Thomas v Commissioner for Consumer Affairs No. Dcaat-02-585

THOMAS & OTHERS v COMMISSIONER FOR CONSUMER AFFAIRS
[2003] SADC 147
Judge Trenorden
Administrative Appeals Division

The appellants have appealed, pursuant to section 37 of the Conveyancers Act 1994, against the determination of the Commissioner for Consumer Affairs upon their respective claims for compensation made under section 32 of the Conveyancers Act. The Commissioner had determined that compensation was not payable to any of the appellants.
With respect to the Thomas and McAuley the Commissioner for Consumer Affairs advised each of them of the outcome of their claim, in identical terms, as follows:
“I have determined that you are entitled to compensation from the Indemnity Fund in the amount of $5,104.
Our investigations reveal that the mortgage in question was unenforceable, meaning no interest accrued under the mortgage. The whole $4,896 recovered via legal proceedings is therefore considered to be a recovery of principal.”
Concerning the O’Sullivan claim the Commissioner for Consumer Affairs determined the claim in the following terms:
“I have determined that you are entitled to compensation from the Indemnity Fund in the amount of $3,320.
Our investigations reveal that the mortgage in question was unenforceable, meaning no interest accrued under the mortgage. The whole $3,180 recovered via legal proceedings is therefore considered to be a recovery of principal.”
The Grounds of Appeal & Notice of Alternative Contention
The grounds of appeal are as follows:
“1.That the Respondent erred in determining the mortgage was unenforceable and that no interest accrued under it.
2.That the Respondent should have determined that interest accrued under the mortgage.
3.That the Respondent erred in determining that amounts recovered by the applicants were recovery of principal.
4.That the Respondent erred in determining that the appellants were precluded from appropriating recovered amounts pursuant to the mortgage.
5.That the Respondent did not give any or any sufficient weight to the findings of the District Court (McCauley -v- Panagiatidis) (sic) (No. 2) [1998] SADC 3916 (Judgment of Judge Lunn, 25 November 1998) and McCauley -v- Panagiatidis (sic) (No. 3) [1999] SADC 6 (Judgment of His Honour Judge Lunn, 19 January 1999) in which the Trial Judge made no declaration concerning the validity of the mortgage and no finding that the mortgage was wholly unenforceable.”
The respondent filed a Notice of Alternative Contention, in which it contended as follows:
“1.That there has been no fiduciary default within the meaning of section 32 of the Conveyancers Act 1994 (“the Act”), and accordingly there is no basis for claiming against the Indemnity Fund; alternatively
2.that the mortgage was only enforceable to $60,000. Accordingly, entitlement to interest in accordance with clause 28 of the mortgage document must be calculated upon that sum, and any funds exceeding interest calculated upon that basis must be treated as principal for the purposes of section 32(2) of the Act. The respondents’ entitlement from the Indemnity Fund is therefore as follows:

Thomas            $7,726.42

McCauley         $7,726.42

O’Sullivan         $5,022.00”
The appellant filed a Reply to the Respondent’s Notice of Further Contentions, in particular paragraph 1 thereof, in the following terms:
“In reply to paragraph 1 of the Notice of Further Contentions, the Appellant also relies on the following further fiduciary default of the Conveyancer as entitling them to compensation under the Act.
The fiduciary default comprises one (or more) of the following acts:
(a)representing to the Appellants that the Conveyancer had “completed a current satisfactory credit enquiry” when the Conveyancer knew that to be incorrect by reason that the Conveyancer knew that part of the funds lent were being applied to pay out the Commonwealth Bank which had made a demand on the borrower under a mortgage over the property and was thus threatening to foreclose for non-payment of moneys owed
(b)representing to the Appellants that the loan was replacing a loan made by an “Original Investor withdrawing for personal reasons” knowing that to be false in that the loan was being made for the purposes of:
(i)paying out existing guarantee mortgages over the property in favour of the State Bank and Commonwealth Bank
(ii)paying funds to a third party namely Drossos Panagiotidis as owner of Blackwood Tiles to use that money in that business and principally to pay many outstanding creditors.
(c)representing to the Appellants that the loan was to Katerina Panagiotidis knowing it was all being used to satisfy debts of her husband or his company
(d)representing to the Appellants that the Conveyancer had “completed a current satisfactory credit enquiry” when either the Conveyancer knew that to be incorrect as they knew the true borrower had been made bankrupt or alternatively when they had not made such a credit enquiry at all
(e)failing to ensure Katerina Panagiotidis understood the mortgage in circumstances when they knew she could not understand it, and that therefore she could challenge its validity.
