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Residential Housing Corporation v Esber & Ors [2011] NSWCA 25 (21 February 2011)
Last Updated: 31 October 2011
This decision has been amended. Please see the end
of the decision for a list of the amendments.
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Case Title:
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Residential Housing Corporation v Esber &
Ors |
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Medium Neutral Citation:
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Hearing Date(s):
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Decision Date:
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Jurisdiction:
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Before:
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Campbell JA at 1 Macfarlan JA at 194 Sackville
AJA at 195 |
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Decision:
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(1) Leave to appeal be granted, if necessary;
(2) The appeal be dismissed with costs. [Note: The Uniform Civil
Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise
orders, a judgment or order is taken to be entered when it is recorded in the
Court's computerised
court record system. Setting aside and variation of
judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18.
Parties should in particular note the time limit of fourteen days in Rule
36.16.] |
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Catchwords:
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TORRENS SYSTEM - MORTGAGES - SALE BY MORTGAGEE -
DISPOSITION OF SURPLUS PROCEEDS OF SALE - RPA land subject to two registered
mortgages
and one unregistered mortgage - first mortgagee exercises power of
sale and pays whole amount surplus to its entitlement to second
mortgagee -
second mortgagee pays whole amount surplus to its entitlement to third mortgagee
- third mortgage later held to secure
no debt, and third mortgagee becomes
insolvent - whether second mortgagee obliged to compensate mortgagor for amount
paid to third
mortgagee - whether s 58(3) RPA applies at all to a mortgagee
other than the mortgagee who exercises a power of sale - whether s 58(3) RPA
requires payment of surplus proceeds to a mortgagee who is unregistered -
comparison of s 58(3) RPA with s 88(1) Property Law Act 1974 (Qld) and s 135
Real Property Act 1886 (SA) - interaction of s 58(3) with equitable obligations
of a mortgagee who holds surplus proceeds of sale PROCEDURE - SUPREME
COURT PROCEDURE - INTERPLEADER - payment into court in stakeholder's
interpleader, and payment into court under
s 95 Trustee Act 1925 compared and
contrasted EQUITY - FIDUCIARY OBLIGATIONS - OF MORTGAGEE HOLDING SURPLUS
PROCEEDS OF SALE - obligation to pay each subsequent security holder
and the
mortgagee the amount each is owed, in their respective order of priority -
explanation of Re Thomson's Mortgage Trusts [1920] 1 Ch 508 - if there is a
statutory direction about order of payment of proceeds, whether the equitable
obligation operates only after the
statute has run its course, or whether the
equitable obligation applies immediately to whoever holds the surplus proceeds
of sale APPEAL - POINT NOT TAKEN AT TRIAL - when point not only not
taken, but conceded at trial - when point could not have been affected
by
evidence at trial [41]-[42] - when point is failure to prove an essential
element of plaintiff's case, and there was concession
at trial
[175]-[177] JUDGMENTS AND ORDERS - SATISFACTION OF - rule against double
satisfaction applies universally - source of rule against double
satisfaction |
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Legislation Cited:
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Cases Cited:
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Texts Cited:
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Butt, Land Law, 5th ed (2006) CCH, NSW Conveyancing
Law and Practice, [vol 2] Croft and Johannsson, The Mortgagee's Power of
Sale, 2nd ed, 2004 Hargraves and Helmore, An Introduction to the Principles
of Land Law (NSW) Pearce & Geddes, Statutory Interpretation in Australia,
6th ed, para [4.6] |
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Category:
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Parties:
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Residential Housing Corporation Pty Ltd
(Applicant/Appellant) Marcel Esber (First Respondent) Casanda Pty Limited
(Second Respondent) |
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Representation
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Counsel: G K Burton SC with him Mr P Bruckner
and Mr E A Walker (Applicant/Appellant) T G R Parker SC with him Ms S
Fendekian (Respondents) |
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- Solicitors:
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Solicitors: Bolzan & Dimitri
(Applicant/Appellant) Sachs Gerace Lawyers (Respondents) |
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File number(s):
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Decision Under Appeal
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- Court / Tribunal:
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- Before:
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- Date of Decision:
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- Citation:
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- Court File Number(s)
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Publication Restriction:
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JUDGMENT
- CAMPBELL
JA :
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CONTENTS
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Para No.
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The First-Instance Proceedings
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8
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The Orders Appealed Against
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16
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Leave to Appeal
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19
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Relevant Statutory Provisions
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22
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Construction of S 58(3) in the Court Below |
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The Issues on Appeal Concerning S 58(3) |
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Permit Argument Contrary to Concession in Court Below?
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41
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"Subsequent Mortgages, Charges and Covenant Charges":
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44
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"Subsequent Mortgages, Charges or Covenant Charges" - "Covenant
Charge"
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45
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"Subsequent Mortgages, Charges or Covenant Charges" - "Charge"
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49
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"Subsequent Mortgages, Charges or Covenant Charges" - "Mortgage"
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Does S 58(3) Apply to an Unregistered Mortgage? |
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Does S 58(3) Apply to a Non-Selling Mortgagee? |
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Obligation Under S 58(3) Requires Payment of Whole Surplus to Next
Mortgagee? |
105
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Payment Into Court
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Resi Entitled to Pay Kimberley in 2002 On What Was Then Known?
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120
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Conclusion re Application of S 58(3) |
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PART B - EQUITABLE OBLIGATIONS CONCERNING DISTRIBUTION OF PROCEEDS OF
SALE
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123
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Obligations re Distribution of Sale Proceeds Under the General Law
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125
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Re Thomson's Mortgage Trusts
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145
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154
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Application of Principles to Facts of This Case
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167
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An Aspect of Ground 1
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170
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Failure to Prove Loss?
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172
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Disentitling Delay?
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183
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Wrongful Inclusion of Costs of Pursuit of Kimberley?
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187
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Orders
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192
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- The
Respondents (the " Esbers ") were involved in Knox Street Apartments Pty
Ltd (" Knox "), a company that embarked upon a real estate development.
The Esbers owned two home units. Title to those units was held under the
Strata Titles Act , and thus the Esbers' ownership arose by their being
registered proprietors under the Real Property Act (" RPA "). Over
each home unit there was a first registered mortgage to Permanent Trustee
Australia Limited, and a second registered mortgage
to the Appellant (" Resi
").
- When
the development was partly complete, Kimberley Securities Limited ("
Kimberley ") entered into a Joint Venture Agreement with Knox.
Kimberley's arrangement with Knox entitled it to various benefits, one of which
was a $2m fee payable in certain events.
- The
Esbers provided a guarantee to Kimberley of certain of the obligations of Knox
to Kimberley. One of those obligations was to pay
to Kimberley certain amounts
that Kimberley was to advance for the purpose of the development that fell
within a defined term "Project Costs" . With the written consent of Resi,
the Esbers also gave Kimberley a third mortgage over each of the home units in
question, to secure
their obligations under the guarantee. Though Resi had
consented to the third mortgages being registered, in fact they remained
unregistered.
Kimberley never lodged a caveat claiming an interest under the
mortgages.
- Following
default under the mortgages that the Esbers had granted to Permanent, Permanent
exercised a power of sale over the home
units. After payment of its secured debt
from the proceeds of sale, Permanent paid to Resi the amount that remained from
the proceeds
of sale. Resi in turn appropriated the amount owed to itself under
its mortgages. It then held an amount of $416,780.81 (" the Surplus Proceeds
").
- By
that time, a dispute had arisen between the Esbers and Kimberley about who was
entitled to the Surplus Proceeds. The Esbers called
on Resi to pay the Surplus
Proceeds to them. Kimberley called on Resi to pay the Surplus Proceeds to it. In
a letter dated 13 February
2002 to the Esbers' solicitors, Resi's solicitors
said that Resi "is not in a position at this stage to release any funds until
such issue is resolved" and that Resi would not place itself in a position
of risk from any dispute between Kimberley and the Esbers.
- Notwithstanding
that initial stance, on 28 February 2002, following a conversation between a
director of Resi and a director of Kimberley,
Resi and Kimberley entered into a
deed of indemnity and release. Under it, Resi paid the Surplus Proceeds to
Kimberley, on the basis
of an indemnity from Kimberley for any loss it might
suffer by so doing. The only limitation that that deed placed upon the use that
Kimberley could make of the money was a covenant "that the Surplus Moneys
must be utilised by Kimberley in reduction of its third mortgages" from Knox
and the Esbers.
The First-Instance Proceedings
- The
Esbers began proceedings, number 50110 of 2006, in the Commercial List of the
Equity Division of the Supreme Court of New South
Wales. The defendants in those
proceedings were both Kimberley and Resi. McDougall J determined some separate
questions in those
proceedings, and in another set of proceedings that related
to the same real estate development: Investmentsource v Knox Street
Apartments [2007] NSWSC 1214. Resi was not represented at that hearing - the
contest was between the Esbers (plus a Mr Joseph Esber), Kimberley, and a Mr and
Mrs
Flexman, who had provided some finance for the development.
- One
of the questions before McDougall J concerned the amounts secured by the
mortgages that the Esbers had given to Kimberley. His
Honour recorded, at [243]:
"As best I understand the position taken by the mortgagors, they did not
dispute that Kimberley, as third mortgagee, was entitled
to hold the balance
paid to it until all their liabilities to Kimberley that were secured by the
mortgages had been discharged. They
did however submit that on this analysis
(which in effect treats the money as a replacement for the security over real
property)
they were entitled to the interest that accrued from time to time, in
the same way as they would have been entitled to the rents
and profits of the
realty."
- After
holding that the mortgages did not secure payment of the $2m fee, his Honour
said, at [269]:
"It would seem to follow that, whilst Kimberley may have been entitled to
hold the net proceeds of sale until the extent of the Guaranteed
Moneys could be
determined, it was not entitled to do as it has done, and allow itself the
beneficial use of them."
- His
Honour's ultimate holding was (at [272](8)):
"[T]he mortgages in question did not secure payment of Kimberley's fee. In
principle, to the extent that Kimberley has not been reimbursed
for any other
Project Costs, the mortgages (or the net proceeds of sale now held in their
place) secure any deficiency. The question
of interest on those proceeds has not
been resolved"
- Kimberley
appealed against the determination of McDougall J that I have just quoted. The
Esbers were the only respondents to that
appeal. The appeal was dismissed with
costs: Kimberley Securities Limited v Esber [2008] NSWCA 301.
- McDougall
J's judgment had left open the possibility that there might have been Project
Costs secured by the mortgages that Kimberley
held from the Esbers, or interest
payable on all or part of the sum that Kimberley had received. Another judgment
of McDougall J
considered what amount the Esbers continued to owe to Kimberley:
Investsource v Knox Street Apartments Corporation Pty Ltd (24 April 2008,
revised 28 April 2008, unreported and no medium neutral citation). That judgment
held, at [16], that the Esbers owed
nothing to Kimberley. It is apparent from
his Honour's reasoning that that zero balance owing applied as at 28 February
2002, as
at 31 May 2002, and as at the date at which the judgment was delivered.
Consequently, McDougall J directed entry of judgment for
the Esbers against
Kimberley in an amount to be agreed by the parties, or otherwise assessed. He
ordered that each of those judgments
bear interest from 28 February 2002 at the
rates applicable under the Supreme Court Act or the Civil Procedure
Act .
- Hammerschlag
J gave the decision now appealed from on 16 December 2009: Marcel Esber v
Kimberley Securities Limited [2009] NSWSC 1422. By that time, Kimberley had
been wound up in insolvency. Hammerschlag J found at [19]:
"Because of Kimberley's insolvency the Esbers have not recovered from it and
there is no suggestion that they ever will. The second
defendant's indemnity
from Kimberley is apparently worthless."
- Though
the Esbers have an order for costs against Kimberley for the costs of the appeal
from the decision of McDougall J it is not
apparent, on the material before us,
whether McDougall J has ever made an order fixing how the burden of costs of the
proceedings
before him should be borne as between the Esbers and Kimberley.
The Orders Appealed Against
- In
his admirably concise judgment, Hammerschlag J held that Resi owed fiduciary
obligations concerning the Surplus Proceeds, that
it did not act in accordance
with either section 58(3) RPA or its equitable obligations in paying the
Surplus Proceeds to Kimberley, and that in consequence it was obliged to
compensate the
Esbers. His Honour concluded, at [64], that there would be a
judgment for the Esbers:
"a in the amount of $416,780.81; plus
b interest to be calculated from 28 February 2002; plus
c an amount to be determined as representing the costs properly and
reasonably incurred by the Esbers in their unsuccessful pursuit
of Kimberley;
less
d the amount of $60.50 for stamp duty paid by the second defendant which
discharged the Esbers' obligation to pay that impost."
- On
12 February 2010 his Honour ordered a judgment for the Esbers against Resi in
the sum of $724,296.66. He also ordered that there
should be a judgment for the
Esbers against Resi:
"For the costs properly and reasonably incurred by the [Esbers] in their
unsuccessful pursuit of Kimberley Securities Limited, including
in
(a) these proceedings 50110 of 2006; and
(b) Court of Appeal proceedings 40150 of 2008."
- His
Honour made an order referring the question of what was the amount properly
representing those costs. His Honour reserved the
costs of the proceedings and
of the reference. Presumably because a question arises in this appeal about the
correctness of the principle
in accordance with which his Honour ordered Resi to
pay the costs of the Esbers in their unsuccessful pursuit of Kimberley, no order
for costs has been made in the proceedings below.
