Zhaos Capitals Pty Ltd as trustee for the Zhaos Investment Trust v Wang - [2022] WASC 458

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION:   ZHAOS CAPITALS PTY LTD AS TRUSTEE FOR THE ZHAOS INVESTMENT TRUST -v- WANG [2022] WASC 458
CORAM:   ACTING MASTER MCDONALD
HEARD:   11 NOVEMBER 2021
DELIVERED          :   28 DECEMBER 2022
FILE NO:   COR 100 of 2021
BETWEEN:   ZHAOS CAPITALS PTY LTD AS TRUSTEE FOR THE ZHAOS INVESTMENT TRUST
Plaintiff
AND
YI WANG
First Defendant
ANKIT SONI
Second Defendant
REGISTRAR OF TITLES
Third Defendant
THE STATE OF WESTERN AUSTRALIA
Fourth Defendant

Catchwords:

Application pursuant to s 568F(1) of the Corporations Act 2001 (Cth) – Application for vesting order – Existence of an equitable mortgage – Priority of equitable mortgage where no registered mortgage – Priority of equitable mortgage over any other security interests – Whether mortgagee is entitled to be granted a vesting order pursuant to s 568F(1)

Legislation:

Corporations Act 2001 (Cth), s 127, s 568A, s 568B, s 568F

Result:

Plaintiff's application granted

Category: B

Representation:

Counsel:

Plaintiff	:	J S Slack-Smith
First Defendant	:	No appearance
Second Defendant	:	No appearance
Third Defendant	:	No appearance
Fourth Defendant	:	L W Geddes

Solicitors:

Plaintiff	:	Torrens Legal
First Defendant	:	No appearance
Second Defendant	:	No appearance
Third Defendant	:	No appearance
Fourth Defendant	:	State Solicitor's Office

Cases referred to in decision:

Birjandi v Todaytech Distribution Pty Ltd [2005] WASCA 44
Bunnings Group Ltd v Hanson Construction Materials Pty Ltd & Anor [2017] WASC 132
National Australia Bank Ltd v Clowes [2013] NSWCA 179
Pico Holdings Inc v Wave Vistas Pty Ltd [2005] HCA 13; (2005) 79 ALJR 825
Sullivan v Energy Services International Pty Ltd (in liq) (2002) 171 FLR 106
Tonic v South Australia [2019] FCA 1361
Willmott Growers Group Inc v Willmott Foress Ltd (recs and mgrs appointed) (2013) 251 CLR 592

ACTING MASTER MCDONALD:

Smartdevelop Pty Ltd (in liquidation) (Smartdevelop) owned Units 18 and 19, 17 Royal James Circuit, Quinns Rocks (Units).
In 2015 and 2016, the plaintiff advanced money to Smartdevelop to assist with the development of the Units.
In mid‑2019, Smartdevelop was put into liquidation and the liquidators disclaimed the Units.
The plaintiff claims that the Units should vest in it on the basis that it has an equitable mortgage over the Units.
The first defendant, Yi Wang, has lodged a caveat over the Units on the basis that he has an equitable interest in the Units. He has not entered an appearance to this application.
The second defendant, Ankit Soni, may also have an equitable interest in the Units but has not lodged caveats over the Units. He also has not entered an appearance to this application.
The plaintiff says that its equitable mortgage over the Units has priority over the first and second defendants' equitable interests because its equitable mortgage was created first in time.
The third defendant, the Registrar of Titles, has lodged caveats over the Units, but has indicated it will abide by the decision of the Court, subject to some qualifications.
Upon the disclaimer of the Units by the liquidator, the Units conditionally escheat to the State of Western Australia. That is why the plaintiff joined the State as the fourth defendant. The State has entered an appearance and has indicated that it will abide by the decision of the Court.
For the reasons that follow, I find that:
(a)the plaintiff does have an equitable mortgage over the Units in priority to any equitable interest of the first and second defendants; and
(b)it is appropriate that the Units vest in the plaintiff.