PARTICULARS
The appellants rely on the facts found by His Honour Judge Lunn in McCauley v Panagiotidis (no 2) [1998] SADC D3916 and paragraphs 1-18 and 48 in particular.”
The Conveyancers Act 1994
The relevant parts of section 32 of the Conveyancers Act is set out hereunder:
“(1)Subject to this Division, a person who-
(a) has suffered pecuniary loss as a result of a fiduciary default; and
(b) has no reasonable prospect of recovering the full amount of that loss (except under this Division),
may claim compensation under this Division.
(2)The amount of a claim cannot exceed the actual pecuniary loss suffered by the claimant in consequence of the fiduciary default less any amount that the claimant has received or may reasonably be expected to recover (apart from this Division) in reduction of that loss.”
All claims for compensation arose following dealings between each of the appellants and GC Growdens Pty Ltd (“Growdens”), who were at the relevant time carrying on business in South Australia as mortgage managers and finance brokers. Growdens has since failed. It was not in issue that section 32 entitled the appellants to make a claim from the indemnity fund in respect of fiduciary default on the part of Growdens; the latter being a mortgage financier within the meaning of clause 2 of Schedule 2 – Transitional Provisions, to the Conveyancers Act. By sub-clause 2(4) of Schedule 2, Part 4 of the Conveyancers Act applies to:
(a) a mortgage financier as if the references therein to a conveyancer were references to a mortgage financier; and
(b)where trust was lent to another on the security of a mortgage before 1 June 1995, to trust money received by the mortgage financier by way of payment of principal or interest or both, under that loan.
The appeal was heard together with another appeal (Drabsch & Rosenzweig v Commissioner for Consumer Affairs), because one of the issues to be determined in each matter were similar; that is, whether there was in the terms of the Conveyancers Act, a “fiduciary default”. In addition, if the Court holds that there was a fiduciary default within the meaning of the Act, then the question arises as to the amount of compensation to be paid in each case.
The Thomas & McAuley Claims
The facts are as follows:
1.   Thomas entrusted the amount of $10,000 to Growdens for the Panagiotidis loan.
2.   McAuley entrusted funds to Growdens in the amount of $10,000 for the Panagiotidis loan. It is not disputed that this money was held in trust by Growdens immediately prior to its application to the Panagiotidis loan.
3.   The Panagiotidis loan was effected upon the signing of the mortgage documents on 16 February 1994.
4.   It is not disputed that this money was held in trust by Growdens immediately prior to its application to the Panagiotidis loan.
The O’Sullivan Claim
The facts are as follows:
1.O’Sullivan had invested monies with a borrower named Mujaro, as arranged by Growdens in its capacity as a mortgage financier prior, to 1 September 1995 (the prior loan).
2.The prior loan was discharged on 1 September 1995 and the principal sum of $15,000 was placed in the O’Sullivan’s account of Associated Savings Pty Ltd, by Growdens.
3.Growdens proposed to O’Sullivan on about 30 October 1995 that $6,500 be invested with a current client, Panagiotidis, on the security of an existing mortgage.
4.On 16 November 1995 the sum of $6,500 was lent by O’Sullivan to Panagiotidis, arranged by Growdens. The O’Sullivan funds replaced those of an existing lender who had withdrawn his/her funds, on the same date, having given prior notice of his/her desire to withdraw the funds.
I find that the O’Sullivan monies in the amount of $6,500 were in the possession or control of Growdens immediately before it applied same to the existing Panagiotidis loan.
Whether there was “Fiduciary Default”
The initial question is whether the appellants suffered pecuniary loss as a result of a fiduciary default. It is accepted that they suffered pecuniary loss when Panagiotidis defaulted on the loan, but had there been a “fiduciary default”? The term is given a meaning for the purposes of part 4 of the Conveyancers Act (unless the contrary intention appears) in section 14, as follows:
“‘fiduciary default’ means a defalcation, misappropriation or misapplication of trust money occurring while the money is in the possession or control of –
(a)    a conveyancer; or
(b)    a firm of which a conveyancer is a member;”
Other relevant terms are also given meanings:
“trust account” means an account in which trust money is required to be deposited by a conveyancer;
“trust money”, in relation to a conveyancer, means money –
(a)    that is received by the conveyancer when acting on behalf of another in connection with a dealing with land; and
(b)    to which the conveyancer is not wholly entitled in law and in equity,
but does not include money received by a conveyancer in the course of mortgage financing.”