Leave to Appeal
- Recognising
the possibility that leave to appeal might be necessary if Hammerschlag J's
orders of 12 February 2010 were properly to
be regarded as interlocutory, Resi
has sought leave to appeal.
- At
the time this Court made orders for a partial stay of the orders of Hammerschlag
J, the Court noted that the Esbers consent to
the grant of leave to appeal, if
leave be necessary. Their written submissions on the appeal took a different
stance. No reason was
put forward for the change of stance. Of course, in any
event, their consent would not be determinative of whether leave to appeal
was
granted.
- In
my view, the questions involved in the case are of sufficient importance to
warrant the grant of leave to appeal, if leave be necessary.
In that situation
there is no point in considering whether leave is actually necessary.
Relevant Statutory Provisions
- Section
58(3) RPA is one of the principal focuses of contention in this appeal.
However, understanding it, and dealing with some of the arguments put
in the
appeal, requires several other provisions of the RPA to be taken into
account.
- For
the purposes of deciding whether Resi acted contrary to its statutory
obligations under RPA in paying Kimberley, it is the RPA as at the
date of the payment that is determinative. Section 3(1) RPA as at
February 2002 opened with the words:
"In the construction and for the purposes of this Act ... (if not
inconsistent with the context and subject matter):
(a) the following terms shall bear the respective meanings set against them:
- Section
3(1) contained the following definitions:
Charge -Any charge on land created for the purpose of securing the
payment of an annuity, rent-charge or sum of money other than a debt.
Dealing -Any instrument other than a grant or caveat which is
registrable or capable of being made registrable under the provisions of this
Act, or in respect of which any recording in the Register is by this or any
other Act or any Act of the Parliament of the Commonwealth
required or permitted
to be made.
Mortgage -Any charge on land (other than a covenant charge) created
merely for securing the payment of a debt.
Mortgagor -The proprietor of land or of any estate or interest in land
pledged as security for the payment of a debt.
Mortgagee -The proprietor of a mortgage.
Proprietor -Any person seised or possessed of any freehold or other
estate or interest in land at law or in equity in possession in futurity
or
expectancy.
- Other
relevant provisions of RPA as at February 2002 were:
36 Lodgment and registration of documents
(9) Dealings registered with respect to, or affecting the same estate or
interest shall, notwithstanding any notice (whether express,
implied or
constructive), be entitled in priority the one over the other according to the
order of registration thereof and not according
to the dates of the dealings.
41 Dealings not effectual until recorded in Register
(1) No dealing, until registered in the manner provided by this Act, shall be
effectual to pass any estate or interest in any land
under the provisions of
this Act, or to render such land liable as security for the payment of money,
but upon the registration of
any dealing in the manner provided by this Act, the
estate or interest specified in such dealing shall pass, or as the case may be
the land shall become liable as security in manner and subject to the covenants,
conditions, and contingencies set forth and specified
in such dealing, or by
this Act declared to be implied in instruments of a like nature.
42 Estate of registered proprietor paramount
(1) Notwithstanding the existence in any other person of any estate or
interest which but for this Act might be held to be paramount
or to have
priority, the registered proprietor for the time being of any estate or interest
in land recorded in a folio of the Register
shall, except in case of fraud, hold
the same, subject to such other estates and interests and such entries, if any,
as are recorded
in that folio, but absolutely free from all other estates and
interests that are not so recorded except:
[various exceptions not presently relevant]
(2) In subsection (1), a reference to an estate or interest in land recorded
in a folio of the Register includes a reference to an
estate or interest
recorded in a registered mortgage, charge or lease that may be directly or
indirectly identified from a distinctive
reference in that folio.
56 Lands under this Act: how mortgaged or encumbered
(1) Whenever any land or estate or interest in land under the provisions of
this Act is intended to be charged with, or made security
for, the payment of a
debt, the proprietor shall execute a mortgage in the approved form.
56A Postponement of mortgages
(1) If two or more mortgages registered under this Act affect the same land,
the mortgage which for the time being has priority over
the other or others may,
by a memorandum in the approved form registered under this Act, be postponed to
the other or others in so
far as the whole or a disposable part of that same
land is concerned.
...
(2) A memorandum under this section shall not be registered when any
registered mortgage intervenes between the mortgage to be postponed
and the
mortgage intended to have benefit of the postponement, unless the proprietor of
the intervening mortgage joins in the memorandum.
(3) The Registrar-General shall register a memorandum under this section by
making such recording in the Register with respect to
the memorandum as the
Registrar-General thinks fit.
(4) After registration of a memorandum under this section, the mortgages
affected by the postponement shall be entitled in priority
the one over the
other as if they had been registered in the order in which by the memorandum
they are expressed to have priority.
57 Procedure on default
(1) A mortgage, charge or covenant charge under this Act has effect as a
security but does not operate as a transfer of the land mortgaged
or charged.
(2) A registered mortgagee, chargee or covenant chargee may, subject to this
Act, exercise the powers conferred by section 58 if:
[list of preconditions for exercise of those powers]
58 Power to sell
(1) Where a mortgagee, chargee or covenant chargee is authorised by section
57 (2) to exercise the powers conferred by this section,
the mortgagee, chargee
or covenant chargee may sell the land mortgaged or charged, or any part thereof,
and all the estate and interest
therein of the mortgagor, charger or covenant
charger, ... all which sales ... shall be as valid and effectual as if the
mortgagor,
charger or covenant charger had made, done, or executed the same, and
the receipt or receipts in writing of the mortgagee, chargee
or covenant chargee
shall be a sufficient discharge to the purchaser of such land, estate, or
interest, or of any portion thereof,
for so much of the purchaser's purchase
money as may be thereby expressed to be received.
(2) No such purchaser shall be answerable for the loss, misapplication, or
non-application, or be obliged to see to the application
of the purchase money
by the purchaser paid, ...
(3) The purchase money to arise from the sale of any such land, estate, or
interest, shall be applied, first, in payment of the expenses
occasioned by such
sale; secondly, in payment of the moneys which may then be due or owing to the
mortgagee, chargee or covenant
chargee; thirdly, in payment of subsequent
mortgages, charges or covenant charges (if any) in the order of their priority;
and the
surplus (if any) shall be paid to the mortgagor, charger or covenant
charger, as the case may be.
59 Registration of transfer by mortgagee, chargee or covenant chargee
The Registrar-General shall, for the purpose of a sale authorised by section
58, register a transfer executed by a mortgagee, chargee
or covenant chargee in
the approved form and, upon that registration, the estate or interest of the
mortgagor, charger or covenant
charger in the land comprised in the transfer
shall pass to and be vested in the transferee, freed and discharged from all
liability
on account of the mortgage, charge or covenant charge, or of any
mortgage, charge or covenant charge registered subsequent thereto.
PART A - CONSTRUCTION OF SECTION 58(3)
Construction of Section 58(3) in the Court Below
- Before
the trial judge the Esbers contended that Resi held the Surplus Proceeds subject
to an obligation to account for those funds
to the person or persons who were
entitled to them. The Esbers contended that that obligation arose under section
58(3) RPA , or alternatively (relevantly) in equity.
- The
Esbers contended that section 58(3) imposed an obligation concerning the manner
of application of the proceeds arising from the
exercise of a power of sale over
RPA land. They contended the obligation was imposed on any person into
whose hands the proceeds came. Thus, they contended, it bound Resi,
even though
Resi was not in the present case the mortgagee who had exercised the power of
sale. Further, they contended that the
obligation arising under section 58(3) to
cause the proceeds of sale to be applied "thirdly, in payment of subsequent
mortgages ... (if any) in the order of their priority" applied only to
require payment of subsequent mortgages that were registered. Thus, in the
present case, as Kimberley's third mortgage
was not registered, the obligation
under section 58(3) was for Resi to cause the proceeds of sale in its hands to
be applied by payment
to the mortgagor, ie, to the Esbers.
- Alternatively,
they contended that if section 58(3) permitted a payment to an unregistered
mortgagee, the amount it required to be
paid to the unregistered mortgagee was
the amount actually secured by that unregistered mortgage. In the circumstance
where nothing
was owed to Kimberley, the Surplus Proceeds were still required by
section 58(3) to be paid in their entirety to the Esbers.
- In
the further alternative, the Esbers contended that Resi, having received the
amount that was surplus to the entitlement of the
first mortgagee, was subject
to an equitable obligation to account for that sum to the mortgagor. In making a
payment in accordance
with such an account, Resi was entitled to deduct the
amount properly owed to it, but then, because nothing in truth was owed to
Kimberley, its equitable obligation was to pay the Surplus Proceeds to the
Esbers.
- Before
the trial judge, Resi also contended that section 58(3) imposed an obligation on
it. It submitted, however, that those entitled
to the proceeds of sale
"thirdly" under section 58(3) included unregistered mortgagees. It
contended that section 58(3) imposed a statutory obligation on it to pay
the
entirety of the proceeds of sale that were surplus to its own requirements to
Kimberley as the subsequent mortgagee, and that
it had acted in accordance with
that statutory obligation. Further, it contended that, because the mortgages
that the Esbers had
given to Kimberley were "subsequent mortgages" ,
within the meaning of section 58(3), the statutory obligation bound it to pay
the Surplus Proceeds to Kimberley even if no moneys
were then actually due under
the mortgages. Its implicit assumption seems to have been that the statutory
obligation overrode any
equitable obligation that, absent the statute, might
have existed.
- Hammerschlag
J proceeded in accordance with the common ground that section 58(3) bound Resi.
His Honour would have preferred the view
that the "subsequent mortgages"
in section 58(3) were confined to registered mortgages. However, in Re S
& D International Pty Ltd (in liq) [2009] VSC 225 Robson J had held that
"subsequent mortgages" in the Victorian equivalent of section 58(3)
included unregistered mortgages. Some support could also be found for that view
in Butt,
Land Law , 5 th ed (2006) at [18174] and CCH, NSW
Conveyancing Law and Practice , vol 2 at [35]-[440]. Hammerschlag J
concluded:
"... whilst I take a view different to that of Robson J, I do not consider
that his Honour's view, supported as it is at least by
obiter dicta and text
writers, is so clearly wrong I should not follow it. The resolution of the
difference is best left to an appellate
tribunal."
- The
next question of construction concerned whether the payment of the Surplus
Proceeds to Kimberley was "in payment of" a subsequent mortgage.
Hammerschlag J held it was not. He said (at [60]):
"In my view 'payment of subsequent mortgages' means payment of money due or
owing under such a mortgage or mortgages, that is, payment
to someone
beneficially entitled to the fund and for whose benefit the prior mortgagee
holds it. It does not mean payment to whoever
holds the next registered or
equitable mortgage, irrespective of whether the holder is owed money."
- In
circumstances where, by that time, the decisions of McDougall J had made clear
that no money was secured by Kimberley's third mortgages
as at 28 February 2002,
it followed that the totality of the Surplus Proceeds had been paid to a
recipient who was not the recipient
to whom section 58(3) required it to be
paid.
- Even
though it was by application of section 58(3) that the Esbers succeeded before
Hammerschlag J, his Honour noted at [47] that
even if "subsequent mortgages"
in section 58(3) meant only registered mortgages:
"... the section does not extinguish the rights of equitable interest holders
or affect their priorities. If Kimberley had had an
equitable interest in the
disputed amount it would have been entitled, as against and in priority to the
Esbers, to receive it."
- He
said, at [49] that if the position were to be governed by section 58(3) but by
general principles of equity, the outcome would
be no different from that which
he had held arose under section 58(3). His reason for expressing that view was,
at [56], that Resi:
"... was in a fiduciary position. It was a mortgagee who was paid more than
it was entitled to retain and it had no beneficial interest
in the excess (in
this case the totality). It was in a position no different to a first mortgagee
who exercises a power of sale where
the purchase price received is more than the
mortgage debt."
- He
said, at [57]:
"... Its debt having been paid, the second defendant held the disputed amount
as trustee for the persons beneficially interested.
In the present case that was
the Esbers, not Kimberley. When faced with the competing claims, the second
defendant's proper course
and that which would have protected it, was to pay the
disputed amount into court or to interplead. It chose instead to pay the money
to Kimberley in return for an indemnity, when Kimberley was not entitled to
receive any payment. It may have paid away the trust
fund but its breach of duty
was complete once it had done so."
The Issues on Appeal Concerning Section 58(3)
- Some
of Resi's grounds of appeal challenge those matters relating to the construction
of section 58(3) that the primary judge found
against it. In addition Resi seeks
to argue that section 58(3) does not apply to it at all. By Notice of
Contention, the Esbers submit
that the judge should have held that section 58(3)
RPA refers only to registered mortgages.
- The
issues that arise concerning section 58(3) are thus:
1. Should Resi be permitted to argue that section 58(3) does not apply to it
when that argument is contrary to its concession in the
court below?
2. If yes to 1, does section 58(3) apply to a non-selling mortgagee?
3. Does section 58(3) apply to an unregistered mortgage?
4. Does section 58(3) require a mortgagee to whom it applies to pay the whole
amount surplus to its own claim to the next mortgagee
in order of priority?
5. Was Resi entitled, on what it knew on 28 February 2002, to pay the Surplus
Proceeds to Kimberley?
- The
conclusions at which I have arrived are:
1. Yes
2. Yes
3. No
4. No
5. No
- It
is convenient to consider those issues in a slightly different order to that set
out above. Considering those issues also involves
considering the scope of the
expression "subsequent mortgages, charges and covenant charges" in
section 58(3).