Plaintiff's application

The plaintiff makes an application by originating summons dated 4 June 2021 pursuant to s 568F(1) of the Corporations Act 2001 (Cth) (Act) seeking the Units are vest in, or be delivered to the plaintiff by order of the court, for the plaintiff to sell.
The plaintiff relies upon the following in support of the application:
(a)affidavit of Xin Wang sworn 4 June 2021 (First Wang Affidavit);
(b)affidavit of service of Charles Lai sworn 26 August 2021 (Lai Affidavit);
(c)supplementary affidavit of Xin Wang sworn 26 August 2021 (Second Wang Affidavit);
(d)affidavit of Ella Lui sworn 10 November 2021 (Lui Affidavit);
(e)affidavit of Peter Francis Burke sworn 26 November 2021 (Burke Affidavit);
(f)plaintiff's outline of submissions filed 27 August 2021;
(g)plaintiff's outline of submissions in reply to fourth defendant's outline of submissions filed 27 October 2021;
(h)plaintiff's supplementary submissions filed 10 November 2021; and
(i)plaintiff's further supplementary submissions filed 26 November 2021.
In response to the application, the fourth defendant filed an outline of submissions dated 17 September 2021, a supplementary outline of submissions dated 10 November 2021 and a further supplementary outline of submissions dated 15 November 2021.
By way of preliminary matters, I am satisfied that:
(a)all necessary parties have been joined to the application;
(b)the notice of disclaimer of the liquidators has been validly given under s 568A of the Act;[1]
(c)the notice of disclaimer was lodged by the liquidators with the Australian Securities Investment Commission on 23 August 2019[2] and therefore, the period to set aside the notice expired 14 days from that date;[3] and
(d)the Units became disclaimed property as of 24 August 2019.[4]
[1] First Wang Affidavit [ 9].
[2] First Wang Affidavit [35].
[3] s 568B(1)(d) of the Act.
[4] s 568C(3)(a), s 568A(2) of the Act.

Issues for determination

The following issues arise for determination:
(a)does the plaintiff have an equitable mortgage over the Units;
(b)if so, does the plaintiff's equitable mortgage have priority over any other security interests;
(c)if so, should the Units be vested in the plaintiff under s 568F(1) of the Act; and
(d)if so, what conditions should the Units be vested upon.