The facts of the making of the loan to Panagiotidis are set out in McAuley and Ors v Panagiotidis (No. 2) (1998) 200 LSJS 205. The appellants in this appeal were plaintiffs in that case. Lunn DCJ in that judgment, found that the borrower, Mrs Panagiotidis, was illiterate at least in English. In his judgment, His Honour Judge Lunn said, at paragraph 48:
“As Growdens knew that the 1^st defendant was giving the mortgage to secure, at least in part, a substantial loan to a business in which she had no financial interest, they should have been particularly careful in the interests of the plaintiffs to ensure that no possible ground of challenge to the validity of the mortgage could subsequently be raised by her. However, in spite of Growdens’ knowledge of these matters through Smith and Ms McPharlin, they did nothing to ensure that the 1^st defendant understood what she was doing in executing the documents and that there was no equitable fraud being perpetrated by the 2^nddefendant. They should have realised that the 1^st defendant was acting under some significant disability. Questions such as “Can you read English?” or “Do you understand the documents which you are signing?” would certainly have produced a response which would have made it clear that the 1^st defendant needed to be independently advised through a Greek interpreter. They were not asked. In the light of what they knew, and should have suspected, it was wilful blindness by Growdens not to pursue the matter at least to that extent, and they can be in no better position through having not done it than if they had done so. They, and therefore the plaintiffs, thus had notice when the first mortgage was signed that the 1^st defendant did not properly understand what she was doing and may have been subject to equitable fraud by her husband.”;
and further; in paragraph 59:
“As Growdens were on notice, as I found above, about such matters, it is unconscionable for the plaintiffs to benefit from the disadvantageous position in which the 1^st defendant was placed by enforcing the mortgages, although subject to the countervailing equities mentioned below: Commercial Bank v Amadio (1983) 151 CLR 447. As Ms McPharlin conceded, if she had realised that the 1^stdefendant did not speak proper English and did not understand the transaction, it was improper for her to have witnessed her signature on the first mortgage and she should have been sent away to get independent advice.”
As a result of Judge Lunn’s conclusions, I find for the purpose of these proceedings, that on 16 February 1994, Growdens lent the monies of the appellants, Thomas and McAuley, to Panagiotidis when Growdens knew or should have known that Panagiotidis did not understand what she was doing in entering into the mortgage.
The relationship between Growdens and the appellants is significant in determining this appeal. Growdens were mortgage managers and finance brokers. The business had clients of two kinds: those who had money to invest and those who wished to borrow money. Growdens received enquiries from a person who wished to invest monies in mortgages, with a view to receiving interest on the monies lent on the security of a mortgage. Growdens also received requests to borrow money for a specified purpose, following which they would obtain a valuation of the property that was to stand as security for the loan, check the creditworthiness of the prospective borrower, and prepare a proposal to be submitted to one or more lenders. They would then seek to match prospective borrowers with prospective lenders that were on their records. Growdens would submit the proposal to each prospective lender, usually with a copy of the valuation obtained in respect of the property to stand as security and (in the case of the appellants) a First Mortgage Investment Authority form to be completed by the lender, if the proposal was acceptable to them. For each loan arranged, Growdens would compete the documentation and effect the loan upon the signing of the mortgage document by the mortgagor. For these services, Growdens received fees from both the borrower and each lender.
In each case, the appellants were on Growdens’ records as existing or prospective lenders. In each case the appellants received a proposal in respect of the prospective (or in the case of O’Sullivan, existing) borrower Panagiotidis, and each signed and forwarded to Growdens a completed First Mortgage Investment Authority, authorising, inter alia:
·the lending of specified monies on the security of a first mortgage over the property specified to Panagiotidis for a specified period at a specified rate of interest;
·Growdens to collect all interests and payments due by the borrower; and
·Growdens “to manage and take all necessary legal action to protect my/our investment and to maintain the mortgage security in Trust”.
