Van Beveren v Denny and 2 Ors

[2000] NSWSC 973

CITATION:	Van Beveren v Denny & 2 Ors [2000] NSWSC 973
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 5291/97
HEARING DATE(S):	14/06/00, 15/06/00, 16/06/00, 01/08/00
JUDGMENT DATE:	20 October 2000
PARTIES :	Sean Willems Van Beveren (Plaintiff) Janice Louise Denny (First Defendant) The estate fo the late Kathleen Maude Denny (Second Defendant) Vanden Stock Biz Pty Ltd (ACN 063 092 660) (Third Defendant)
JUDGMENT OF:	Santow J

COUNSEL :	M K Minehan (Plaintiff) D Alexander (Defendants)
SOLICITORS:	Melville Orton & Lewis (Plaintiff) Vagg & Reynolds (Defendants)
CATCHWORDS:	EQUITY — De facto relationships — Termination of relationship in which male de facto came to own property jointly with female de facto’s mother — Contributions to purchase price and to servicing mortgage for purposes of sharing in sale proceeds if trust for sale ordered — Whether male de facto agreed to contribute to mortgage on sole basis or jointly with the mother — Effect of decline in value of property — Whether payments made by female de facto from three-way loss-making partnership between two de factos and mother or from riding business owned 50/50 by de factos should be attributed proportionately to male de facto — Effect of so doing when he had not contributed sufficiently to mortgage — Basis for discretion to order sale under s66G of Conveyancing Act.
LEGISLATION CITED:	Conveyancing Act 1919 (NSW) s66G
CASES CITED:	Forgeard v Shanahan (1994) 35 NSWLR 207 Hogan v Baseden (1997) 8 BPR 97676 Nichols v Nichols (1986) 4 BPR 97262
DECISION:	S66G sale ordered on terms yielding nil proceeds to Plaintiff.

_

IN THE SUPREME COURT
OF NEW SOUTH WALES
IN EQUITY

SANTOW J

No. 5291/97
SEAN WILLEMS VAN BEVEREN
Plaintiff
JANICE LOUISE DENNY
First Defendant
The estate of the late KATHLEEN MAUDE DENNY
Second Defendant
VANDEN STOCK BIZ PTY LTD (ACN 063 092 660)
Third Defendant
JUDGMENT

20 October 2000

Table of Contents
Page

INTRODUCTION
The Proceedings
Agreed Statement of Facts
RESOLUTION OF ISSUES BETWEEN THE PARTIES
Summing up
Were payments made indirectly by the Plaintiff via the Partnership or from the horse-riding business or both, and if so in what amount and with what consequence?
CONCLUSION AND ORDERS

INTRODUCTION

1    I am concerned with the equitable unravelling of intertwined property and financial affairs between a de facto couple, the Plaintiff and First Defendant. It also involved the First Defendant’s late mother the Second Defendant who gave evidence at the hearing, but subsequently died. That unravelling has principally involved certain rural land (“the Property”) owned by the Plaintiff and the First Defendant’s mother used by the three parties. This has followed termination of the de facto relationship with consequential effects on a rural partnership between the three associated with the Property and a horse-riding business owned through the Third Defendant and connected with the Property. The central question is how that unravelling is to be done so as to reflect the contribution each made in relation to the jointly owned Property, and in particular the servicing of an encumbrance upon it. This is in circumstances where the Property has declined in value and remains encumbered, the parties disputing their respective obligations and actual contribution in servicing the encumbrance. That servicing came, inter alia, from the revenue of the rural partnership between the three parties and from the associated horse-riding business owned through the Third Defendant, a 50/50 company of the Plaintiff and First Defendant, as well as from the Plaintiff’s direct contribution; but with what property consequences the parties dispute. 2    In broad terms what occurred was this. Early on during the de facto relationship, the Plaintiff Sean Van Beveren bought into joint ownership of the rural Property with the Second Defendant the late Kathleen Denny. That Property was utilised in a horse-breeding and cattle and sheep grazing partnership (“the Partnership”) between the Plaintiff, Janice Denny the First Defendant and the Second Defendant in equal one-third shares. There was also a horse-riding venture conducted on the Property through a company jointly owned by the Plaintiff and First Defendant, Vanden Stock Biz Pty Limited, the Third Defendant. 3    With the de facto relationship now ended, though a number of matters have been resolved in connection with the unravelling of these property and financial affairs, two sticking points remain. These relate to the Property and the respective contributions to an encumbrance upon it. Those sticking points become the questions to be answered. Those are:

Question 1 — Mortgage Responsibility

(a) did the Plaintiff undertake legal responsibility for the whole of the repayments on the mortgage over the Property, as the Defendants claim, or only half, as the Plaintiff contends, with that half corresponding to the Plaintiff’s half interest; and

(b) has the Plaintiff also contributed indirectly to those repayments and to the discharge of any obligation via payments made by the First Defendant

(i) out of the Partnership, drawing upon his one-third interest, or
(ii) out of the horse-riding business, drawing on his one-half interest, as contended by the Plaintiff and denied by the Defendants,
and if so, in what amount and with what consequence?