Does the plaintiff have an equitable mortgage over the Units

In May 2015, the plaintiff entered into the following agreements with Smartdevelop and others;
(a)Deed of Agreement (2015 Deed of Agreement); and
(b)Acknowledgment of Debt (2015 Acknowledgment of Debt).[5]
[5] First Wang Affidavit [23].
In May and July 2015, the plaintiff advanced $2,000,030 to Smartdevelop under the 2015 Acknowledgment of Debt.[6]
[6] First Wang Affidavit [23].
In May 2016, the plaintiff entered into a Deed of Variation with Smartdevelop and others (2016 Deed of Variation).[7]
[7] First Wang Affidavit [16].
In June 2016, the plaintiff entered the following agreements with Smartdevelop and others:
(a)Deed of Agreement (2016 Deed of Agreement); and
(b)Acknowledgment of Debt (2016 Acknowledgment of Debt).[8]
[8] First Wang Affidavit [17] ‑ [19].
In June 2016, the plaintiff advanced $612,323 to Smartdevelop under the 2016 Acknowledgment of Debt.[9]
[9] First Wang Affidavit [25].
The plaintiff has received payment of $461,000 towards the principal amount loaned to Smartdevelop together with some interest payments.[10]
[10] First Wang Affidavit [28] ‑ [33].
As at 30 June 2020, Smartdevelop owed an amount of principal and interest to the plaintiff totalling $4,525,309.98 (Debt).
The plaintiff is not a registered mortgagee in respect of the Units. The plaintiff submits that its security interest over the Units arises from binding promises made by Smartdevelop that it would provide the plaintiff with executed mortgages capable of registration.
An equitable mortgage will arise where there is a specifically enforceable agreement between mortgagor and mortgagee to create a mortgage. It is sufficient for there to be a binding promise that Smartdevelop would provide the plaintiff with executed mortgages over the Units capable of registration.[11]
[11] Pico Holdings Inc v Wave Vistas Pty Ltd [2005] HCA 13; (2005) 79 ALJR 825, 837 [68]; National Australia Bank Ltd v Clowes [2013] NSWCA 179 [25].
There is a preliminary issue as to whether each of these agreements was validly executed by Smartdevelop.
The relevant execution block in each agreement states:[12]
SIGNED by the said SMARTDEVELOP PTY LTD [ACN: 168 598 749] by the authority of its directors in accordance with section 127 of the Corporations Act 2001[.]
[12] First Wang Affidavit, 65, 90, 99, 109.
Peter Burke signed these agreements on behalf of Smartdevelop at a time when Smartdevelop also had two other directors (Rongping Chen and Ran Mo).[13] Therefore, the agreements were not executed by Smartdevelop as required by s 127 of the Act.
[13] First Wang Affidavit, 14.
Mr Burke deposes that:[14]
[14] Burke Affidavit [1], [7], [8], [11], [13].
(a)he was the managing director of Smartdevelop and Maryalma Pty Ltd (in liquidation);
(b)Mr Burke and his wife were the directors and shareholders of Maryalma;
(c)Mr Mo was a director and the secretary of Swenhe Yi Pty Ltd;
(d)Mr Chen and Swenhe Yi Pty Ltd became shareholders of Smartdevelop on 14 January 2015;
(e)after Mr Chen and Swenhe Yi Pty Ltd became shareholders, Maryalma held 65% of the shares in Smartdevelop;
(f)on or around 14 January 2015, Mr Chen and Mr Mo expressed an interest in being directors of Smartdevelop;
(g)Mr Burke told Mr Mo and Mr Chen that he would only agree to appoint them as non‑executive directors of Smartdevelop if he was still fully authorised to act on behalf of the company;
(h)Mr Chen and Mr Mo agreed;
(i)Mr Burke alone signed most, if not all, of the agreements entered into by Smartdevelop.
I find that the agreements were validly executed by Smartdevelop for the following reasons:
(a)the agreement between Mr Burke, Mr Chen and Mr Mo that Mr Burke was fully authorised to act on behalf of the company constitutes a binding resolution of Smartdevelop (given that they represent all of the shareholders of Smartdevelop); and/or
(b)Mr Burke, as managing director of Smartdevelop had implied authority to make contracts in the course of Smartdevelop's normal trading activities, which included obtaining funding.[15]
[15] Birjandi v Todaytech Distribution Pty Ltd [2005] WASCA 44 [34].
The 2015 Acknowledgement of Debt provides[16]:
6)[Smartdevelop] shall provide to the [plaintiff] a charge over the [Units] in the form of a registered mortgage which documentation will be prepared by the [plaintiff] and executed by [Smartdevelop]. The [plaintiff] has agreed not to register the mortgage while the [Units are] the subject of a first mortgage to the accredited financial institution
7)Notwithstanding clause 6 above, [Smartdevelop] further agrees to provide to the [plaintiff] an executed registered mortgage document over the purchased [Units] in which [Smartdevelop] undertakes not to lodge the registered mortgage document unless one of the following occurs:
i)[Smartdevelop] is in default of [its] obligations to the [plaintiff];
ii)[Smartdevelop] is in default of [its] obligations under the First Registered Mortgage.
[16] First Wang Affidavit, 85.
No mortgage was in fact prepared or executed.[17]
[17] First Wang Affidavit [14].
I find that the 2015 Acknowledgment of Debt, by cl 6, created an enforceable obligation for Smartdevelop to give a registered mortgage over the Units. Notwithstanding that a registered mortgage was to be prepared by the plaintiff, I find that an immediate equitable mortgage was created at the time that the 2015 Acknowledgment of Debt was executed.
This construction of cl 6 is supported by the following parts of the 2015 Acknowledgment of Debt:[18]
(a)the words 'with [the plaintiff] having an unregistered second mortgage' in Recital E;
(b)the words '[the plaintiff's] security interest over the [Units] will be second only to the interest of the First Registered Mortgagee' in cl 8; and
(c)the words '[the Smartdevelop] covenants not to further encumber the [Units]' in cl 9.
[18] First Wang Affidavit, 84 ‑ 5.
I also find that cl 7 of the 2015 Acknowledgement of Debt imposed an additional enforceable obligation on Smartdevelop to provide the plaintiff with an executed registered mortgage document.[19] Smartdevelop did not provide this document to the plaintiff.[20] Clause 7 created an equitable mortgage against the Units in favour of the plaintiff as at the date it was executed.
[19] First Wang Affidavit, 85.
[20] First Wang Affidavit [14].
I find that 2015 Acknowledgement of Debt does give rise to an equitable mortgage over the Units in favour of the plaintiff and that the equitable mortgage was created on 20 May 2015, the date that 2015 Acknowledgment of Debt was executed.