The relationship between the appellants and Growdens can be characterised thus:
·each appellant contracted with Growdens, for the latter to find, and once found and arranged, manage suitable mortgage investments for the former;
·Growdens was the agent for each of the many principals, including the appellants, with whom it had contracted;
·Growdens received funds from and on behalf of the appellants which funds, while they were in its possession, were held by it in trust for the appellants; and
·in respect of the funds held by it for each appellant there was a fiduciary relationship between Growdens and that appellant.
The contractual arrangements between the appellants and Growdens included in each case a term that the investment was to be made against the security of a first mortgage over the borrower’s property. In other words, the appellants instructed Growdens to lend their investment monies to Panagiotidis on the security of a first mortgage over her property. This did not mean “a mortgage that might be enforceable” or “a mortgage which it might be unconscionable to enforce”, but a mortgage that was a security as it purported to be.
In the event, Growdens did not apply the appellants’ funds in accordance with this specific term. Growdens applied the funds that it was holding in trust from the appellants Thomas and McAuley after being put on notice that Panagiotidis did not properly understand what she was doing, and therefore were on notice that the mortgage which was to be security for the appellants’ loans, might well be subject to a challenge as to its validity (see McAuley v Panagiotidis (No. 2) at paragraph 48).
In the case of the appellant O’Sullivan, Growdens applied his monies to the Panagiotidis loan on the security of the existing mortgage despite having had notice that the mortgage might be subject to a challenge as to its validity.
In each case, Growdens were careless as to whether the mortgage document constituted an enforceable security. These are the determinations I have reached following the findings of Lunn DCJ in McAuley v Panagiotidis (above), particularly at paras 58 and 59, where His Honour held that it would be unconscionable for the plaintiffs in that case to enforce the mortgage against Panagiotidis, given the knowledge of Growdens.
I was referred to Craik v Agents Indemnity Fund, Commercial Tribunal case 13/90/05, 28 May 1991. There the Tribunal considered the meaning of the term “misapplication” as it appeared in an identical provision of legislation preceding the Conveyancers Act. At page 16 the Tribunal said:
“As to “misapplication”, we consider that in order to establish a misapplication of trust money it is necessary to prove that the money was applied for a purpose other than that for which it was entrusted. (As this would almost invariably involve a breach of trust, the word “misapplication” probably adds nothing to “defalcation”).”
In my view that meaning is too narrow if read strictly. Money that has been entrusted to be applied for a particular purpose, may be said to have been properly applied only when applied in accordance with those terms of the application that are fundamental or critical to the purpose for which the money was entrusted. In the case of these appellants, it was a critical term of the contract with, agency of and instructions to Growdens that the money to be lent was to be secured by way of a first mortgage. The appellants wanted to invest money, but with security for their investments. Growdens held itself out as facilitating the lending and borrowing of money, upon mortgages. It must be the case that applying money other than in accordance with the instructions upon which it was entrusted to be applied, amounts to an application of money for a purpose other than that for which it was entrusted.
It follows that Growdens misapplied the monies held by it in trust on behalf of each of the appellants. This amounted in each case to a fiduciary default by Growdens, within the meaning of the Conveyancers Act. The fiduciary default occurred when Growdens applied the funds held in trust on behalf of the appellants when they had failed to ensure Katerina Panagiotidis understood the mortgage in circumstances when they knew she could not understand it, and that therefore she could challenge its validity. This is a variation of the contention of fiduciary default set out in paragraph (e) of the Appellant’s Reply to the Notice of Alternative Contention.
With respect to the appellants Thomas and McAuley, there was a fiduciary default by Growdens on 16 February 1994. By sub-section 14(2) of the Conveyancers Act, the right to claim on the indemnity funds extends to persons who have suffered a pecuniary loss notwithstanding that the default occurred prior to the commencement of the Conveyancers Act. The appellants Thomas and McAuley suffered pecuniary loss as a result of the fiduciary default of Growdens on 16 February 1994.

O’Sullivan has suffered pecuniary loss as a result of the fiduciary default by Growdens, that default being the misapplication of trust money while it was in Growdens possession on a date after the commencement of the Conveyancers Act1994. In the case of O’Sullivan, that date was 16 November 1995.
Thus far, these findings appear to be consistent with the respondent’s decision.
I reject the Appellant’s contention that the acts specified in paragraphs (a) to (d) inclusive of their Reply to the Notice of Alternative Contention constituted the fiduciary default upon which the claims for compensation were properly based. The acts discussed in paragraphs (a), (c) and (d) might, if true, amount to misrepresentation, but that does not amount to fiduciary default. Paragraph (b) was not pursued; the allegation having been made in error.