Question 2 — Implications for Sale

Taking into account the answer to these questions:

(i) what are the implications for whether a sale under s66G of the Conveyancing Act 1919 (NSW) should be ordered of the Property against the objection of the Defendants who contend that the Plaintiff has in reality no equity in the Property;

(ii) if such a sale were nonetheless ordered, how should the proceeds of sale be equitably divided to reflect the ownership interests, based upon the respective contributions of the parties?

4    To place these questions in their forensic context, I describe the current proceedings below.

The Proceedings

5    By Amended Summons filed 3 April 1998 the Plaintiff seeks orders in relation to:

(a) A partnership which it is agreed existed between the Plaintiff, the First Defendant and, until her recent death in July this year, the Second Defendant (“the Partnership”) for its dissolution and now winding-up, and associated orders, including for a receiver and the taking of accounts;

(b) The Property being the land comprised of Lot 1, Deposited Plan 576558 and known as “Kia-Ora” at Tantawangalo to be made the subject of a trust for sale and a division of the proceeds, whereby the Plaintiff was to receive (after repayment of the existing encumbrance) prior payment of half the mortgage payments claimed to have been made by the Plaintiff (initially paid by the Plaintiff to total $8,316 but subsequently said to total $35,882), and thereafter divided equally between Plaintiff and Second Defendant, or otherwise as the Court deems appropriate.

(c) Vanden Stock Biz Pty Limited ACN 063 092 660 (“the Company”) for its winding up, following its reinstatement.

6    The Defendants filed no cross-claim in response. The nature of the issues between the parties emerged in argument and from affidavit with the Plaintiff submitting further elaboration of the orders sought in regard to the trust for sale. The Defendants, but only in their written submissions, belatedly articulated a cross-claim and sought various declarations the gist of which being that the Plaintiff would be declared to hold his 50% interest on trust for the Second Defendant. 7    There is no dispute in relation to the partnership and the company. The Defendants do not oppose the dissolution of the partnership and the Company has been deregistered. 8    The Partnership and the Company have a continuing relevance insofar as activities conducted by them have contributed to the maintenance of the Property. However, the substantive issue is the disposition of the Property. The issues between the Plaintiff and the Second Defendant include whether or not there was an agreement between the Plaintiff and the Second Defendant by which, instead of equal liability for mortgage repayments (being a loan from the Police Credit Union), the Plaintiff agreed to accept sole liability as the Defendants contend and the Plaintiff denies. 9    Much of the factual background is uncontroversial and has been embodied in an agreed statement of facts. Set out below is that agreed statement. I have amplified it with some additional findings on the evidence which I consider to be relatively uncontroversial. I then deal with some additional questions of fact which, with the earlier factual background, are relevant to answering the first question concerning legal responsibility for the mortgage payments.