Permit Argument Contrary to Concession in Court Below?
- In
the court below Resi accepted that section 58(3) applied to it. Indeed, it
contended that section 58(3) bound it to pay the whole
of the proceeds to
Kimberley, as the next mortgagee in priority. On the appeal, Resi sought to
argue that section 58(3) imposed obligations
only on a selling mortgagee, and as
it was not a selling mortgagee it could not possibly be in breach of section
58(3).
- Mr
Parker SC, Senior Counsel for the Esbers, submits that Resi should not be
permitted on the appeal to argue that section 58(3) does
not apply to it. He
disavows any submission that relevant evidence could have been admitted if the
point had been taken below. However,
he submits that this is a case where it
would be contrary to the interests of justice to allow a new point to be taken
on appeal,
even if evidence at the trial could not have affected it: Multicon
Engineering Pty Ltd v Federal Airports Corporation (1997) 47 NSWLR 631. He
points out that what Resi is seeking to do is not only raise a new point on the
appeal, but to repudiate a stance deliberately
adopted in the court below. He
submits that his clients mortgaged their property many years ago and had been
seeking ever since to
recover what they can of it, that they are not a large
financial institution like Resi, and that, as well as Resi's change of tack
involving the incurring of extra costs, there is a public interest in requiring
the issues in litigation to be identified completely
at first instance. There is
no apparent reason for the concession made in the court below being withdrawn at
this stage, beyond the
fact that Resi's counsel on the appeal are different to
its counsel in the court below.
- In
my view, those arguments are powerful, and in many cases they might prevail.
However, in the present case, even if this particular
point were not permitted
to be taken on appeal, it would still be necessary for the court to construe
section 58(3), and to consider
the manner in which it interacts with equitable
principles. That task would not be appreciably shortened by refusing to permit
the
new point to be raised on appeal. As well, it is common ground that there is
no authority on the question of whether section 58(3)
applies to a mortgagee
other than a selling mortgagee. In any event I have concluded that the
appellant's argument fails. In those
circumstances, it is preferable to permit
the argument to be raised, and to give the reasons why it fails.
"Subsequent Mortgages, Charges and Covenant Charges"
- I
turn to the construction of the expression "subsequent mortgages, charges and
covenant charges" in section 58(3).
"Subsequent Mortgages, Charges or Covenant Charges" - "Covenant Charge"
- Section
87A Conveyancing Act 1919 contains the following definition:
" public positive covenant , in relation to land, includes a covenant
which imposes obligations requiring:
(a) the carrying out of development on or with respect to the land, within
the meaning of the Environmental Planning and Assessment Act , 1979
(b) the provision of services on or to the land or other land in its
vicinity, or
(c) the maintenance, repair or insurance of any structure or work on the
land,
or imposes any term or condition with respect to the performance of or
failure to perform any such obligation."
- Section
88A Conveyancing Act enables certain easements in gross (ie easements
without a dominant tenement) to be created in favour of a limited class of
public
authorities. Section 88BA enables positive covenants for maintenance or
repair of the site of the easement to be imposed concerning, inter alia, an
easement
without a dominant tenement created in favour of a prescribed authority
under section 88A. Section 88F confers on the prescribed authority having the
benefit of a public positive covenant, powers to carry out certain types of
action
that the proprietor of the servient tenement is required by the covenant
to carry out, but has failed to carry out, and to recover
the cost of so doing.
Section 88F(4) enables a public authority who has made such a payment, and
obtained a judgment for an amount payable to it concerning that payment,
to
lodge with the Registrar General an application for registration of a charge
over the land for the judgment debt. For RPA land, the registration takes
place in the Register maintained pursuant to the RPA . For old system
land, the registration takes place, under section 187 Conveyancing Act ,
in the General Register of Deeds. When registered, such a charge operates as a
charge on the land for the amount to which it relates.
- It
is this type of charge that falls within the definition of "covenant charge"
in section 3 RPA . There has never been a covenant charge over the
mortgaged land that is presently the subject of dispute.
- In
oral argument Mr G Burton SC, for Resi, submitted in aid of his argument that
section 58(3) permitted payment to a subsequent unregistered mortgagee, that
there could be a covenant charge that was not registered under RPA . It
is true that there can be a covenant charge that is not registered under RPA
, namely one that is over old system land, and is registered in the General
Register of Deeds. However, that is not a relevant covenant charge, for
the purpose of section 58(3). The "subsequent mortgages, charges and covenant
charges" in section 58(3) must all be mortgages, charges or covenant charges
over the land that has been sold. When RPA land has been sold by a
mortgagee, any covenant charge that exists over that land must be
registered pursuant to RPA .
"Subsequent Mortgages, Charges or Covenant Charges" - "Charge"
- In
Avco Financial Services Limited v Commonwealth Bank of Australia (1989)
17 NSWLR 679, at 682, Young J (as his Honour then was) said:
The word 'charge' is defined by s 3(1) of the Real Property Act as
'any charge on land created for the purpose of securing the payment of an
annuity, rent-charge or sum of money other than a debt'.
It should be realised
that what happened in the 1979 amendment to the Real Property Act was
that the word 'charge' replaced the old word 'encumbrance'. The definition
covers the liability to pay a periodical sum but it
does not cover the situation
where a principal sum is charged on land: see the notes in Woodman and Nettle
on the Torrens System in New South Wales (1985) at 114, a note that
originated in the first edition of Baalman on the Torrens System in New South
Wales (1951) at 13."
- The
rights that Kimberley had under its unregistered mortgage in the present case,
secured the repayment of "the moneys due and owing by the Mortgagor as
Borrower to that Mortgagee as Lender pursuant to the Deed of Loan and Guarantee
of even
date" . Those moneys included the principal amount that the Esbers
had guaranteed. Thus, the mortgage that Kimberley held over the land
was not a
"charge" within the meaning of the definition of that word in section 3
RPA .
"Subsequent Mortgages, Charges or Covenant Charges" - "Mortgage"
- It
will be recalled that the definition of "mortgage" in section 3 RPA
is "any charge on land (other than a covenant charge) created merely for
securing the payment of a debt" . The word "charge" in that
definition could not have been intended to have the defined meaning of
"charge" . That is because the defined meaning of "charge"
specifically excludes a charge on land created for the purpose of securing a
debt, while the definition of "mortgage" requires there to be a charge on
land created for securing the payment of a debt. In both the definition of
"charge" and the definition of "mortgage" the word "charge"
itself appears. In both those definitions, it bears its ordinary meaning of
an act in the law by which an item of property is made
available as a source
from which some legal obligation can be met.
- The
definition of "mortgage" in section 3 RPA can include unregistered
mortgages. It is used with that extended meaning when the expression
"unregistered mortgage" or one of its cognates appears in section
57(2)(b1)(ii), and section 61(2)(d)(iii) RPA .
Does Section 58(3) Apply to an Unregistered Mortgage?
- It
is another question whether "mortgage" is used in its full defined sense
in section 58(3). For the reasons that follow, it would be inconsistent with the
context and subject matter for it to bear its full defined sense in
section
58(3). Rather, section 58(3) is concerned only with registered mortgages.
- Section
41(1) RPA has the effect that a dealing not only does not pass any estate
or interest in Torrens system land until registered, but also that
the dealing
does not render the land liable as security for the payment of money until it is
registered. It might happen that a transaction,
such as a contract, that is
evidenced by the dealing gives rise to a security in the eyes of equity, but
that happens outside the
scope of the RPA itself, and does not affect the
construction of RPA .
- Section
36(9) RPA makes clear that it is the dates of registration of dealings,
not the dates of creation, that determine their respective orders of
priority.
Section 56A provides a means by which the holders of registered mortgages can
alter their priority inter se , by registration of a particular type of
memorandum in the approved form.
- When
there is an unregistered mortgage, the registered proprietor of the land holds
his estate or interest in the land free from that
mortgage, pursuant to section
42(1) RPA , except in the case of fraud. It is uncontroversial that the
registered proprietor is also subject to any personal equities ( Frazer v
Walker [1967] 1 AC 569 at 585; Barry v Heider [1914] HCA 79; (1914) 19 CLR 197 at
213; Breskvar v Wall [1971] HCA 70; (1971) 126 CLR 376 at 385) but what matters for the
present task of statutory construction is that these personal equities arise
outside the statute,
not within its structure.
- Section
56(1) RPA requires Torrens title land to be mortgaged using a mortgage in
the approved form.
- Section
57(2) sets out various preconditions for the exercise of the powers under
section 58. As the opening words of section 58(1) make clear, the power of sale
can be exercised only when the preconditions laid down in section 57(2) have
been met. The chapeau of section 57(2) makes clear that the only type of person
eligible to fulfil those preconditions is "a registered mortgagee, chargee or
covenant chargee" . Thus, the only mortgagee who can exercise the power of
sale under section 58 is a registered mortgagee. Powell J expressly so decided
in Midland Montagu Australia Ltd v Cuthbertson (1989) 17 NSWLR 309 at
313.
- Section
58(3) only comes into operation once the power of sale under section 58(1) has
been exercised. The opening phrase of section 58(3), "the purchase money to
arise from the sale of any such land, estate or interest" , refers back to
the type of land, estate or interest that is capable of being sold under section
58(1), which is only Torrens system land.
- In
the order of application of proceeds laid down by section 58(3), the second
application of money, after the expenses, is "in payment of the moneys which
may then be due of owing to the mortgagee, chargee or covenant chargee" .
The "mortgagee, chargee or covenant chargee" there referred to is the
mortgagee, chargee or covenant chargee who has exercised the power of sale - ie,
necessarily someone with
a registered mortgage, charge or covenant charge.
- Next
in line is "in payment of subsequent mortgages, charges or covenant charges
(if any) in the order of their priority" .
- There
was some mention in argument of the possibility that, when those subsequent
interests are to be paid "in the order of their priority" that is a
reference to the priority that they are accorded by the RPA itself. The
argument is that whether their order of priority arises solely under section
36(9) from the order of their registration, or is also affected by the
registration of a memorandum under section 56A, that order of priority exists
only amongst registered mortgages.
- Provisions
somewhat analogous to section 58(3) RPA , namely section 135 Real
Property Act 1886 (SA) and section 88(1) Property Law Act
1974 (Qld), have been held to be intended "not to establish
priorities but to provide the machinery for giving effect to the priorities
otherwise legally established" : Mercantile Credit Ltd v Australia and
New Zealand Banking Group Ltd (1988) 48 SASR 407 at 410 per King CJ;
Australia and New Zealand Banking Group Ltd v Evans [1992] 2 Qd R 230 at
233 per de Jersey CJ; Emerson v Custom Credit Corporation Ltd (1991) Q
Conv R [54-414]; Rockett v Moneycorp Securities Pty Ltd [2008] QFC 258 at
[15]-[16]. In Mercantile Credit v ANZ King CJ said, at 410, that such a
provision was not:
"... apt to create a priority which would not otherwise exist. Its broad
effect is to provide that the moneys are to be applied in
payment of the
mortgages according to the priorities established by law, the balance being paid
to the mortgagor."
- Thus,
Mercantile Credit v ANZ held (as Holland J had previously held in
Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293) that where a first
registered mortgage contains an all moneys clause, a second mortgage is later
registered, and the first mortgagee
then makes further advances, the equitable
rule in Hopkinson v Rolt [1861] EngR 641; (1861) 9 HL Cas 514; 11 ER 829 could operate to
limit the priority of the first mortgage to the amount that the first mortgagee
had advanced at the time of acquiring
notice of the second mortgage. (Notice of
the second mortgage does not always have that effect - there can be reasons, as
were found
to exist in Matzner , that outweigh in equity's eyes the
significance of the first mortgagee having notice of the second mortgage.) As de
Jersey CJ put
it in Australia and New Zealand Banking Group Limited v Evans
[1992] 2 Qd R 230 at 233, the order of priority referred to in section 88(1)
of the Queensland legislation is not "the priority prima facie established by
the order of registration, but the true priority, however lawfully it is
achieved".
- In
my view the Queensland decisions that I have cited in [63] are not determinative
of the point presently in issue.
- Like
section 58(3) RPA , section 88(1) Property Law Act 1974-1975
(Qld) required the surplus moneys received by a mortgagee to be held in
trust and applied by him in accordance with the section. Section 88(1) ended:
"(c) Thirdly, in payment of any subsequent mortgages or encumbrances:
and the residue (if any) of the money so received shall be paid to the person
entitled to receive or entitled to give receipts for
the proceeds of sale of the
mortgaged property."
- However,
section 88 appeared in Part 7 of the Act, which commenced by saying:
77(1) This Part-
(a) applies to unregistered land and to any mortgage of such land; and
(b) applies to land and any mortgage of land which is subject to the
provisions of-
(i) the Real Property Acts; or
(ii) the Land Act; or
(iii) the Miners' Homestead Leases Act; or
(iv) the Mining Act; or
(v) the State Housing Act; or
(vi) any other Act, and any repealed Act which continue to apply to such land
or mortgage made before that Act was repealed; and
(c) subject to any other Act, apply to any other mortgage whether of land or
any other property.