Does the plaintiff's equitable mortgage over the Units have priority over any other security interests

The general rule is that, if equitable interests are equal in all other respects, the equitable interest created first in time has priority.[21]
[21] Bunnings Group Ltd v Hanson Construction Materials Pty Ltd & Anor [2017] WASC 132 [22].
The first defendant, second defendant, Smartdevelop and another entered into an Acknowledgement of Debt on 1 August 2015 (Competing Acknowledgement of Debt).[22]
[22] First Wang Affidavit, 215.
On 26 April 2019, the first defendant lodged a caveat over the Units.[23]
[23] First Wang Affidavit, 207 ‑ 208.
There is no evidence that the first defendant or the second defendant advanced any monies to Smartdevelop.
The Competing Acknowledgement of Debt is in similar terms to the 2015 Acknowledgement of Debt, but was executed after the 2015 Acknowledgment of Debt and after the plaintiff advanced funds to Smartdevelop.
The plaintiff's equitable mortgage was created on 20 May 2015, prior to the creation of any security interest of the first and/or second defendants.
I find that the equitable mortgage in favour of the plaintiff created by the 2015 Acknowledgement of Debt has priority over any security interest of the first and/or second defendants.
I also find that it is not presently necessary to resolve the issue of which of the 2016 Acknowledgement of Debt or the Competing Acknowledgement of Debt has priority for the following reasons:
(a)'desktop valuations' of the Units estimate them to have a collective market value of between $748,000 and $953,000;
(b)the equitable mortgage created by the 2015 Deed of Acknowledgement relates to an amount of $2,000,030 (2015 advance);
(c)even after applying all of the repayments made towards the 2015 advance, the amount of the 2015 advance still outstanding significantly exceeds the estimated market value of the Units; and
(d)in the event that the Units do sell for more than the outstanding 2015 advance, the application can be relisted to determine the priority between the 2016 Deed of Acknowledgement and the Competing Acknowledgement.
In these circumstances, it is also unnecessary to determine the effect of a failure by certain parties to sign the 2016 Acknowledgement of Debt and/or when the plaintiff, by Mr Yang, became aware of the claim by the first defendant.
I find that the plaintiff's equitable mortgage created by the 2015 Acknowledgement of Debt has priority over all other security interests.