Agreed Statement of Facts

10    Prior to 1989, the sole registered proprietor of the Property Kia-Ora was James Clifford Denny, the then husband of the Second Defendant. 11    Pursuant to an order of the Family Court dated 9 October 1989, by transfer dated 8 November 1989 and registered 6 February 1991, the Property was transferred by James Clifford Denny to the Second Defendant. After the transfer to the Second Defendant, the Property was unencumbered. 12    By transfer dated 8 November 1989 and registered 22 May 1991, the Second Defendant, in consideration of the payment of $52,900, transferred to Hilary Matthew Graham as tenant in common, a one-half share in the Property, financed by the loan in 13 below, secured as there described. 13    In about October 1990, the State Bank made a loan of $59,000 for the acquisition by Mr Hilary Graham of an interest in the Property. Hilary Graham and the Second Defendant are both referred to in the State Bank loan documents (Exhibit PX6) as “the Customer” and “the Provider of Security” and signed the loan documents as such. The State Bank loan was secured by a first registered mortgage over the Property registered 22 May 1991. 14    Though the borrowers were the Second Defendant and Hilary Graham, it was Hilary Graham who made the loan repayments to the State Bank until about late 1992, when he ceased to do so. I accept for reasons elaborated later, Mrs Denny’s evidence that in relation to Mr Graham she neither expected to meet nor could meet, loan repayments and was simply putting up as security what she had (her interest in the Property); see T, 72.45 — .50. Nonetheless it appears she was jointly liable for Mr Graham’s (and her) mortgage payments. After 1992, the loan went into default as payments were not otherwise made. I accept that there were then two options available to the Second Defendant, though how likely the first one was, it is not possible to determine on the evidence. The first one was the First Defendant had contacts in the US who at one stage offered to advance funds to the Second Defendant in respect of the Property. The second was through the Plaintiff, then romantically involved with the First Defendant, who had expressed interest in acquiring a share in the Property. 15    On 3 March 1993, written application was made to the Police Department Credit Union Ltd for a loan of $61,500. The application (Exhibit DX1) was signed by the Plaintiff and the Second Defendant (though there is no agreement she did so on 3 March 1993). 16    A valuation carried out for the Police Credit Union on 23 March 1993, valued the Property at $162,000. 17    Following approval, the Police Credit Union on or about 21 May 1993 granted a loan of $61,500 secured against the Property by a first registered mortgage given by the Plaintiff and the Second Defendant. 18    The loan from the Police Credit Union was for 15 years at 9.46% per annum, with repayments of $297 per fortnight. Repayments later increased to $305 per fortnight and were later made at $650 per month. 19    In May 1993, the parties had agreed the Plaintiff would buy Hilary Graham’s interest in the Property. There is a dispute between the parties as to the consideration. The Plaintiff referred to consideration of $10,000 (see affidavit of Plaintiff of 8 July 1998, para 11) and indeed the sum of $10,000 was paid by the Plaintiff to Hilary Graham. The Police Credit Union loan was used to discharge the mortgage over the Property held by the State Bank, the amount required to discharge the State Bank loan being $61,337.83. However, what is disputed is whether the Plaintiff was liable for all the amount to discharge the loan in the names of Mr Graham and the Second Defendant (as the Defendants say). Or as the Plaintiff contends, whether he was liable only for half the amount borrowed to extinguish that loan as joint borrower and mortgagor with the Second Defendant taking equal responsibility as between them. The Plaintiff says he never assumed sole liability but was willing to make the payments he did until such time “when the partnership becomes profitable”, when “we can use income to offset mortgage payments” (para 17 of Plaintiff’s affidavit of 8 July 1998). 20    By transfer dated 21 May 1993 and registered 27 May 1993, Hilary Graham and the Second Defendant transferred their interest in the Property to the Plaintiff and the Second Defendant, for an expressed consideration of $10,000. Thereafter, the Plaintiff and the Second Defendant held the Property as tenants in common, in equal shares. 21    An equal partnership was formed between the Plaintiff, the First Defendant and the Second Defendant in about April or May 1993, for the purposes of horse breeding and cattle and sheep grazing. 22    The Property was used by the partnership for its partnership activities. 23    The Company was incorporated on 11 January 1994. 24    The Company was incorporated by the Plaintiff and the First Defendant, who were the directors and shareholders of the Company. 25    The purpose of the Company was to operate a horse-riding business. 26    The relationship between the parties broke down in about February 1995. 27    The Plaintiff made the loan repayments to the Police Credit Union until 27 July 1995, paying a total of $16,632 when he ceased to contribute further. 28    After July 1995, the First Defendant made the loan repayments to the Police Credit Union. Between July 1995 and 14 June 2000, she made payments tot he Police Credit Union in relation to the loan in the total amount of $38,300 (or possibly $38,900). 29    As of 14 June 2000, the amount owing to the Police Credit Union was $39,914 (and as of 14 May 2000 $39,672.70). 30    The Company was de-registered on 18 September 1996. After that date, the First Defendant continued the horse-riding business previously conducted by the company. 31    The amount of $7,930 for “Rent” shown in the partnership profit and loss statements for each of the years ending 30 June 1996 and 30 June 1997 represents the repayment in each of those years of the loan to the Police Credit Union, totalling $15,860. It was conceded by the First Defendant that the mortgage payments to the Police Credit Union were to that extent included as expenses of the Partnership, such that one-third ($2,643.33) of that item was paid by the Plaintiff. 32    The Company leases horses from the Partnership and paid the following lease payments to the Partnership:

Year ended 30 June 1994: $ 4,480.00
Year ended 30 June 1995: $ 8,384.00
Year ended 30 June 1996: $13,804.25
Year ended 30 June 1997: $10,844.80

33    The Company leased about twenty horses from the Partnership from 1994 to 1997. In 1998 and 1999 about 15 to 16 Partnership horses were used in the horse-riding business. That business was conducted by the Company until September 1996 and thereafter it was taken over by the First Defendant. 34    By letter dated November 1996, the Plaintiff purported to resign from the Partnership (Annexure K to Plaintiff’s affidavit of 8 July 1998. 35    In the financial years ending 30 June 1996 and 30 June 1997, the profit and loss accounts of the Company and the Partnership show the following:

Company Partnership
1996

Income: $42,718.05 $12,282.00
Expenditure: $42,760.21 $17,702.53
Loss: $ 42.16 $ 5,420.53 (1/3 = $1,806.84 loss for each partner)

1997

Income: $94,672.08 $ 9,295.03
Expenditure: $95,797.56 $18,359.68
Loss: $ 1,125.48 $ 9,064.65 (1/3 = $3,021.54 loss for each partner)

36    There are no financial statements available for the partnership nor for the horse-riding business for the years ended 30 June 1998 and 1999. 37    The horse-riding business previously conducted by the Company, and now solely by the First Defendant, is still in operation, using, inter alia, 15-16 Partnership horses. 38    There are still partnership cattle on the Property, the number of which is uncertain. 39    On 26 July 1999, the Property was valued at $130,000. Taking into account the amount owing to the Police Credit Union ($39,914), the equity in the Property is about $90,000. 40    The Second Defendant died on 18 July 2000. She had however earlier given evidence despite her frail health.