(2) In this Part-
"instrument of mortgage" includes-
(a) a bill of mortgage and a bill of encumbrance within the meaning of the
Real Property Acts; and
(b) a memorandum of mortgage under the Land Act, the Miners' Homestead Leases
Act, or the Mining Act;
"mortgagee" includes an encumbrancee under a registered bill of
encumbrance;
"mortgagor" includes an encumbrancer under a registered bill of
encumbrance;
"principal money" includes any annuity, rent charge or principal money
secured or charged by a bill of encumbrance registered under the Real Property
Acts.
- It
is significant that section 88 Property Law Act 1974 (Qd) is a
provision that, by reason of section 77, is expressly made applicable to land
under both a Torrens title and a non-Torrens title, and to registered and
unregistered mortgages.
That is not the case with section 58(3) RPA.
- For
mortgages over land that is not Torrens land, and for priorities between
unregistered mortgages, priorities must be decided through
the general law, not
by inspecting a Torrens register. The meaning of section 88(1)(c) must be
ascertained in a way that takes account of this wide scope of application of
section 88(1)(c) - the provision cannot have a different meaning when applied in
one factual situation to when it is applied in a different factual
situation.
However, there is no similar necessity for section 58(3) RPA to
accommodate, as a matter of its construction, priorities ascertained other than
by the Torrens register.
- If
section 58(3) were to be construed in the way section 88(1) has been construed
in Queensland, the relevant order of priorities would include the priority
between a registered and an unregistered
mortgage, and an unregistered mortgage
would then be part of the "subsequent mortgages, charges or covenant charges"
. However, so construing it would produce a significant anomaly. It would
make the scope of the phrase "subsequent mortgages, charges or covenant
charges" extend beyond the registered interests in land to which all six of
the previous references in section 58 to "mortgages, charges and covenant
charges" (or cognates of that expression) refer, when there is no indication
in either the text or the context that a different meaning is
intended. It has
long been a principle of construction that a word or phrase is assumed to be
used consistently in legislation, and
(unless the word or phrase appears in
contexts that show that different meanings are intended) it should be given the
same meaning
in the various places at which it appears: Pearce & Geddes,
Statutory Interpretation in Australia, 6 th ed, para [4.6] and cases there
cited. That principle has special force when the same word or phrase is used
several times in
the one section.
- The
way in which the situation of the unregistered mortgagee is accommodated is not
through the construction of section 58(3), but by equitable principle operating
to modify the operation of section 58(3) to prevent it being used to produce
inequitable results.
- It
is necessary for equitable principles to be called into play in deciding
priorities between NSW registered mortgages because section 58(3) does not deal
with all the possible situations in which proceeds of sale might come to be
distributed amongst a mortgagor and mortgagees.
If it is a second registered
mortgagee who sells, section 58(3) says nothing about the first registered
mortgagee being paid out (because it is not a "subsequent mortgage" ).
Clearly the first mortgagee would have priority even over the second mortgagee
(absent an agreement altering the priority arising
from registration) but it is
equitable principles, not section 58(3) that requires it to be paid to give
effect to that priority.
- Further,
it is possible, by agreement between the mortgagor, all registered mortgagees,
and a lender whose security interest is unregistered,
for the unregistered
interest-holder to be given whatever priority the parties might choose. If the
chosen priority was subsequent
to that of the selling mortgagee, and (contrary
to my view) the Queensland construction of its section 88(1) were to apply to
section 58(3) RPA , that unregistered mortgage would be one of the
"subsequent mortgages, charges or covenant charges" within section 58(3).
Section 58(3) would then require payment to it, in its appropriate order of
priority. However, if the parties by agreement gave the unregistered
interest a
first priority, section 58(3) would not address that situation at all, because
the unregistered interest was not a "subsequent" mortgage. In that
situation the unregistered mortgagee would ultimately be accorded first
priority, by equity enforcing the priority
agreement as giving rise to a
personal equity that bound the registered mortgagees. If equitable principle is
needed to accommodate
the unregistered mortgage in one of these situations, it
is a more harmonious construction to also bring it into play in the other.
- Another
reason why equitable principle is needed to supplement the words of section
58(3) arises from the fact that the "surplus" referred to in section
58(3) is the surplus after payment of the previous three items listed in section
58(3). In other words, the amount that section 58(3) requires to be paid to the
mortgagor, charger or covenant charger is an amount ascertained without
deduction of any amount that a
mortgagor or charger might have agreed, in an
unregistered document, the land in question would be security for.
- When
the words of section 58(3) must be supplemented by equity, the preferable
construction of them, in accordance with the usual principle of statutory
construction,
accords the same meaning to different instances of a phrase being
used in the one section.
- As
the decision in Mercantile Credit v ANZ is a decision of the South
Australian Full Court, and I can see no relevant difference between section 135
of the South Australian legislation and section 58(3) RPA , particular
attention must be paid to precisely what it decided. While King CJ expressed the
view about what section 135 did not do (namely, create a priority which
would not otherwise exist), and about the "broad effect" and the
"purpose" of section 135, he did not, as I read his judgment, decide that
section 135 had a meaning different to that which seems to me to be the correct
meaning of section 58(3). The other judge who wrote his own judgment, Mohr J,
said expressly (412):
"Although there are, as pointed out in argument, some ambiguities and
uncertainties in the language of section I find it unnecessary
to resolve that
in the instant case. Here the facts are clear and the answer to the special case
will not depend on any interpretation
of S135. "
- The
remaining judge, Millhouse J, (who was the third and last of the judges to give
judgment) said only "I agree" , without saying with which aspects of
which judgment or judgments he agreed, beyond (obviously) the result. In the
circumstances
I see nothing in the decision in Mercantile Credit v ANZ
that stands in the way of the construction of section 58(3) RPA that
seems to me to be correct.
- It
remains to consider Re S & D International Pty Ltd (in liquidation)
(Receiver and Manager Appointed) , the decision that deflected Hammerschlag
J from his own preferred course ([31] above). There, Robson J considered a
situation where
there were two properties, each subject to a registered first
mortgage. Other claims over the properties arose from an unregistered
mortgage,
an unregistered charge, a trustee's lien, and a liquidator's lien for fees and
expenses. One of the properties had been
sold by the first mortgagee, the other
remained unsold but in the hands of a receiver appointed by the first mortgagee.
The manner
of disposition of the proceeds of a mortgagee sale was laid down by
section 77(3) Transfer of Land Act 1958 (Vic).
- Relevant
provisions of the Transfer of Land Act 1958 (Vic) include:
74(1) The registered proprietor of any land -
(a) may mortgage it by instrument of mortgage in an appropriate approved
form;
(b) may charge it with the payment of an annuity by instrument of charge in
an appropriate approved form.
(2) Any such mortgage or charge shall when registered have effect as a
security and be an interest in land, but shall not operate
as a transfer of the
land thereby mortgaged or charged.
...
76(1) If default is made in payment of the principal sum interest or annuity
secured or any part thereof or in the performance or
observance of any covenant
express or implied in any such mortgage or charge and continues for one month or
such other period as
is therein expressly fixed, the mortgagee or annuitant may
serve on the mortgagor or grantor of the annuity and such other persons
as
appear by the Register to be affected notice in writing to pay the money owing
or to perform and observe the covenants (as the
case may be).
...
77(1) If within one month after the service of such notice or demand or such
other period as is fixed in such mortgage or charge the
mortgagor grantor or
other persons do not comply with the notice or demand the mortgagee or annuitant
may, in good faith and having
regard to the interests of the mortgagor grantor
or other persons, sell or concur with any other person in selling the mortgaged
or charged land ...
(3) The purchase money received arising from the sale shall be applied-
(a) firstly in payment of all costs charges and expenses properly incurred
incidental to the sale and consequent on such default;
(b) secondly in payment of the moneys which are due or owing on the mortgage
or charge;
(c) thirdly in payment of moneys owing under or in respect of subsequent
mortgages and charges in the order of their respective priorities;
(d) fourthly in payment of the residue (if any) to the mortgagor or into the
Supreme Court under the provisions so far as they are
applicable of section
sixty-nine of the Trustee Act 1958 and the rules referred to
therein ...
- After
an extensive review of the authorities, Robson J at [159](c) concluded that,
"the reference to subsequent mortgages and charges in s 77(3)(c) of the TLA
includes unregistered mortgages and charges." The authorities cited for that
conclusion were: Ex parte Australian Co-operative Development Society Limited
(in liq) [1978] Qd R 395; Avco Financial Services Limited v Commonwealth
Bank of Australia ; and Fraser v Australian Securities & Investments
Commission, in the matter of Lanepoint [2007] FCAFC 85.
- I
agree with Hammerschlag J that these authorities do not support the conclusion
that Robson J drew from them. In Ex parte Australian Co-operative Development
Society Limited Hoare J considered a situation where a registered first
mortgagee had exercised a power of sale. The applicant held an unregistered
second mortgage.
- Hoare
J said, at 396:
"The original scheme of the Real Property Acts equated a bill of
encumbrance with a bill of mortgage. It is difficult to see why provisions of
the Property Law Act should apply to an unregistered bill of mortgage but
only to a registered bill of encumbrance. While one can readily see the creation
and enlargement of doubts by the provisions of s. 77(2) of the Property Law
Act , nevertheless, I find it difficult to see why the provisions of s.
88(1)(c), at any rate as they apply to a bill of mortgage should be restricted
to a registered bill of mortgage. At the same time it would,
on the face of it,
be absurd if the bill of encumbrance is, by the operation of s. 77(2), to be
placed, as it were, in a different category and with separate provisions
applying to a bill of encumbrance. It is not necessary
for me to determine this
aspect of the matter on this application but it may be that the operation of s.
77(2) is sufficiently restricted by the words, 'unless the contrary intention
appears.' However, I say no more of the bill of encumbrance
but it does seem to
me that, having regard to the existing law which is so well established, I can
see no good reason why s. 88(1)(c) as far as its application to a mortgage is
concerned, should be restricted to a registered mortgage and I so hold."
- As
shown earlier ([66]-[69]), on its correct construction section 88(1) Property
Law Act (Qld) applies to both registered and unregistered mortgages. However
that is a result of a peculiarity of the drafting of the Queensland
legislation
that is not reflected in either section 58(3) RPA or section 77(3)
Transfer of Land Act (Vic). Section 77(1) Transfer of Land Act
operates by reference to " such mortgage or charge ", which refers
back to section 74, which relates only to registered mortgages.
- Avco
Financial Services Limited v Commonwealth Bank of Australia arose after a
registered mortgagee who had exercised a power of sale paid a surplus into
court. A lender who had an unregistered equitable
charge over the land applied
to Young J (as his Honour then was) under section 98 Trustee Act 1925
for the payment out to it of the money in court. By the time of the hearing
the only other potential claimants to that money were
the mortgagors. They had
left Australia and were probably living permanently in the Philippines. The
applicant had obtained a default
judgment against them, for more than the amount
of the sum in court. Young J said, at 682, that Ex parte Australian
Co-operative Development Society was:
"... one of the particular wording of the Queensland Act, but nonetheless it
goes some way to persuade one that the words in the New
South Wales statutes
should be liberally construed. Especially is this so when one can see in s 58, a
distinction made between a
mortgage charge or covenant charge on the one hand
and a registered mortgage charge or covenant charge on the other. Section 56 B
again appears to recognise an unregistered mortgage as a mortgagee under the
Act."
- After
holding that the equitable charge of the applicant was not a "charge, within
the meaning of the definition of that term in section 3 RPA " his Honour
said, at 682-3:
"Accordingly, although I lean to the view that one should read the word
'mortgage' in s 58(3) as including an equitable mortgage,
because I do not
consider that the equitable charge in this case is a charge within the meaning
of the Real Property Act , the statutory trust in that former subsection
does not avail the plaintiff."
- His
Honour referred to Hope v Hope [1977] 1 NZLR 582, in which Wilson J had
upheld the claim of an unregistered subsequent mortgagee to part of the surplus.
He quoted Wilson J's statement
(at 583) that the section:
"... does not vest the surplus from a mortgagee's sale in the mortgagor free
from all equities but subject to them. In equity the
equitable charge on the
land is converted, on the sale of the land, to a charge on the proceeds."
(The relevant New Zealand section, section 104(1) Land Transfer Act
1952 (NZ) differed from section 58(3) RPA only in that the
third payment to be made is "of subsequent registered mortgages or
incumbrances (if any) in the order of their priority" .)
- His
Honour concluded, at 683:
"Accordingly, the Court will, outside s 58(3) find that there is virtually a
sub-trust whereby the equitable charge created by the
mortgagor which enures
against the fund produced by the mortgagee sale is enforced in personam against
the mortgagor.
It follows that the plaintiff has a better title in equity to the fund than
the mortgagor ..."
- Thus,
the inclination (not final view) that his Honour expressed about section 58(3)
extending to unregistered mortgages was not part
of the ratio of the case.
- Fraser
v ASIC arose when the director of two associated companies in receivership
requested the receivers to advance money from company funds for
the purpose of
conducting various pieces of litigation that the director wished to bring
relating to the affairs of the companies.
The receivers refused the request.
Each company had given to the bank that had appointed the receivers both Real
Property mortgages and a debenture over its undertaking and assets to secure
their respective borrowings ([43], [49]). One of the companies,
Lanepoint
Enterprises Pty Ltd had also given a second fixed and floating charge over its
assets to Perpetual Nominees Limited. A
first instance judge, hearing an
application by the director that was treated as an appeal under section 1321
Corporations Act 2001 (Cth) against a refusal of the receivers to
advance funding for the litigation in question, had authorised a particular
advance to
be made. That order was reversed on appeal.