Extent of the Pecuniary Loss
The remaining question is whether there has been a pecuniary loss on the part of the appellants as they have claimed.
The mortgage has not been declared by a Court to be unenforceable. The Court in Panagiotidis (No. 2) and (No. 3) refrained from doing so.
In Panagiotidis (No. 2) Lunn DCJ said:
“…subject to the countervailing equities mentioned below, that it would be unconscionable to allow the plaintiffs to enforce the first and the second mortgages against her.”; (para 58)
“As Growdens were on notice, as I found above, about such matters, it is unconscionable for the plaintiffs to benefit from the disadvantageous position in which the 1^st defendant was placed by enforcing the mortgages, although subject to the countervailing equities mentioned below…”; (para 59)
“It would be unconscionable for the 1^st defendant to obtain equitable relief in respect of the first mortgage unless that relief is made conditional upon her continuing to remain liable on it to the extent of the moneys applied from it to discharge her liabilities under the 1993 State Bank mortgage and the Commonwealth Bank mortgage.” (para 62)
In Panagiotidis (No. 3) His Honour concluded at para 12 as follows:
“Here the practical course, which is in accordance with the legal principles, is to give judgment in favour of the plaintiffs on the first mortgage conditional upon the 1^st defendant not first doing equity to the plaintiffs. This is consistent with the form of judgment approved by the High Court in Maguire v Makaronis, 25/6/97, FC97/020, unreported. The proposal of the 1^st defendant would be contrary to principle in that it would require the avoidance of the 1^st mortgage before she had done equity for the plaintiffs.” (para 12), and judgment was in terms which reflected that course.
At the end of the day, the plaintiffs have suffered a pecuniary loss because it was unconscionable to allow the plaintiff to enforce the mortgage against Panagiotidis, given that acts which gave rise to the fiduciary default committed by the plaintiff’s agent; namely Growdens.
The plaintiffs in the Panagiotidis cases recovered monies from Panagiotidis. Lunn DCJ held in effect, that it would have been unconscionable to allow the plaintiff to enforce the mortgage beyond the worth of the countervailing equities.
However, in this matter, the plaintiffs’ loss as a result of the fiduciary default is the principal invested, together with the interest payable but not received. The latter does not fall within “actual pecuniary loss” and therefore cannot be the subject of a claim from the Fund: see Jarrett v Commissioner for Consumer Affairs [2000] SADC 56.
Monies recovered by the plaintiff, as a result of Panagiotidis (No. 3) should be applied first towards the interest which should have been but was not, paid to the appellants in each case, on the mortgage, given that clause 28 of the mortgage agreement provided that in the absence of the mortgagee determining a priority, monies paid by the mortgagor shall be paid first towards interest due and secondly for payment of the principal: see Jarrett (above).
The plaintiffs are each entitled to claim up to “the actual pecuniary loss suffered … in consequence of the fiduciary default less any amount that the claimant has recovered or may reasonably be expected to recover … in reduction of that loss” (section 32(2) Conveyancers Act).
It is in error to argue that what may be claimed is limited by the fiduciary default. The purpose of section 32 of the Conveyancers Act is to enable a person to claim compensation for the actual pecuniary loss suffered directly as a result of the fiduciary default by the mortgage financier (in this case). There is no suggestion in the legislation the “actual pecuniary loss” is to be limited by the consequences for the mortgage of the mortgage financier’s fiduciary default. I agree with the appellants’ contention that such an approach would result in the fiduciary default both founding a claim on the Fund and (potentially) defeating it. That cannot have been the intention of Parliament in enacting the legislation.
The actual pecuniary loss suffered in consequence of the fiduciary default is, in each case, the whole of the principal.
Thus, in conclusion, each of the plaintiffs are entitled to successfully claim against the Fund as follows:
· for the whole of the principal lost less:
(a) the balance (if any) of any amount recovered from Panagiotidis after application of same to interest payments not paid; and
(b)any other amounts which have been received or are reasonably expected to be recovered, in reduction of the loss.
I am not in a position to carry out those calculations.
Conclusion
I would uphold the appeal. I shall hear the parties as to final orders.

[2003] SADC 147

9 October 2003