Resolution of issues between the parties

41    As to the question of the Plaintiff’s mortgage responsibility, I start by enquiring what was the basis upon which the Plaintiff bought into the Property. In particular what responsibility did the Plaintiff undertake in relation to the mortgage over that Property which replaced the existing encumbrance? 42    In order to answer these questions, one must start with the background to the Plaintiff buying into the Property. The Second Defendant owned the Property with her former husband. She subsequently owned it wholly in her own right as the result of Family Court orders made in 1989 though not for long. Contemporaneously in 1989, the Second Defendant transferred to Mr Hilary Graham a one-half share. From 1989 until 1993 they owned the Property together as tenants-in-common in equal shares. 43    Relevantly, the consideration to be paid by Mr Hilary Graham was $52,900. It was financed by a loan in the amount of $59,000 secured by a first registered mortgage dated 8 November 1989, given by the Second Defendant and Mr Graham. Although the borrowers were Mr Graham and the Second Defendant, it was always Mr Graham who met the repayments. But then he became unable to continue to do so in late 1992. That resulted in the sale of his half interest in the Property to the Plaintiff. I have earlier said that I accept the Second Defendant’s evidence that, in relation to Mr Graham, she neither expected to meet, nor could meet, the loan repayments. While she had to put up as security her interest in the Property, and in that sense accepted a liability under the mortgage, it would be surprising indeed if she had intended, vis a vis Mr Graham, to repay the money used to buy his half share from her in the first place. Obviously one would expect an external lender to want security over the whole. 44    The contemporaneous file note of 9 February 1993 by Mr Naylor the Second Defendant’s solicitor, states that “the State Bank granted the mortgage to Mr Graham for his half share of the land on the basis that Mrs Kathleen Denny would be jointly responsible with him for the mortgage and that she also secured payment of Mr Graham’s mortgage by permitting a mortgage over her half of the land”. That outcome was in circumstances where it was noted she did not receive any legal advice about these arrangements; see DX10. Moreover, in the same file note Mr Naylor says this: “However, Mr Graham, when refusing to pay the mortgage for his share of the land and having the State Bank threaten to take over the land, has been acting to the detriment of Mrs Denny throughout these proceedings and it would be a matter of equity that Mrs Denny should not be penalised by Mr Graham’s refusal to repay the mortgage.” That clearly implies that as between Mrs Denny and Mr Graham, there was no understanding that she was to contribute to repayment of the mortgage. It would hardly have been equitable that she should, for the mortgage was to repay the borrowing Mr Graham needed to buy his half from Mrs Denny. To the extent she paid off the mortgage she would be making a gift to Mr Graham. Those file notes were made in the context of an initial proposal for the Plaintiff to pay out the State Bank mortgage completely and secure his $60,000 interest by taking out a mortgage on Mrs Denny’s half share of the land, a proposal that her legal adviser did not adopt, commenting that the procedure “looks very messy”. But the significance of that, is that the Plaintiff was looking to step into Mr Graham’s shoes. 45    Then in a letter of 10 February 1993 (PX12) Mr Naylor, writing to Mr Graham’s solicitors, said: “We are instructed that for some reason unbeknown to the writer, Mrs Denny entered into an agreement not only to become jointly responsible for Mr Graham’s mortgagee payments, but even agreed with the State Bank that her half of the land should be security for Mr Graham’s mortgage loan.” 46    However, there was no suggestion in the correspondence with Mr Graham’s solicitor that Mrs Denny had vis a vis Mr Graham undertaken any responsibility for half of the mortgage repayments; indeed to the contrary as DX10 and PX12 bear out. That she was liable to the Bank was explicable. Nonetheless, she relied on Mr Graham to make 100% of the payments, knowing the bank wanted 100% of the Property as security. 47    Then on 5 March 1993 Mr Naylor wrote to the solicitors for Mr Graham in these terms:

“The money to purchase Mr Graham’s share will be coming from the fiance of Mrs Denny’s daughter Janice, one Sean Van Beveren, and effectively the settlement would involve a transfer of Mr Graham’s share in the mortgage to Mr Van Beveren, with payment out of the existing mortgage.”