- Section
105 Transfer of Land Act 1893 (WA) provided:
"(1) The proprietor of land under the operation of this Act may -
(a) mortgage the land; or
(b) charge the land with the payment of an annuity.
(2) A mortgage or charge shall be in an approved form."
- Section
106(1) provides:
"Subject to Division 2 of Part 6 of the Land Administration Act
1997 in the case of conditional tenure land, a mortgage and a charge
under this Act shall when registered as hereinbefore provided have
effect as a
security but shall not operate as a transfer of the land thereby mortgaged or
charged; and in case default be made in
payment of the principal sum interest or
annuity secured or any part thereof respectively or in the performance or
observance of
any covenant expressed in any mortgage or charge or hereby
declared to be implied in any mortgage and such default be continued for
one
month or for such other period of time as may therein for that purpose be
expressly fixed the mortgagee or annuitant or his transferees
may serve on the
mortgagor or grantor or his transferees notice in writing to pay the money owing
on such mortgage or charge or to
perform and observe the aforesaid covenants (as
the case may be)."
- Section
109(1) provides, so far as relevant:
"The purchase money arising from the sale of the mortgaged or charged land
shall be applied as follows: -
If the sale be by the mortgagee or his transferees -
First in payment of the expenses of and incidental to such sale and
consequent on such behalf; secondly in payment of the moneys which
may be due or
owing on the mortgage; thirdly in payment of subsequent mortgages and of any
money which may be due or owing in respect
of any subsequent charge in the order
of their respective priorities; and the surplus (if any) shall be paid to the
mortgagor. Provided
always that if the sale be made by a mortgagee or his
transferees and there is a subsequent charge the purchase moneys after there
shall have been made thereout all proper prior payments shall be deposited by
him or them in the manner and names and for purposes
corresponding with those
after mentioned.
- The
debenture that Lanepoint had given to the first mortgagee stated that funds
obtained from the sale of the charged property should
be applied in the same way
as was provided for in section 109:
- Finkelstein
J held that, concerning the surplus that the receivers would eventually hold
there would be two claimants, one of them
a guarantor that had made a payment
under its guarantee and would be subrogated to the first mortgagee's securities,
and Perpetual.
As Perpetual's only security interest over the land arose from
its fixed and floating charge, in the ordinary course of things that
interest
would be purely an equitable security. His Honour said at [53]:
"Perpetual is a claimant because of the common law rule that once a receiver
has paid the amount due to his principal he must account
for the surplus to
second and subsequent mortgagees before any funds are paid to the mortgagor:
Re Thomson's Mortgage Trusts [1920] 1 Ch 508; Kerabee Park Pty Ltd v
Daley [1978] 2 NSWLR 222 , 228. It could also rely on s 109 of the
Transfer of Land Act ."
- His
Honour held that a payment to the director out of that surplus was a payment
that the receivers would not be permitted to make
even if they were of the
opinion that it was desirable to make the payment. His Honour said, at [54]:
"The receivers would not be permitted to make the payment because it would be
inconsistent with both s 109 of the Transfer of Land Act and the mortgage
instrument. Thus the first effect of the order was to require the receivers to
make a payment which was both in breach
of statute and in breach of the
mortgage."
That reasoning contemplates that Perpetual could fall into the order of
application of funds laid down by section 109.
- Ryan
and Gilmour JJ gave a different reason why the order of the primary judge was
incorrect. Their Honours said, at [38]:
"We are prepared to assume, without deciding, that receivers may have a
discretion, once they are satisfied that they will have a
surplus of funds after
their secured creditor has been paid in full and after all the costs and
expenses of the receivership have
been met, to make a payment in advance of
their retirement to the mortgagor company. That discretion is apparently
qualified by the
duty owed to second or subsequent mortgagees or other
encumbrancers of the company's assets which has been identified by Finkelstein
J
in his separate reasons at [53] below; see Re Thomson's Mortgage Trusts
[1920] 1 Ch 508 and the other authority there cited. However, even if there
were no second mortgagee or subsequent secured creditor of whom the receivers
had notice, they would not be entitled to pay funds under their control to the
mortgagor company on the condition that it apply those
funds in a certain way or
for some specified purpose. Such a condition could potentially cut down the
rights of secured creditors
of whom the receivers had no notice or of any
unsecured creditors and might, if it matters, constitute a preference."
- Their
Honours' statement "that discretion is apparently qualified ..." is less
than adoption of [53] of the judgment of Finkelstein J. Further, the reason that
their Honours give for the payment by the
receivers being beyond power is one
that applies "even if there were no second mortgagee or subsequent secured
creditor of whom the receivers had notice" . In those circumstances, [53] of
the judgment of Finkelstein J is not part of the ratio decidendi of the case.
- Finally,
in my view, section 109 Transfer of Land Act applies only to registered
mortgages. The Division in which it occurs relates, as section 105 makes clear,
only to registered land. The type of " charge " that the Division (and
thus section 109) is concerned with is identified by a 105(1)(b) as a charging
of the land with payment of an annuity. It is that type of charge that
is
referred to by the provision in section 109 for the " thirdly " payment
to be made to " any subsequent charge ". Similar considerations of
consistency in language use to those that apply under section 58(3) RPA
make preferable the construction that section 109 does not extend to the
payment out of subsequent unregistered equitable interests in the land. While
some of the other provisions
in the Division are subject to an exception
concerning land under the Land Administration Act 1977 , section
109(2) says that section 109 does not apply to the application of proceeds of
sale by a mortgagee in accordance with section
77 Land Administration Act
. Thus I respectfully disagree with the view that an unregistered mortgage
could fall within the order of application of funds laid
down by section 109.
- In
these circumstances I would not follow the aspect of Re S & D
International that held that section 77(3) Transfer of Land Act
authorised the payment to subsequent unregistered mortgages and charges. I
uphold the Notice of Contention. On its true construction,
section 58(3) RPA
does not authorise the payment out of subsequent unregistered mortgages.
Does Section 58(3) Apply to a Non-Selling Mortgagee?
- Mr
Burton submits that section 58(3) does not apply to Resi, because it was not the
mortgagee who exercised the power of sale over the land.
- Clearly,
he submits, it is the mortgagee who exercises the power of sale who will first
have the purchase money arising from the sale
in his hands, and who would, in
the ordinary course, make payment of the expenses occasioned by the sale. The
payment second in line,
of "the moneys which may then be due or owing to the
mortgagee, chargee or covenant chargee" refers, he submits, to the
mortgagee, chargee or covenant chargee who exercises the power of sale.
- He
goes on to submit that the payment "thirdly" is likewise one that the
mortgagee exercising the power of sale should make. Even if (contrary to another
of his submissions) the
obligation to make payment "of subsequent mortgages,
charges or covenant charges ... in the order of their priority" is an
obligation to pay the amount correctly owing to each successive mortgagee,
chargee or covenant chargee, that is an obligation
that it was Perpetual's task
to perform, and that it failed to perform by paying the entire amount to Resi.
Thus, he submits that
Resi was not in breach of any obligation imposed on it by
section 58(3) when it paid the whole of the surplus to Kimberley when, as it
turned out, Kimberley was not entitled to it.
- I
do not accept this argument. In Provident Capital Ltd v Printy [2008]
NSWCA 131 Basten JA (with whom Tobias and McColl JJA agreed) at [30] referred to
section 58(3) as effecting a "statutory allocation of the proceeds" .
While it is correct that the task of dividing the purchase money would
ordinarily fall to the mortgagee who exercised the power
of sale, section 58(3)
is cast in the passive voice. It says that the purchase money shall be
applied in a particular fashion, but does not say by whom it shall be so
applied. It is a statutory diktat , about how Parliament requires this
aspect of the world's affairs to be carried out.
- In
my view, the preferable construction is that section 58(3) has the effect that
whenever the purchase money arising from the exercise of a power of sale comes
into someone's hands, that person
comes under an obligation to dispose of the
purchase money in accordance with section 58(3). That obligation would be
subject to any more specific countervailing statutory obligations, such as the
statutory obligation of a
solicitor who receives money from a client on trust to
disburse it in accordance with the directions of the client: Adams v Bank of
New South Wales [1984] 1 NSWLR 285.
Obligation Under Section 58(3) Requires Payment of Whole Surplus to Next
Mortgagee?
- Mr
Burton submitted that, even if section 58(3) is capable of applying to a
non-selling mortgagee like Resi, its obligation was satisfied by handing over
the entire amount of the
surplus, after meeting its own secured debt, to the
next mortgagee in line. My upholding of the Notice of Contention provides a
reason
why, even if this argument were correct, it would not avail Resi in the
present case because Kimberley, as an unregistered mortgagee,
is not a
"subsequent mortgagee" within the meaning of section 58(3).
- Apart
from this, I do not accept that the argument is correct. The language of section
58(3) is loose in some respects. Once the time comes for distribution of the
purchase money arising from a power of sale, there are no
"subsequent
mortgages, charges or covenant charges" on foot - they have all been
discharged by the exercise of the power of sale, and converted into a
proprietary right in the proceeds
of sale. Further, a mortgage under the RPA
is, even while it is still on foot, an interest in land consisting of a
charge. It is not possible, literally, to pay an interest
in land. However it is
a common enough use of language to talk, for example, of paying the credit card
or the electricity bill, when
one does not mean that payment is to be made to a
piece of plastic or paper, but rather that the amount that is owing on the
credit
card or the electricity bill is to be paid. As Mr Parker rightly points
out, the obligation under section 58(3) is to pay the subsequent mortgage, not
to pay the subsequent mortgagee. The construction that best makes sense of
section 58(3) is that it is the obligation that was secured at the time of the
sale by that interest in land which is to be paid, to the extent
to which it has
priority. That is not to say that the only amount to be paid is the number of
dollars that were owing at the time
of sale - the relevant obligation includes
incidental covenants like those for payment of interest or enforcement expenses.
- Another
problem for this construction is that section 58(3) has a positive requirement
that "the surplus (if any) shall be paid to the mortgagor..." . If, as
seems to me to be correct, section 58(3) imposes an obligation on anyone into
whose hands the proceeds of the sale come, but the requirement of the section
was for a mortgagee
whose own debt had been paid to pass the entire amount that
was surplus to his own requirements to the next mortgagee in line, it
would not
be possible for anyone but the last mortgagee in line to perform the obligation
of paying the surplus to the mortgagor.
When section 58(3) imposes obligations
on all mortgagees, the obligation to arrange matters so that "the surplus (if
any) shall be paid to the mortgagor ... " cannot be performed by the
selling mortgagee, or any mortgagee but the last in line. Section 58(3) should
not be interpreted as imposing an obligation that cannot be performed.
- Mr
Burton submits that significant practical problems would arise if a mortgagee
with purchase money in his hand was required to ascertain
correctly the amount
owing to each subsequent mortgagee. He points out, correctly, that a mortgagee
has no power to require documents
from subsequent mortgagees, or from
mortgagors, to ascertain the private arrangements between them in order to
determine what are
the covenants to which their security relates and what are
the amounts owing under these covenants. He points out, correctly, that
even if
the amount that is owing to a subsequent mortgagee seems clear at the time the
power of sale is exercised, a claim might
later be made that it was not the
amount that then seemed clear. He points out, correctly, that it is not unusual
for mortgages to
secure amounts that fluctuate from time-to-time.
- These
difficulties are capable of applying equally to subsequent registered and
unregistered mortgages. I doubt that in practice they
would cause real
difficulty as often as Mr Burton suggests. In any event, for both types of
mortgage, if a mortgagee holding a surplus
is in real doubt about how much to
pay to whom, and it is not possible for agreement to be reached between the
mortgagor and all
subsequent mortgagees about how much is owing to the
respective mortgagees, the procedure for payment into court provides the
solution.
Payment Into Court
- Uniform
Civil Procedure Rule 43.1 defines "stakeholder" as meaning "a
person (other than the Sheriff) who is under a liability in respect of a debt or
other personal property." A mortgagee who had sale proceeds in his hands,
after payment of his own secured debt, would be a stakeholder within this
definition
both by reason of his statutory obligations under section 58(3) and
by reason of his fiduciary obligation.
- Uniform
Civil Procedure Rule 43.1 also provides:
"claimant means a person by whom a stakeholder ... is being sued, or
expects to be sued, in proceedings before a court.
disputed property means any debt or other personal property in respect
of which a stakeholder ... is being sued, or expects to be sued, by two or more
persons in proceedings before a court."
- Uniform
Civil Procedure Rule 43.2(1) provides:
"If, in relation to disputed property, a stakeholder is sued, or expects to
be sued, in any court by two or more claimants, the court
may, on application by
the stakeholder, grant relief by way of interpleader."
- Uniform
Civil Procedure Rule 43 contains a procedure whereby the stakeholder can pay
the disputed amount of money into court, and the court can set in motion a
procedure for giving notice to the rival claimants and requiring them to
litigate their claims, or be barred from prosecuting the
claim against the
applicant and those claiming under the applicant. It is also possible under
UCPR 43 for the stakeholder to keep the property while the dispute is
being resolved, upon giving security to the value of the subject
matter to the
satisfaction of the court ( UCPR 43.2(3)(c)). Such a procedure might be
available if the applicant consented, and a better rate of return could be
obtained if the
disputed fund remained in the applicant's hands, held on a
suitable trust, than would be obtained if it were paid into court.