Should the Units be vested in the plaintiff under s 568F(1) of the Act

Disclaimed land conditionally escheats to the State in which the land is situated.[24] Therefore, upon being disclaimed by the liquidators, the Units escheated to the State of Western Australia. The Court however may vest the land under s 568F(1) of the Act.
[24]Tonic v South Australia [2019] FCA 1361 [8].
Section 568F(1) of the Act provides:
(1)The Court may order that disclaimed property vest in, or be delivered to:
(a)a person entitled to the property; or
(b)a person in or to whom it seems to the Court appropriate that the property be vested or delivered; or
(c)a person as trustee for a person of a kind referred to in paragraph (a) or (b).
A disclaimer does not affect any right or liability that has already accrued.[25] Prior to the date that the Units were disclaimed, Smartdevelop was in default of the equitable mortgage pursuant to the 2015 Acknowledgement of Debt as it had not repaid the Debt as required by cl 3 of the 2015 Acknowledgement of Debt. Therefore, the disclaimer of the Units by the Liquidator does not affect Smartdevelop's rights under its equitable mortgage.
[25] Willmott Growers Group Inc v Willmott Foress Ltd (recs and mgrs appointed) (2013) 251 CLR 592, 631 ‑ 2 [136] ‑ [138].
Neither the plaintiff nor the fourth defendant could direct me to any case that has considered whether an equitable mortgagee is entitled to be granted a vesting order pursuant to s 568F(1) of the Act.
Nonetheless, this does not mean that a vesting order ought not be granted to an equitable mortgagee. The underlying rationale for s 568F of the Act is to cause as little prejudice as possible to all persons interested in the disclaimed property.[26] If the liquidator had not disclaimed the Units, the plaintiff would have been able to enforce its equitable mortgage.
[26] Sullivan v Energy Services International Pty Ltd (in liq) (2002) 171 FLR 106, 112 [37].
Accordingly, to avoid the prejudice to the plaintiff of not being able to enforce its equitable mortgage, I find that it is appropriate that the Units should be vested in the plaintiff pursuant to s 568F(1) of the Act.

What conditions should the Units be vested upon

The plaintiff seeks, inter alia, the orders as set out below in the minute of proposed orders filed 27 August 2020 (sic 2021) (Minute of Proposed Orders):
2.Subject to any further order of the Court, the Units shall be sold by the Plaintiff within 6 months.
3.The proceeds of sale shall be applied in the following order:
3.1first, in the payment of all costs, charges and expenses, properly incurred by the Plaintiff as incidental to the sale, or any attempted sale, of the Units;
3.2second, in discharge of the amounts owing to the plaintiff under the written agreement styled 'Acknowledgement of Debt' dated 20 May 2015; and
3.3third, into Court.
4.The parties have liberty to apply.
Given my findings that:
(a)it is unlikely that there will be a surplus of funds after the payment of the outstanding amounts owing under the 2015 Acknowledgement of Debt; and
(b)the priority of security interests between the 2016 Deed of Acknowledgement and the Competing Deed of Acknowledgement do not presently need to be determined,
it is appropriate that any surplus funds are paid into Court, as opposed to being paid to the liquidators of Smartdevelop.
The Units should vest in the plaintiff upon the conditions proposed in the plaintiff's Minute of Proposed Orders.

Conclusion and final orders

The plaintiff has an equitable mortgage over the Units in priority to any other security interests. It is appropriate that the Units be vested in the plaintiff pursuant to s 568F(1) of the Act.
I make the following orders:
1.Pursuant to s 568F(1) of the Corporations Act 2001 (Cth), Units 18 and 19, 17 Royal James Court, Quinns Rocks, Western Australia, being Lots 18 and 19 on Strata Plan 69887 and being the whole of the land comprised in Certificate of Volume 2921 Folio 172 and Certificate of Volume 2921 Folio 173, (together, Units) vest in the Plaintiff as trustee for the Zhaos Investment Trust on the following conditions.
2.Subject to any further order of the Court, the Units shall be sold by the Plaintiff within 6 months.
3.The proceeds of sale shall be applied in the following order:
3.1.first, in the payment of all costs, charges and expenses, properly incurred by the Plaintiff as incidental to the sale, or any attempted sale, of the Units;
3.2.second, in discharge of the amounts owing to the plaintiff under the written agreement styled 'Acknowledgement of Debt' dated 20 May 2015; and
3.3.third, into Court.
c.The parties have liberty to apply.

I certify that the preceding paragraphs comprise the reasons for decision of the Supreme Court of Western Australia.
TG
Associate to the Principal Registrar
28 DECEMBER 2022