48    Significantly, the next paragraph reads as follows:

“Mr Van Beveren would be liable for the balance of mortgage , legal fees and stamp duty.” [emphasis added]

The letter goes on to say:

“He instructs us that he would be right at the limit of his credit to raise an additional $10,000 “capital gain” from Mr Graham but that if Mr Graham was interested in a quick settlement, this could be done within twenty-one days.”

49    All of this is consistent with the proposition put by the Defendants. It is this. Just as the Second Defendant was never intended to make any mortgage repayments under her arrangements with Mr Graham, though those arrangements were not, vis a vis the lender, documented to remove the Second Defendant’s liability jointly with Mr Graham, so as between the Second Defendant and the Plaintiff she was not intended to make any such mortgage payments either. It would not be expected that the Second Defendant would have willingly placed herself in a worse position than she was in with Mr Graham, when it came to Mr Van Beveren replacing him. Moreover, Mr Van Beveren was coming in on the highly favourable basis. That basis was that he paid merely $10,000 plus took over the existing mortgage with its borrowing of $61,500. For this he got a half interest of Property. A 100% interest was then valued as high as $162,000. In other words, the Plaintiff was paying effectively $71,500 for the half interest. Thus he paid over $10,000 and took over the mortgage for $61,500 and that got a half interest worth $81,000. That gave the Plaintiff an instant profit of $10,000. 50    The alternative hypothesis, namely that the Plaintiff was paying $10,000 but merely taking responsibility for half of the then mortgage of $61,500, namely $30,750, presupposes that the Second Defendant was prepared to let the Plaintiff take a half interest for $40,750 that was worth $81,000. That would have given rise to a much larger instant profit of $40,250 and for no apparent reason. That, as the Defendants argued, is intrinsically improbable between two parties acting at arm’s length. Even if the Second Defendant was earlier vulnerable to the mortgagee realising the security, the Second Defendant saw herself as having at least one other option. It appeared that the First Defendant had contacts in the United States which she perceived gave the prospect of an advancement of funds to her mother in respect of the Property. Whether that would have come off was not finally tested, but I am prepared to accept the Defendants’ evidence that they genuinely saw this as an alternative option. Thus it appears she did not see herself as bereft of other options, forced to make so large a gift to the Plaintiff to forestall enforcement. 51    In any event, the Plaintiff essentially conceded that he had more than a mere moral obligation to undertake the repayments, at least for so long as the Second Defendant was not able to contribute (see T, 51.30—.41):

“Q. You undertook, didn’t you, to take exclusive responsibility for repayments of the loan from the Police Credit Union?
A. As I stated yesterday, I felt a moral obligation and I was the only one in a position to undertake repayments.
Q. Well it was more than a moral obligation, wasn’t it? You undertook that you would be exclusively responsible for those repayments?
A. Well, initially, yes, on the basis that the Second Defendant wasn’t able to contribute, hence the reason for setting up the partnership and ultimately, the business.”

52    That arrangement was clearly not wholly altruistic. Not only was the Plaintiff buying in at a favourable price but he obtained the twofold benefit of reducing his tax liability and his liability under the Child Support Scheme. He conceded that this was one factor in his decision to enter into the Partnership venture; see T, 54.4—.10. 53    Other circumstances pointed to the Plaintiff commencing with exclusive responsibility for the loan. Thus the loan application was made to the Police Credit Union, which was a financial institution in which the Plaintiff but not the Second Defendant was then a member. The application was made under his membership number, as is apparent by reference to the relevant statements. The current assets listed in the application are only assets of the Plaintiff and not those of the Second Defendant. 54    It appears that while the Plaintiff signed the loan application on 3 March 1993 it was not received until 5 March 1993 (see Exhibit A) such that it was likely that the Second Defendant signed the application between or on one of those dates. The Second Defendant gave evidence that she did not attend the Police Credit Union. If the Second Defendant had signed at the credit union at the same time as the Plaintiff, the application would presumably have been lodged on that date and in fact, as I have said, it was not received until 5 March 1993. Thus I am prepared to draw the inference that the Second Defendant did not sign the document at the credit union. The manner in which it has been witnessed, the specification of a sole applicant and the amendment to that part of the application headed “Name of Spouse” supports that inference. 55    The crucial difference between the Plaintiff and the Second Defendant is that while the Plaintiff effectively concedes that his was the sole responsibility, going beyond merely a moral one, for repaying the Police Credit Union, this was only until the Partnership became profitable. The Defendants say that the Second Defendant was never responsible vis a vis the Plaintiff for mortgage payments. The Plaintiff however contends that he told the Second Defendant that: “When the partnership becomes profitable, we can use income to offset the mortgage payments.” [emphasis added] To which (he says) the Second Defendant said, “Yes that sounds OK.”; see para 17 of the Plaintiff’s affidavit of 8 July 1998. In para 23(17) of the Second Defendant’s affidavit of 17 October 1998, the Second Defendant denies the words attributed to her by the Plaintiff, but does not expressly deny what the Plaintiff says he said to her. 56    However, even accepting that were said, I am satisfied that what was conveyed by the words “use income” was so vague and uncertain that it would not convey that upon the Partnership becoming profitable, the Plaintiff would be henceforth excused from the obligation to pay 100% of the mortgage payments. The statement is equally consistent with his retaining that 100% obligation but having the capacity, once the Partnership became profitable, to use income from the Partnership, but only his one-third share of it, to offset the mortgage payments. But even if he intended to convey more than that, namely that the now assumed profitable partnership would provide income to the other two partners to offset the mortgage payments that would have otherwise been his sole responsibility, on the evidence the Partnership never did become profitable and showed no prospect of doing so. The Agreed Statement of Facts makes this clear; see para 35 where for both the years 1996 and 1997 a loss is disclosed being respectively $5,420.53 and $9,064.65. 57    It is true that para 22 of the Agreed Statement of Facts makes clear that the amount of $7,930 for “rent”, shown in the Partnership profit and loss statements for each of those two years, represents the repayment in each of those years of the loan to the Police Credit Union. But taking that into account still does not render the Partnership profitable. Firstly, one could not, on any view of matters, treat the Partnership as profitable in 1997 even after adding back the $7,930 so paid. Earlier, for the 1996 year, adding back $7,930 still left the Partnership hardly profitable; certainly not in any maintainable sense, as the next year (1997) bore out. Thus, even were it legitimate to calculate the profitability of the Partnership in a particular year before any payment of the mortgage, it could not be said that the Partnership thus “becomes profitable” when deducting the mortgage payment leaves it immediately in a loss situation. 58    On any view of matters, it could not be said that the Partnership had achieved a maintainable profitability if, after adding back mortgage payments, it was only profitable for one year and reverted to loss the following year (1997). I am satisfied that the notion of becoming profitable carries with it a sense of maintainable profit, not a one year flash in the pan or one which depends on adding back the mortgage payment.