- Before
these provisions can be availed of, the person paying in needs to qualify as a
person " being sued, or who expects to be sued ". If the stakeholder is
not actually being sued, often (though maybe not inevitably) that would require
the stakeholder to have had
enough communication with at least one of the
claimants to have a basis for expecting to be sued.
- An
alternative procedure is available under section 95 Trustee Act 1925
. That section empowers trustees to pay trust moneys into court. Section 99
Trustee Act provides that, for the Part within which section 95 falls,
"trustee includes every implied or constructive trustee without any
exception". That unusually emphatic definition exists because section 5
Trustee Act provides that, unless the context or subject matter otherwise
indicates or requires,
" Trust does not include the duties incident to an estate conveyed by
way of mortgage; but, with this exception, includes implied and constructive
trusts, and cases where the trustee has a beneficial interest in the trust
property, and the duties incident to the office of legal
representative of a
deceased person.
Trustee has a meaning corresponding with that of trust; and includes
legal representative and the NSW Trustee and a trustee company."
- The
purpose of the "without exception" in section 99 is to remove the
exception concerning the duties incident to an estate conveyed by way of
mortgage that appears in the
definition of "trust" in section 5. It is
clearly established that a mortgagee holding surplus funds following exercise of
the power of sale is at the least constructive
trustee of those funds: see [142]
below. Thus a mortgagee holding surplus proceeds of sale can pay into court
under this provision,
without needing to establish that he is being sued or
expects to be sued. The procedure for payment into court under the Trustee
Act , and administration of those funds once in court, appears in UCPR
55.8-55.12.
- Once
the procedures under section 95 Trustee Act or UCPR 43 have been
availed of, section 171 Conveyancing Act provides:
"Payment of money into court under the provisions of this or any other Act
shall effectively exonerate therefrom the person making
the payment."
Payment into court under UCPR 43 is "under" an Act because
UCPR 43 is delegated legislation made under Civil Procedure Act
2005 , section 9.
- When
section 171 Conveyancing Act provides this statutory exoneration to a
person paying into court, a New South Wales mortgagee who pays a surplus into
court is just
as effectively protected as is a Victorian mortgagee who pays into
court pursuant to the express option given to him to do so under
section
77(3)(d) Transfer of Land Act 1958 (Vic).
- While
funds paid into court by a mortgagee holding a surplus can earn interest (
UCPR 41.5-41.8) the rate might not be as attractive as a rate obtainable
by another form of investment, and there can be costs associated
with making the
payment in and obtaining the payment out (eg UCPR 41.8-41.145,
55.8-55.12). Thus it may be more advantageous for the disputants to agree upon a
regime for keeping the funds secure
and invested out of court.
Resi Entitled to Pay Kimberley in 2002 On What Was Then Known?
- A
further argument that Mr Burton puts forward is that even if it is now clear
that Kimberley's mortgage over the land secured nothing
at the time it received
the surplus in February 2002, that situation was not known in February 2002.
Indeed, even at the time that
McDougall J gave his 2007 judgment he recognised a
possibility that, even though the $2m fee was not secured by Kimberley's
mortgages,
there might be other Project Costs that were so secured. That
possibility was not eliminated until McDougall J's April 2008 judgment.
- That
state of affairs is merely one particular example of the many different reasons
why a person with surplus proceeds of sale in
his hands might not be able to
ascertain the precise amount owing to a subsequent security holder. Faced with
that situation, Resi
could not tell what its obligation was under section 58(3).
That provided a good reason for it to pay the surplus into court. It provided no
justification for Resi paying the entire surplus
to Kimberley on the terms it
did.
Conclusion re Application of Section 58(3)
- If
section 58(3) were the only relevant legal obligation on Resi, it has paid the
surplus to someone who is not a "subsequent mortgagee" within the meaning
of section 58(3). Thus it will have performed its duty only if there is an
intervention of equity in the operation of section 58(3), which results in a
different conclusion. I turn to consider that topic. In light of the way the
case was argued, where the only
remedy asserted on the appeal was an equitable
one, there is no occasion to consider whether section 58(3) by itself gives rise
to a common law remedy if it is breached.
PART B - EQUITABLE OBLIGATIONS CONCERNING DISTRIBUTION OF PROCEEDS OF SALE
- Mr
Burton submits that the judge was mistaken in holding that if the position were
governed not by section 58(3) but by the general principles of equity, the
outcome would be no different.
- He
submits that, under the general law, Re Thomson's Mortgage Trusts [1920]
1 Ch 508 is authority that a first mortgagee who exercises a power of sale is
required to pass the whole net surplus to the next encumbrancer
as the person
entitled to the mortgaged property or authorised to give receipts for the
proceeds of sale thereof. Croft and Johannsson,
The Mortgagee's Power of
Sale, 2 nd ed, 2004 , at [12.1], 186 also incline to that view,
though they say that the matter is not free from doubt.
Obligations re Distribution of Sale Proceeds Under the General Law
- Before
considering Thomson , I will set out what other authorities show to be
the position under the general law. The position under a general law mortgage
was
explained in West London Commercial Bank v Reliance Permanent Building
Society (1885) 29 Ch D 954 at 962. That case arose when a mortgagor of land
sold it with the concurrence of the first mortgagee. The first mortgagee had
been
given notice of the existence of a second mortgage, but by the time of the
sale the relevant officers of the first mortgagee had
all forgotten about it.
- In
accordance with the usual way that old system conveyancing was carried out, it
was necessary for the first mortgagee to provide
the deeds that he was holding
to the mortgagor to enable the mortgagor to complete the sale. As well, the
first mortgagee affixed
its seal to a deed that recited that the mortgagor had,
with the concurrence of the first mortgagee, agreed with the purchaser to
give
him a title to the property free from encumbrances. The deed then provided that,
in consideration of X paid by the direction
of the mortgagor to the first
mortgagee, and of the further sum of Y to the mortgagor, the first mortgagee and
the mortgagor conveyed
the property to the purchaser (961). The one solicitor
acted for both the mortgagor and the first mortgagee. Upon completion the
balance of the purchase money, after payment of the first mortgage, was handed
to the mortgagor.
- The
second mortgagee sued both the mortgagor and the first mortgagee. The mortgagor
did not appear. The Court of Appeal held that
the first mortgagee was liable to
make good to the second mortgagee the amount of its security, to the extent of
the balance of the
purchase money. Counsel for the first mortgagee submitted:
"It has never been decided that notice to a first mortgagee of a second
mortgage makes him a trustee for the second mortgagee or imposes
on him any duty
as such; it only prevents him from tacking further advances against the second
mortgagee: Hopkinson v Rolt [1861] EngR 641; 9 HLC 514."
- A
fallback argument of the first mortgagee was:
"We cannot be held liable to account for more of the purchase money than we
actually received."
- Both
arguments were rejected. Cotton LJ said, at 961-2:
"... when the first mortgagee, as owner of the property and having the
control over it, turns the land into money-for the owner of
the equity of
redemption cannot, without the concurrence of the first mortgagee, himself turn
the land into money-if he, the first
mortgagee, does so with knowledge that the
money is not going to be applied in a proper manner , he is, in my
opinion, as liable for the money as if he had received it under an express
obligation to give it to the person properly entitled to it . It is
conceded that if he exercises his power of sale as mortgagee, whether under the
terms of the mortgage deed or by statute,
he is answerable for the money he
receives if he pays it to the wrong person , that is to say, if he passes
over the second mortgagee and pays it to the mortgagor who has no right to
receive it. Ought we, then,
to make any distinction between such a case and the
present? Here the first mortgagees, though they did not concur with the
mortgagor
in putting up the property for sale, did concur with him in the
conveyance. Having done so with the knowledge that part of the purchase-money
was going to be applied in violation of a right of which they had had notice,
they are, in my opinion, just as liable as if they
had received the whole of the
money. Not being able to give a good receipt for the whole of the money, they
must be held liable for
that portion of it for which they could not give a good
receipt, for it was in their power to refuse to concur in the sale unless
the
whole of the purchase-money was properly applied ." (emphasis added)
- Lindley
LJ said that if the first mortgagee had present to its mind at the time of the
sale the existence of the second mortgage:
"[w]ould it not then be a clear case, both in law and in morality, against
the society? They, with full knowledge of the facts, would
then have paid the
money or allowed it to be paid to the mortgagor."
- He
rejected an argument that the solicitors who acted for both the mortgagor and
the first mortgagee on the sale had authority from
the first mortgagee only to
receive the amount actually owing to the first mortgagee because:
"... they, as agents for the first mortgagees, facilitated the payment of the
balance of the money to the mortgagor and allowed it
to go in the wrong
direction : consequently, as regards this balance, the first mortgagees are
liable for the act of their agents." (emphasis added)
- The
various passages that I have emphasised strongly suggest that the obligation of
a holder of mortgage proceeds is to pay to each
subsequent security holder and
to the mortgagor the amount that each is owed, in their order of priority.
- In
Kerabee Park Pty Ltd v Daley [1978] 2 NSWLR 222 Holland J gave a reason
why a subsequent mortgagee was not entitled to interfere in a proper exercise by
a mortgagee of its power
of sale:
"As well as being required by s 58(3) to apply surplus proceeds in payment of
subsequent mortgages, the first mortgagee is liable by the general law to
account to the
holder of a subsequent encumbrance of which he has notice:
West London Commercial Bank v Reliance Permanent Building Society (1885)
29 Ch D at 954."
Holland J is saying here that the obligation to account is owed to any
subsequent encumbrance holder of whom the selling mortgagee
has notice, not just
to the next one in line.
- In
Banner v Berridge (1881) 18 Ch D 254 Kay J said, at 269, that when there
is a surplus upon a sale of a mortgaged personalty:
"... there is sufficient fiduciary relation between the mortgagor and
mortgagee to make the mortgagee constructively a trustee of
the surplus, in case
it is shewn there is a surplus. But that seems to me to be a case not of express
trust at all but of constructive
trust, that is to say, a case of a trust which
only arises on proof of the fact that there was a surplus in the hands of the
mortgagee
after paying himself."
- In
re Bell; Jeffery v Sayles [1896] 1 Ch 1 held the person entitled, under a
will trust, to receive 1,000, had mortgaged it to Jeffery, then assigned his
rights subject to
that mortgage. The will trustees had notice of the assignment.
Jeffery's mortgage secured considerably less that 1,000. The court
rejected his
contention that the will trustees should pay him the whole 1,000, and permit him
to administer what remained after paying
off his own security.
- In
Lloyd's Bank NZA Limited v National Safety Council of Australia Victorian
Division (in liquidation) [1993] VicRp 88; [1993] 2 VR 506, Marks J at 511 and JD Phillips J
(with whom Fullagar J agreed) at 514 collect extensive authority dating from
Thornborough v Baker (1676) 1 Ch Cas 508; 22 ER 364 that under the
general law, and independent of any statutory provision, a constructive trust is
impressed on surplus money received
from the sale of mortgaged property, whether
the property be land or chattels (though Marks J thought that its
characterisation "in modern terms may well be a resulting trust" ). That
constructive trust was held to exist in favour of the mortgagor. (The case did
not involve any mortgagee subsequent in priority
to the selling mortgagee.) See
also Baypoint Pty Ltd v Baker (1994) 6 BPR [97498] per Young J, at
13,689, recognising "under the general law, a trust of the surplus in favour
of the subsequent encumbrancers and the mortgagor" .
- Adams
v Bank of NSW arose when a registered first mortgagee exercised a power of
sale, at a time when there was also a registered second mortgage. Hutley
JA, at
295, said that in that situation:
"Upon the sale being completed, the mortgagee is bound to furnish to the
person or persons entitled to receive those moneys an account,
if demanded, of
his claims under the mortgage in respect of principal, interest and costs:
Coote on Mortgages , 9th ed (1927) at 945, 946. His position after sale,
qua a second mortgagee, is clearly stated by Kay J, in Charles v Jones
(1887) 35 Ch D 544 at 549, 550:
'His duty is to say, 'I have paid my debt: this property which is pledged to
me, and in respect of which I now hold this surplus in
my hands, is not my
property. I desire to get rid of this surplus, and hand it back to the person to
whom it belongs.' ...
I hold, therefore, that the Defendant Jones is liable to pay interest
at 4 per cent upon the money remaining in his hands after he had paid himself
his debt and costs. That amount
is now known, and he must be charged with
interest upon it from the date of the completion of the sale, and, as I have
said, I cannot
give him any costs of the accounts.'
...
The second mortgagee has no claim against the fund beyond what he was
entitled to up to 2 May 1980 because the balance was held on
trust for the
mortgagor. Any delay in payment by the first mortgagee attracts interest which
the first mortgagee has to pay, but
his default cannot penalize the mortgagor."
- Hutley
JA, at 299, said that the first mortgagee:
"... as a trustee, was bound to produce accounts to beneficiaries. It has
been held that similar words to those appearing in the Real Property Act
1900 , s 58, in the Real Property Act 1862 of Tasmania
did not alter the mortgagee's duties as trustee from those which would have
obtained in equity: Re Morrison; Bennell v Smith [1962] Tas SR 337.
Asquith J in Weld-Blundell v Synott [1940] 2 KB 107 at 115 said:
'That duty is to hold the balance of the proceeds after satisfying his own
debt in trust for those encumbrancers, but I do not think
there is on him an
additional duty comparable to that of the army paymasters in the two cases I
have cited, at his peril to inform
the second mortgagee correctly of the true
state of the account.'
