et de l'Industrie en France SA [1993] 1 WLR 509 at 575-576 would suffice to establish a third party’s knowledge of a dishonest and fraudulent design on the part of the trustee. The fourth category includes knowledge of circumstances which would indicate the facts to an honest and reasonable man. That need not necessarily equate to the actual subjective dishonesty or moral turpitude (that is, morally shameful or depraved conduct), which is required to establish fraud for the purposes of s 42 of the Real Property Act. The significance of this for present purposes is that the majority in LHK Nominees Pty Ltd v Kenworthy apparently did not consider that accessorial liability under the second limb of Barnes v Addy should be allowed as an in personam exception to indefeasibility, because their Honours were of the view that if liability were established under those principles, there would be fraud.
232 Murray J took a different view of the facts. His Honour held that it had not been established that Mr Kenworthy knew that the property was being transferred to him at an undervalue.
233 Murray J also said (at 551 [194]) that it would be open to the appellant trustee to pursue a claim for a “constructive trust in an entirely remedial sense, as opposed to the pursuit of a proprietary claim that, in the circumstances of the case, the appellant retained the equitable interest in the property”. Such a constructive trust in the remedial sense was said to “refer to an equitable remedy for infringement of the plaintiff’s personal equity” (at 551 [195]). His Honour concluded (at 552 [200]) that such a claim was not established because in his Honour’s view, the appellant had not proved that when Mr Kenworthy took the transfer of the property he knew it was at an undervalue of which the trustee, through its directors, was ignorant.
234 I am bound to follow LHK Nominees Pty Ltd v Kenworthy. It follows that at least no proprietary remedy is available against Super 1000 as an accessary to Mr McLay’s breach of fiduciary duty by having taken a mortgage over the company’s property. The mortgage is not liable to be rescinded and is not held on trust for PacGen. It follows that it is unnecessary to deal with Super 1000’s submission that the mortgage could not be avoided because substantial restitution would not be possible.
235 There was no discussion in Macquarie Bank v Sixty-Fourth Throne Pty Ltd, or in LHK Nominees v Kenworthy, or in Farah Constructions Pty Ltd v Say-Dee Pty Ltd, whether personal remedies against a third party liable as a constructive trustee under the first limb of Barnes v Addy are also excluded because the person acquired the title to the property by registration.
236 In the present case, the question is whether Super 1000 can be required to account to PacGen, as a personal remedy against it, for the proceeds of sale of the units in the Dee Why development or rent from the unsold units, which it receives by virtue of its mortgage to the extent they represent the profit it derived from taking the mortgage. That profit is the difference between what it recovers under the mortgage and what it would have recovered had the mortgage not secured the prior advances of $810,000. If it is liable to account, then PacGen’s chose in action against Super 1000 would be charged to the debenture holders (including Super 1000 itself) (see Cinema Plus Ltd v ANZ Banking Group Ltd [2000] NSWCA 195; (2000) 49 NSWLR 513).
237 No such remedy was sought in PacGen’s cross-claim. That is not a bar to entertaining the claim because the defence of indefeasibility was not pleaded. However, no submissions were made by PacGen or Super 1000 about the availability of such relief. I will invite further submissions from those parties on that question.
238 It is unnecessary to consider whether Super 1000 could be liable to pay equitable compensation to PacGen for its knowing participation in Mr McLay’s breach of fiduciary duty. For reasons given in relation to Mr McLay, PacGen has not suffered any loss in respect of which such compensation could be payable.
Conclusion with Respect to the April 2004 Mortgage
239 It follows that, notwithstanding that the April 2004 mortgage was given by Mr McLay in breach of his fiduciary duty to PacGen and that Super 1000 knowingly participated in the breach and profited from it by taking the mortgage, Super 1000 is entitled to the benefit of s 42 of the Real Property Act and holds the mortgage free from any other interests. I reach this conclusion because I am bound by authority so to hold.
Effect of Registration of the Debentures
240 I mention this matter only for completeness. Because Super 1000 through Mr McLay had notice of the earlier debentures, registration of the debentures does not affect priorities as between debenture holders. However, that does not affect the disposition of moneys paid into court.
Alleged Breach of Undertaking
241 At the time of the hearing, three properties remained unsold. On 27 March 2007, PacGen gave an undertaking to the Court that it would “take all reasonable and necessary steps in connection with [Super 1000] and the receiver to Finmore Pty Ltd to effect the sale of the unsold units for a reasonable price”. Super 1000 pleaded that PacGen was in breach of its undertaking. However, no submissions were made in relation to that allegation. In any event, I accept Mr Scott Heathwood’s evidence that the reason the units were let rather than sold was because he was advised by the marketing real estate agent that because of building defects which are noted in the body corporate records, sales could not be effected at reasonable prices. I am not satisfied that PacGen breached its undertaking. In any event, the only relief sought in respect of the alleged breach is that there be an inquiry as to an account of profits derived by PacGen as a result of the alleged breach or as to the damages suffered by Super 1000 due to the alleged breach. As PacGen remains liable to Super 1000 for its full debt, there would be no purpose in such an inquiry.
Disposal of Moneys Paid into Court
242 It follows from these reasons that Super 1000 is entitled to receive the moneys paid into court up to the amount of the debt secured by the 2003 and 2004 mortgages.
243 Mr McLay is liable to pay equitable compensation as indicated in para [191]. PacGen’s right to receive such compensation is property charged to the debenture holders. The 2002 debenture holders have priority over the debenture issued to Super 1000 in December 2003, and over the April 2004 charge. It is not possible in the absence of the joinder of the other debenture holders to make a determination as to whether the 2002 debenture holders rank pari passu or rank in order of the creation of their debentures.
244 I will hear further submissions from PacGen and Super 1000 as to whether Super 1000 is liable to account to PacGen for the profit it may derive from the 2003 mortgage, but there can be no double satisfaction.
245 PacGen and Super 1000 are also invited to make further submissions as to whether Super 1000 has a personal liability to account for profits to be derived by it from the 2004 mortgage.
246 The claims of Mr Paul Heathwood and Mr Bonic against Super 1000 and Mr McLay will be dismissed. They are entitled to judgment against PacGen for the amount owing under the debentures.
247 I will hear the parties on costs.
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