Summing up

59    I am satisfied that the Plaintiff has at all times retained the obligation to make 100% of the mortgage payments, principal and interest, with the payments in fact made being not just in fulfilment of a moral obligation but a legal obligation also as between Plaintiff and Second Defendant. Moreover, I do not consider that that obligation would have been discharged had the Partnership “become profitable”. This is because the language of the alleged conversation, even if accepted, was not sufficiently precise to establish that proposition. Indications to the contrary include the intrinsic unlikelihood that he would have been allowed to enter into ownership of the Property on a basis so favourable that he would in effect have obtained a 50% interest worth at the time $81,000 for about half that price, namely $40,750. Moreover, the Second Defendant as must have been known to the Plaintiff has never had the earning capacity to make the mortgage payments. Nor has the Partnership ever become profitable, certainly not in any maintainable sense. So even if the Plaintiff’s account were accepted, the conditions for any shared mortgage obligation were never fulfilled.

Were payments made indirectly by the Plaintiff via the Partnership or from the horse-riding business or both, and if so in what amount and with what consequence?

60    It is an agreed fact that after July 1995, the Plaintiff ceased to make payments in any direct sense, whilst the First Defendant made the loan repayments to the Police Credit Union in an amount which can be taken to be $38,300 or possibly $38,900. I will take the lower figure, as most favourable to the Plaintiff. The Plaintiff’s argument is that though the Plaintiff made no payments directly, because he was a one-third partner in the Partnership, he must be taken to have made payments out of the Partnership of one-third of the two payments of $7,930 which the Partnership made, namely $2,643.33; that is to say, a total of $5,286.66 (2 x $2,643.33). 61    However, if that were all there were to it, it would still leave the First Defendant as having paid $33,014. 62    Moreover, if one accepts that the Plaintiff was obliged to pay 100% of the mortgage repayments, taking the agreed value of the Property to-day at $130,000, he remains obliged therefore to pay a total of $39,914 to pay out of the balance of the mortgage; in addition he must pay $33,014 to repay the First Defendant for what she has paid notionally on his behalf in reduction of the mortgage. Thus the Plaintiff has to pay a total of $72,928. When one compares that figure to the figure for 50% of the proceeds of selling the Property at the estimated value of $130,000 ($65,000), the Plaintiff’s undischarged liability exceeds half the amount of the proceeds. When one takes into account interest which should be paid in respect of the amounts outlaid on the mortgage by the First Defendant to the benefit of the Plaintiff, there is clearly a liability on the Plaintiff’s part well in excess of $65,000. 63    It is true the payments made out of the Partnership were made substantially after the Plaintiff had reported to resign from the Partnership in November 1996. However, the Plaintiff was still entitled to his pro rata share of the Partnership assets upon the division of those assets, after taking an account of assets and liabilities of the Partnership. But, as the earlier evidence shows, the Partnership was not able to make these payments and still remain profitable on any continuing basis. The Plaintiff was making no contribution to the ongoing activities of the Partnership after July 1995. In contrast, the First and Second Defendants were alone conducting the Partnership and putting their efforts towards its activities, for no salary. 64 However, the Plaintiff’s further attempted answer is that the balance of the mortgage repayments effected after July 1995 purportedly by the Defendants were in fact paid out of the revenues of the 50-50 owned horse-riding business. This was originally the business of the company Vanden Stock Biz Pty Ltd, a company owned in equal shares by the Plaintiff and the First Defendant. After the company was deregistered on 18 September 1996, it is clear that the First Defendant appropriated the horse-riding business to herself, without the Plaintiff’s consent and without paying any consideration to the company or to the Plaintiff for so doing; T, 90.35—.50. On that basis, it could be argued that the Plaintiff indirectly as a 50% partner in that business paid half of the difference between $38,300 and $15,860, namely $11,220. (The $38,300 represents the total amount paid out by the Defendants, albeit from the Partnership, in relief of the Plaintiff’s 100% obligation, as earlier determined. The $15,860 is the total of the two amounts of $7,930 paid out first on 30 June 1996 and then on 30 June 1997, such that the difference between $38,300 and $15,860 was notionally paid from the horse-riding business after its absorption). 