This was a case of a first mortgagee who had had exercised a power of sale
accounting to a second mortgagee for a sum in excess of
what the second
mortgagee was in fact entitled to and his Lordship's remarks were in answer to a
defence of estoppel. They cannot,
in my opinion, be used to exempt the first
mortgagee from the duty to account in his capacity as a trustee, a duty
established as
early as 1714: Wilson v Tooker 5 Bro PC 193; 2 ER 622."
That passage is referred to with apparent approval in Bofinger v Kingsway
Group Ltd (2009) HCA 44; (2009) 239 CLR 269 at footnote 51, though
Bofinger (at 291) left undecided whether the relationship was a trust
relationship rather than a fiduciary relationship. Similarly in Adams v Bank
of NSW Moffitt P at 289 specifically left open whether section 58(3) created
a trust.
- Bofinger
now puts beyond doubt that a mortgagee holding surplus proceeds owes an
obligation to account to all subsequent interest-holders.
In Bofinger
Gummow, Hayne, Heydon, Kiefel and Bell JJ said, at [35]:
" Adams v Bank of New South Wales [1984] 1 NSWLR 285 is authority that
s 58 is to be read in a manner consistent with the equitable duty of the first
mortgagee to account to puisne mortgagees as a trustee
for any surplus. The
position in equity was described as follows by Kay J in Charles v Jones
(1887) 35 Ch D 544 at 549-550 as follows:
'I have never heard it doubted that where a mortgagee sells, and has a
balance in his hands, he is a trustee of that balance for the
persons
beneficially interested. He takes his mortgage as a security for his debt, but,
so soon as he has paid himself what is due,
he has no right to be in possession
of the estate, or of the balance of the purchase-money. He then holds them, to
say the least,
for the benefit of somebody else, of a second mortgagee, if there
be one, or, if not, of the mortgagor. What, then, is he to do?
Surely he has
a duty cast upon him. His duty is to say, "I have paid my debt: this property
which is pledged to me, and in respect
of which I now hold this surplus in my
hands, is not my property. I desire to get rid of this surplus, and hand it back
to the person
to whom it belongs." ... The duty of this mortgagee was at
least to set this money apart in such a way as to be fruitful for the benefit of
the persons
beneficially entitled to it. To that extent and in that manner he
was, according to my understanding of the law, in a fiduciary relation to the
persons entitled
to the money . It was so held in the case of Quarrell v
Beckford (1816) 1 Madd 269 and so far as I know has always been so held, and
although I quite agree that the Court is very reluctant to treat
a mortgagee as
being a trustee in any sense while any money is due to him, still when he has
paid himself, and has money remaining
in his hands which is no longer his
property, how can he be treated as other than a trustee of such money? (emphasis
added)"
- Their
Honours recognised at [47]:
"... that the term 'constructive trust' may be used not with respect to the
creation or recognition of a proprietary interest but
to identify the imposition
of a personal liability to account upon a defaulting fiduciary."
- At
[48] their Honours quoted with approval the remarks of Crennan J in Jones v
Southall & Bourke Pty Ltd (2004) 3 ABC (NS) 1 at 17, that:
"... the term 'constructive trust' covers both trusts arising by operation of
law and remedial trusts. Furthermore, a constructive
trust may give rise to
either an equitable proprietary remedy based on tracing or, whether based on or
independently of tracing,
an equitable personal remedy to redress unconscionable
conduct. The equitable personal remedies include equitable lien or charge
or a
liability to account."
- The
obligation of the mortgagee to account was held by their Honours at [49] to be
"fiduciary in character" . Their Honours concluded at [50]:
"In respect of its misapplication of the surplus moneys and securities and
the consequent loss to the appellants the first mortgagee
is to be treated as a
constructive trustee to the extent that it must account to the appellants as a
defaulting fiduciary. It is
unnecessary to seek to determine upon the agreed
facts whether the first mortgagee was a trustee in a fuller sense which afforded
the appellants a beneficial interest in the assets in question."
- It
is not necessary for the purpose of the present appeal to decide the question
that their Honours left undecided in Bofinger , of whether a mortgagee
holding surplus proceeds of sale is a fully-fledged trustee. The authorities
that I have set out make clear
that a mortgagee who holds surplus proceeds of
sale is under a fiduciary obligation to all subsequent interest holders to
account
to them for the manner in which the surplus is disposed of, and not to
prejudice their interest in the surplus by the manner in which
he disposes of
it.
- Though
the existence of this fiduciary obligation on a mortgagee is clearly established
by authority, its basis in principle is not
hard to find. The selling mortgagee
who holds a surplus, or a subsequent mortgagee to whom the selling mortgagee
hands more of the
proceeds of sale than that subsequent mortgagee is entitled
to, are each in the position of holding property that is not their own.
That
position of control of the property gives rise to a fiduciary obligation not to
harm the interest of the person beneficially
entitled to the property. It is
analogous to the fiduciary obligation that a bailee has to the owner of the
goods bailed ( Re Hallet's Estate (1880) 13 Ch D 696 at 708-709;
Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR
41 at 101 per Mason J; Brambles Security Services Ltd v Bi-Lo Pty Ltd
(NSWCA 19 June 1992) at 31 per Clarke JA, with whom Kirby P agreed; (1992)
Aust Tort Rep 81-161). It is the sort of obligation that arises from holding
property one knows is not one's own. Thus, it is capable of applying to any
subsequent mortgagee into whose hands the surplus proceeds come.
Re Thomson's Mortgage Trusts
- Thomson
needs to be understood against the background of the principles I have just
been setting out. In Thomson , Edward Thomson had granted a first
mortgage that came to be held by Bruty, a second mortgage to his wife Helen
Thomson, then a third
mortgage to Offin. Some years later, Helen Thomson
submortgaged the principal sum of 200 owing on the second mortgage, and the
security
for it, to Wood to secure a loan of 100 to Edward Thomson. Helen
Thomson paid no interest to her husband, but the interest on the
submortgage to
Wood had been paid until April 1918. Offin had submortgaged the principal sum of
300 owing on the third mortgage and
the security for it to Duffield and Bruty.
While the report is not explicit, it seems that after Duffield's death, the
whole of that
submortgage of the third mortgage was held by Bruty.
- Bruty
sold the mortgaged property under the statutory power of sale conferred by the
first mortgage, and had a surplus of nearly 500
in his hands.
- The
plaintiffs in the action were the legal personal representatives of Helen
Thomson, and Wood. They claimed to be entitled to the
whole of the 200 principal
secured by the second mortgage, together with 20 years' of unpaid interest,
making a total of 400. Bruty
claimed that they were entitled only to six years'
arrears of interest by reason of the Real Property Limitation Act 1833
. That aspect of the case is a distraction from what it stands for as a
matter of principle, because Eve J held that, in any event,
no question arose
under the limitation statute because there was a sufficient acknowledgement of
the debt when the submortgage to
Wood was executed (512).
- Bruty
did not suggest that he held the balance other than as first mortgagee, but
submitted that he was entitled to retain the fund
and leave the plaintiffs to
take proceedings to recover, if they could, more than six years' interest. Eve J
said, at 513:
"I do not think this attitude of the defendant Bruty can be justified. I
think he is and always has been since his claims as first
mortgagee were
satisfied under a statutory obligation to pay the surplus to the plaintiff
Wood as the person then entitled to the mortgaged property and authorized to
give a receipt for
the proceeds of sale thereof: see Conveyancing and Law of
Property Act 1881 , s 21, sub-s 3, and s 22 . Bruty had not,
in my opinion, any right as a satisfied prior incumbrancer to retain the surplus
proceeds as against Wood, and in
retaining them he has really been asserting on
behalf of the mortgagor and those claiming under him by title subsequent to the
plaintiffs'
title a right as against the plaintiffs to have paid to them the
whole surplus after deducting principal and six years' arrears of
interest only.
If the fund were in Court and the mortgagor or the defendants applied for
payment out on this footing, it is I think
clear from what was said by the Court
of Appeal in In re Lloyd [1903] 1 Ch 385, 403 that the application would
not be successful even though the mortgagees against whom the application was
made had never had
in their hands the proceeds of sale of the mortgaged
property. Is the position of the defendants strengthened by the fact that the
fund is not in Court but has remained throughout in Bruty's hands, or are the
plaintiffs prejudiced by the fact that it is they and
not the defendants who
come to ask for payment of the fund to them? I think not. Bruty's possession, in
the view I take of the statutory
obligation which arose on his prior claims
being satisfied, must be treated as the possession of the person rightfully
entitled to have the fund handed to him, that is, no more to be treated as
an action to recover interest within the meaning of s 42, than was the position
for payment out in Edmunds v Waugh (1866) LR 1 Eq 418." (emphasis added)
- The
significance for Mr Burton's argument is that it appears to have been Eve J's
view that Wood was entitled to have the entire surplus
handed to him - and it
was Wood alone, not all of the plaintiffs (who between them held all the
interests comprised in the second
mortgage), who had that entitlement. The
amount owed to Wood was considerably less than the surplus that Bruty held.
- The
relevant provisions of the Conveyancing and Law of Property Act 1881
(Eng) are:
"21(3) The money which is received by the mortgagee, arising from the sale,
after discharge of prior incumbrances to which the sale
is not made subject, if
any, or after payment into Court under this Act of a sum to meet any prior
incumbrance, shall be held by
him in trust to be applied by him, first, in
payment of all costs, charges, and expenses, properly incurred by him, as
incident to
the sale or any attempted sale, or otherwise; and secondly, in
discharge of the mortgage money, interest, and costs, and other money,
if any,
due under the mortgage; and the residue to the money so received shall be paid
to the person entitled to the mortgaged property,
or authorised to give receipts
for the proceeds of the sale thereof.
...
22(1) The receipt in writing of a mortgagee shall be a sufficient discharge
for any money arising under the power of sale conferred
by this Act, or for any
money or securities comprised in his mortgage, or arising thereunder; and a
person paying or transferring
the same to the mortgagee shall not be concerned
to inquire whether any money remains due under the mortgage.
(2) Money received by a mortgagee under his mortgage or from the proceeds of
securities comprised in his mortgage shall be applied
in like manner as in this
Act directed respecting money received by him arising from a sale under the
power of sale conferred by
this Act; but with this variation, that the costs,
charges, and expenses payable shall include the costs, charges, and expenses
properly
incurred of recovering and receiving the money or securities, and of
conversion of securities into money, instead of those incident
to sale."
- A
provision substantially the same as section 21(3) Conveyancing and Law of
Property Act 1881 (Eng) continues to operate in relation to old
system land under section 112(4) Conveyancing Act 1919 (NSW).
- An
old system mortgage took the form of a conveyance of the land itself, subject to
a contractual right of redemption in the mortgagor.
A second mortgage likewise
took the form of a conveyance of the land itself, subject to the first mortgage,
and subject also to a
contractual right of redemption: Hargraves and Helmore,
An Introduction to the Principles of Land Law (NSW) p126. The second
mortgage took this form even though, because of the prior first mortgage having
been created, all that the mortgagor
had to mortgage was his equity of
redemption. Under this manner of conveyancing, when a first mortgage was
discharged, the person
entitled to the mortgaged property was the next mortgagee
in order of priority. If the second mortgage had been submortgaged (by
the
second mortgagee conveying the land subject to the first mortgage, and subject
to a contractual right to redeem) then, once the
first mortgage had been paid
off, it was the submortgagee of the second mortgage who would have the legal
estate in the land. Because
of section 22(1), once a first mortgage had been
discharged, the person who was "authorised to give receipts for the proceeds
of sale thereof" was (or, if the first mortgage was paid following exercise
of a power of sale, would have been if the property had not already been
sold)
Wood as the submortgagee of the second mortgagee. These textual matters in
section 22(1) provide some justification for the view at which Eve J arrived in
Re Thomson's Mortgage . Eve J did not go on to consider how the statutory
rights and obligations might be affected by equitable rights and obligations
that
made adherence to the strict statutory regime unconscionable. In these
circumstances Re Thomson's Mortgage does not provide a reason for
doubting that a mortgagee holding surplus proceeds of sale is subject to a
fiduciary obligation to do
nothing that would prevent the surplus from being
paid into the right hands.
- Even
assuming, without deciding, that Eve J's construction of section 21(3) of the
1881 English legislation is correct, there is a significant difference between
it and section 58(3) RPA . The requirement of section 58(3) for the
proceeds to be paid "thirdly, in payment of subsequent mortgages, charges or
covenant charges (if any) in the order of their priority" refers to payment
of amounts, while section 21(3) of the English legislation requires payment of a
person identified by a particular description; "the person entitled to the
mortgaged property, or authorised to give receipts proceeds of the sale thereof"
. That is a fundamental difference for present purposes. In light of it, the
conclusion arrived at in Re Thomson's Mortgage would not be arrived at if
the mortgages in question were RPA mortgages, and the order of
application was decided (at least in the first instance, before any equitable
modification) by section 58(3) RPA .
PART C - INTERRELATIONSHIP OF SECTION 58(3) AND EQUITABLE OBLIGATIONS
- Re
Morrison; Bennell v Smith (1962) Tas SR 337 arose when a registered first
mortgagee of Real Property Act land exercised a power of sale. The
mortgagor having in the meantime become bankrupt, the first mortgagee paid the
surplus proceeds
beyond its debt to the Official Receiver. A moneylender,
Bennell, had an unregistered second mortgage over the land. The Official
Receiver had notice at the time he received the surplus, that the moneylender
claimed to have an unregistered mortgage. Crawford
J, having held that the
unregistered mortgage conferred a right of property that did not vest in the
Official Receiver upon a sequestration
order being made, held that the second
mortgagee was entitled to be paid the secured debt out of the funds held by the
Official Receiver.