65 However, I do not accept that this is an equitable way of dealing with the Plaintiff’s true contribution. The horse-riding business which generated these revenues did so solely as a result of the efforts of the First Defendant, at least after July 1995 when the Plaintiff thereafter played no part. While it is true the horse-riding business had the benefit of access to the Property, and employed assets namely fifteen to sixteen Partnership horses which would have been half-owned by the Plaintiff, nonetheless the horse-riding business did not attribute any amount for salary to the First Defendant who did the work. Had it done so, it is difficult to imagine that the salary would have been much less than $11,220 in any event. Thus it would have been open to the First Defendant to have paid herself a salary of an amount of that order or more and used that money to pay the mortgage repayments. In those circumstances, there could then be no argument that the Plaintiff had indirectly made these payments. The outcome should be no different in the case where no salary was paid. 66 While therefore I accept the Plaintiff’s proposition that in considering the Plaintiff’s application for sale under s66G of the Conveyancing Act 1919 (NSW) the Court should consider the contributions made to the payment of any mortgage by the co-owners of that Property (Forgeard v Shanahan (1994) 35 NSWLR 207 per Meagher JA at 224 F), here the contribution required to be made by the Plaintiff to acquire any equity in the proceeds of sale falls short of that which he would have had to make. This is on the basis that in order to earn a 50% interest, the Plaintiff must pay (or recompense) 100% of the mortgage payments, a conclusion which follows from his having the whole obligation to meet the mortgage payments. While the Second Defendant made no contribution to the repayments to the Credit Union, either before or after 27 July 1995, but rather the First Defendant made those contributions, that does not avail the Plaintiff. The fact remains that such payment by the First Defendant benefited the Plaintiff in relieving him of the burden of making all of the mortgage payments, though not of his obligation to do so. 67    The Plaintiff’s indirect payment of $5,286 was made by a partnership operating at a loss in circumstances where the remainder of the mortgage payments were contributed solely by the First Defendant. So far as the horse-riding business is concerned, payment was out of a business in which she derived no salary, though hers were the efforts that generated the revenue, even if utilising assets shared with the Plaintiff. 68    Moreover, when one examines the $16,632 that was paid, I accept the calculations of the Counsel for the Defendants in his written submissions of 11 August 2000 that only $4,628 of that amount could be attributed to capital reduction. I quote from the relevant paragraphs of those submissions in order to set out the relevant workings:

“17. He made 56 fortnightly payments in the total amount of $16,632. In addition, he had paid $10,000 to Mr Graham.
18. The loan application provides for 9.46% per annum interest. In the first year of the loan, for example, the cost of money was approximately $5,728 or $220 per fortnight. Since the amount of each payment was $297 there were capital payments of $77 per fortnight or about $2,000 over the year. Over the period during which the Plaintiff met his repayment obligations, an assessment of his contribution to capital reduction might look like this.

Year Average Principal (1) Interest (2) Capital Reduction (3)

1 $60,551 $ 5,728 $1,994

2 $57,550 $ 5,444 $2,278

3 $57,228 $ 832 $ 356

$12,004 $4,628
(4 payments only)
(1) Average Principal (“AP”) = (Principal at Year Commencement + Principal at Year End) ÷ 2
(2) Interest (“I”) = AP x 9.46%
(3) Capital Reduction = ($297 x 26) - I
19. The debt of the Plaintiff was about $57,000 ($61,500 less $4,628) at the time at which he ceased to make repayments in July 1995. That calculation does not rely on the policies of the financial institution and the balance may not be that set out in statements. It is a real figure given the principal, the interest rate and the rate of repayment.”

69    I agree with the Defendant’s submissions that having failed to make any loan repayments since July 1995, save in the limited indirect sense earlier noted in the amount of $5,286, the Plaintiff’s equity is extinguished. Only if the Plaintiff had continued to meet all his obligations to make the whole of the mortgage payments, as I am satisfied was his obligation vis a vis the Second Defendant, would he have had a half interest in the Property or its proceeds. In that event, the interest would have been valued at $65,000 (being half the agreed value of the Property at $130,000) but he would have sole responsibility for the $39,672.70 outstanding on the loan leaving an equity of about $25,000. But as I have said, he did not continue to meet his obligations so has lost the opportunity to maintain his equity. 70    The Defendant’s written submissions succinctly explain how the Plaintiff could contribute $26,632 ($10,000 plus $16,632) and yet be left with a nil equity. I quote from the relevant submissions below:

“23.1 The property fell in value. Even if the value of a half interest was $71,500 at the time of the Plaintiff’s purchase (and not $81,000), it is now $6,500 less.
23.2 The Plaintiff ceased to service his own debt. He was liable to meet interest payments which were met by the Second Defendant.
23.3 In reality, he did not suffer a loss in the whole amount of his contribution. There is evidence that he obtained assets in the form of tax losses which both reduced his tax and his obligation to pay child support.
23.4 No property, in the absence of very substantial capital gain (and this property suffered a capital loss over the relevant period), could be expected to support borrowings of 86% of capital (the Plaintiff borrowed $61,500 of total consideration of $71,500). By way further example, since July 1995 the First Defendant has contributed over $38,000 and still has a mortgage of $40,000 to repay. In effect $78,000 is required to sustain an interest worth $65,000.
24. To test that proposition:
If, in July 1995, the Plaintiff had procured the sale of the property at current value, he would have received $7,000 being $65,000 less the amount required to discharge the mortgage being $58,000 (ignoring transaction costs).
Since then, the First Defendant has made payments to support the debt of the Plaintiff without a corresponding capital increase. The $7,000 to which he might have been entitled has been buried under repayments effectively made on his behalf.”

71 It is common ground that the discretion to be exercised under s66G of the Conveyancing Act 1919 (NSW) is a limited one not to be exercised on grounds merely of hardship or general unfairness; see Hogan v Baseden (1997) 8 BPR 97676. 72 However, I accept that the matter falls to be decided on the principle that, where a person is an owner of land (here the Plaintiff) and has encouraged or has left to another (here the Defendants) to contribute to servicing an encumbrance on the Property, it would be unconscionable for that person to take the whole beneficial interest. Equity will order the relief required to relieve the conscience of the legal owner; see Nichols v Nichols (1986) 4 BPR 97262. 73 The Plaintiff ceased to make loan repayments, leaving the Defendants to contribute. They did in fact make loan repayments, preserving the Property from realisation by the mortgagee to the benefit of the Plaintiff as well as themselves. 74 I am satisfied that I should make orders which, consistently with the relative informality of the way in which the issues have been dealt with by Summons, and in the absence of a cross-claim, proceed not by refraining to order sale of the Property, but by setting the terms of that sale in such a way that the Plaintiff derives no interest in the sale proceeds. If instead I were to deny the Plaintiff’s application under s66G of the Conveyancing Act 1919 (NSW) altogether and thus not order a sale, that would leave the Plaintiff still at risk under the mortgage yet treat the Plaintiff as without equity. There can be no assurance, as matters stand, that the First Defendant would continue to make all the payments under the loan agreement with the Police Credit Union, even accepting that it is likely that she would do so to preserve the Property. 75 Accordingly, I would order a sale of the Property on terms that the share of the proceeds to which the Plaintiff would otherwise be entitled is to be reduced by:

(a) the amount required to discharge the mortgage to the Police Credit Union; and

(b) the amount of payments (principal and interest) made by the First Defendant under the mortgage to the Police Credit Union; and

(c) interest at Supreme Court rates on the amount of any such repayments made by the First Defendant under the mortgage to the Police Credit Union as should have been made by the Plaintiff;

such amounts to be remitted upon settlement to the Police Credit Union first, and thereafter to the First Defendant.

CONCLUSION AND ORDERS

76    I have already stated the outcome in terms of anticipated orders, which in the circumstances is not likely to yield any part of the proceeds to the Plaintiff. The remaining orders are likely to be by consent relating as they do to matters not in dispute concerning the consequences of the dissolution of the Partnership and reinstatement of the Company for purposes of its winding-up. 77    I direct the parties to submit orders within fourteen days, giving effect to this judgment. 78    While the parties may address me on costs if they wish, as I presently see matters, costs should be awarded to the Defendants as the Plaintiff has not succeeded on the substantive issue.

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Last Modified: 10/25/2000