- At
the relevant time, section 54 Real Property Act 1862 (Tas) was in
terms not materially different, for present purposes, to section 58(3) RPA
. Crawford J said, at 343-4:
"A sale by a mortgagee constitutes the mortgagee, a trustee of the surplus
proceeds ( Wilson v Tooker (1714) 5 Bro PC 193; Banner v Berridge
(1881) 18 Ch D 254; Weld-Blundell v Synott [1940] 2 KB 107).
Mr Bushby, counsel for the Official Receiver, claimed otherwise. He claimed
that Bennell's only right, now, was a statutory right
to damages against the
first mortgagee under [the Tasmanian equivalent of s 58(3)].
In my opinion the words used in the section that the money, 'shall be
applied' does not alter the position that in equity the mortgagee
is a trustee
in respect of the proceeds of sale. It follows that Bennell has the right to
follow moneys wrongfully applied or to
which he has any right in equity into the
hands of the Official Receiver, particularly as the Official Receiver had notice
of the
existence of Bennell's mortgage before he received the money. It is plain
that a person entitled in equity, such as Bennell (subject
to the questions of
uncertainty and illegality) is entitled to an order in equity against the
Official Receiver, that he account
for the money sufficient to satisfy his
security."
This decision was not based upon the equivalent of section 58(3) applying
directly to the Official Receiver. Rather, it is based on the Official Receiver
being bound by the trust obligations of
the selling mortgagee concerning the
surplus. However neither does it decide that someone other than a selling
mortgagee into whose
hands surplus sale proceeds come is not within the scope of
the section. While the decision upheld the right of the unregistered
mortgagee
to be paid second in priority, that right arose as a matter of an equitable
overlay to the operation of the section, not
as a matter of the section on its
proper construction applying to unregistered mortgages.
- In
Re Murrell; Ex parte Official Trustee in Bankruptcy [1984] FCA 314; (1984) 57 ALR 85,
Smithers J considered a situation where a registered first mortgagee had
exercised a power of sale, and paid half the surplus to
the Official Trustee in
the bankruptcy of one of the two mortgagors. The two mortgagors had given an
unregistered charge over the
land to Esanda, and there was also an equitable
purchaser's lien over the land relating to a deposit paid by an intending
purchaser
of the land under a contract for sale that had not proceeded. After
the bankruptcy had ended, the bankrupt claimed entitlement to
be paid the moneys
held by the Official Trustee, with no deduction relating to any interests of
Esanda or the intending purchaser
of the property. His contention was that
section 77(3) Transfer of Land Act 1958 (Vic) contained mandatory
and unambiguous provisions, that the "subsequent mortgages and charges"
referred to in it were exclusively registered mortgages and charges, and
thus the Official Trustee had a statutory duty to pay the
surplus to him. The
only difference between section 77(3) of the Victorian Act and section 58(3)
RPA was that section 77(3) made express provision for the payment of the
residue to be made to the mortgagor, or into court, under the
provisions of
section 69 Trustee Act 1958 (Vic), and (as explained earlier at
[118]) that difference is not a material one.
- Without
deciding that question of construction of the statute, Smithers J rejected that
argument, at 90, saying:
"On their face the provisions of s 77(3) are mandatory. Nevertheless where
there were in fact subsisting equities in the proceeds of sale which a Court of
Equity would recognize
and enforce it is difficult to contemplate that, while
the surplus proceeds are in the hands of a mortgagee, a Court of Equity would
not give the equitable owners access to it."
- After
citing the passage from Hope v Hope that I have set out at [86] above,
Smithers J concluded at 91-2:
"...while the surplus was in the hands of the mortgagee it was subject to the
enforceable equitable interest of the party having such
interests, in priority
to the interests of the mortgagor.
It is unnecessary for the purposes of the Torrens system that provision be
made for the payment to a mortgagor of a sum of money being
the proceeds of an
interest in land in respect of which the mortgagor had given security to persons
who had given valuable consideration
therefor to him. The notion that for the
purpose of maintaining the purity of the register Parliament might, in effect,
abrogate
lawful interests arising from transactions entered into in good faith
is unacceptable. It is not the purpose of the Torrens system
as exemplified in
the TLA to destroy, as between a registered proprietor and a person doing
business with him, an equitable interest
created by the registered proprietor in
the ordinary course of business. To destroy such an interest where it was an
encumbrance
on the land subject to a mortgage pursuant to which a power of sale
had been exercised, but not otherwise, would be remarkable indeed.
The section
may be construed therefore as operating subject to valid claims of third persons
against the mortgagor, in respect of
a surplus of proceeds from a sale of the
property by the mortgagee, as exist according to law. Where a construction
consistent with
this view is open it should be adopted. It appears to me that
the provision for payment into court at the option of the mortgagee
is made to
deal with cases in which there are conflicting claims to a surplus in the hands
of a mortgagee. There is, therefore, no
burden on a mortgagee who is faced with
such claims.
To give to s 77(3) a mandatory force according to its literal terms would
create difficulties where, for instance, the mortgagor had assigned for value
his interest in the surplus arising from the mortgagee's sale. An assignee could
surely step into the shoes of the mortgagor although
not within contemplation of
the literal terms of the section. The view adopted by Wilson J, appears to me to
be tenable and correct."
- It
is noteworthy that Smithers J held that the equities attached to the surplus
even when it was in the hands of the selling mortgagee
- it was not a matter of
letting the order of application of funds laid down by the section run its
course, and then imposing the
equities on the person who then ended up with the
money.
- Bank
of New South Wales v Adams [1982] 2 NSWLR 659 arose from some irregular
conveyancing. An intending purchaser of land took an assignment of a registered
first mortgage that the
intending vendor had given, but the intending purchaser
never became registered proprietor. At a time when there was a registered
second
mortgage on the property, the first mortgagee sold the land in purported
exercise of a power of sale in the first mortgage.
Acting on his client's
instructions, the solicitor for the first mortgagee had remitted the entire
purchase price, after expenses,
to the first mortgagee. Helsham CJ held the
first mortgagee liable to account to the second mortgagee for the amount
properly owing
to the second mortgagee. At 663 Helsham CJ in Eq said that
section 58(3) places on a selling mortgagee:
"... a duty ... to apply it in payment to certain persons (if there is an
excess) and it gives a right to such persons to be paid
out of that particular
sum of money. Although it is an involuntary duty and obligation imposed on a
person with respect to property
received by him, this does not prevent equity
from placing a trust responsibility upon the person who receives the proceeds of
sale.
I think equity would operate in that fashion with respect to the proceeds
of a mortgagee's sale in order to supplement the law for
the protection of
subsequent mortgages."
- While
the Court of Appeal in Adams v Bank of NSW set aside the judgment against
the first mortgagee, it did so because the second mortgagee, unnecessarily, had
put its claim as a
claim to be paid a specific sum of money that it asserted was
the amount secured by its mortgage. As Hutley JA said at 299,
"The [second mortgagee] took upon itself the burden of proof that there was a
surplus, whereas, if an order that the appellant account
as trustee for [the
second mortgagee, the registered proprietor, and a first mortgagee who had not
been sued] had been sought, the
[selling first mortgagee] would have had to
produce his accounts."
- The
evidence was such that the Court could not be satisfied that there was a surplus
at all, let alone a surplus of the amount for
which Helsham CJ in Eq had entered
judgment. The Court of Appeal did not disapprove the aspect of the judgment of
Helsham CJ in Eq
that I have quoted, and indeed the approach of the Court of
Appeal is consistent with it. It provides an example of how equity intervenes
to
impose an obligation on whoever is at any time holding proceeds of a mortgagee's
sale that are surplus to their own entitlement.
- In
Adams v Bank of NSW Moffitt P said, at 290:
"It is the mortgagee as vendor who receives the money. For s 58(3) to
operate, a division of the money received has first to be made. The first call
on it is to meet the expenses incurred by the first
mortgagee in selling the
property. Then the mortgagee retains the amount of money owing to him as
mortgagee and in this case mortgagee
in possession. Then finally, as the person
who has received the money, he has to account for any residue to the persons
entitled.
If on its true construction the section imposes a trust, it is the
first mortgagee as vendor who is and has the obligations of a
trustee. There is
nothing in s 58(3) which places on others an obligation where none is placed
under the general law eg where there is a trust under a settlement. A solicitor
by receiving the money from a client who is the trustee and accordingly puts it
in a separate account, namely an account exclusively
for the client trustee,
does not himself become a trustee of the money in either class of trust. He is
neither required nor entitled
to inquire into the rights of beneficiaries to the
trust money. He is neither entitled nor bound to take steps to ensure that the
money is dealt with for the benefit of such beneficiaries."
- The
purpose of those remarks was to make clear that the solicitor for the first
mortgagee, who received the proceeds of sale into
his trust account and was
thereby bound to disburse them in accordance with his client's directions, did
not thereby become a trustee
bound by section 58(3). The sentence "there is
nothing in s 58(3) which places on others an obligation where none is placed
under the general law" is carefully written. As, under the general law, a
mortgagee subsequent to a selling mortgagee, who receives part of the proceeds
of sale, owes an equitable obligation to mortgagees subsequent to him and to the
mortgagor concerning the manner of disposition of
any surplus, that remark is
not inconsistent with the construction of section 58(3) that I have adopted.
- The
appellants in Bofinger were guarantors, who had paid part of the debt
secured by the first mortgagee's mortgage. The High Court held that the
appellants
were, to the extent of their payment, subrogated to the first
mortgagee's rights, and to that extent (at [79]):
"... the first mortgagee was required by equity to account for the net
surplus to the appellants. That obligation was imposed upon
the enjoyment by the
second mortgagee of its entitlement under s 58(3) of the RP Act ."
- This
provides another illustration that the way in which section 58(3) interacts with
equitable principles is not that section 58(3)
is permitted to operate in its
entirety, and an equitable personal obligation is then imposed on a person in
whose hands money ends
up - rather, equity intervenes in the operation of
section 58(3) to prevent the statute being used in an inequitable way.
Application of Principles to Facts of This Case
- I
conclude that Resi, as the person into whose hands the Surplus Proceeds had
come, was subject to a fiduciary duty to the Esbers,
and also a fiduciary
obligation to Kimberley, to account for the disposition of the Surplus Proceeds
(in the sense of informing them
what has become of the Surplus Proceeds). It was
also subject to a fiduciary duty to account to them, in the sense of paying to
each
the amount to which each was respectively entitled. I also conclude that in
the circumstance of the present case Resi was also subject
to an equitable
obligation not to prejudice the right of both Kimberley and the Esbers to
receive that part of the Surplus Proceeds
to which each was respectively
entitled. In the circumstance that Kimberley was owed nothing under its
equitable mortgage each of
these duties owed to the Esbers was breached when
Resi paid Kimberley the whole of the Surplus Proceeds on the terms it did. The
Esbers were entitled to equitable compensation for each breach.
- While
the equitable obligations that Resi owed to Kimberley might, in some different
factual situations, have had the effect of modifying
Resi's obligation under
section 58(3) to pay the whole of the Surplus Proceeds to the Esbers, in the
circumstance that Kimberley
was owed nothing no such modification took place.
- Though
upholding the Notice of Contention has the effect that the judge's statement
that the same result is arrived at under section
58(3) as under general
equitable principles operates in a slightly different way to the way that the
judge intended, it is still
correct to say that the same result is arrived at
under section 58(3) as would be arrived at by general equitable principles.
An Aspect of Ground 1
- Part
of ground 1 of the Amended Notice of Appeal contends that the judge was wrong in
finding at [56] "that section 58 [ RPA ] imposes a fiduciary obligation on a
subsequent mortgagee who receives more than is owed under the covenant(s)
secured by that subsequent mortgage." What the judge said at [56] was:
"The second submission did not identify any juridical basis for why the
second defendant was not in a fiduciary position in relation
to the disputed
amount, whether or not the first mortgagee incorrectly paid it to the second
defendant. Clearly it was in a fiduciary
position. It was a mortgagee who was
paid more than it was entitled to retain and it had no beneficial interest in
the excess (in
this case the totality). It was in a position no different to a
first mortgagee who exercises a power of sale where the purchase
price received
is more than the mortgage debt. I accordingly do not accept the second
submission."
- That
is not a finding that the fiduciary obligation arises from section 58. I see no
error in what the judge there said.
PART D - OTHER MATTERS
Failure to Prove Loss?
- In
its Second Amended Commercial List Response, Resi pleaded that the Esbers
"have suffered no loss, or alternatively they have not suffered the loss
alleged" . The particulars to that allegation made clear that it was based
upon the Esbers having a judgment against Kimberley for the Surplus
Proceeds.
There was no evidence in the court below concerning whether Kimberley would be
likely to pay the judgment debt in whole
or part.
- Mr
Burton submits that, in the absence of proof about the ability of Kimberley to
satisfy the judgment debt, the Esbers' claim should
have failed, or
alternatively should have been for a lesser amount than that actually awarded,
namely the amount not paid by Kimberley.
- Resi's
Statement of Issues in the court below included as issues:
"6 Have the plaintiffs suffered a loss for which Resi is liable?
7 If so, what is the loss?"
- However
Resi addressed no written submission to those issues. When Resi's counsel in the
court below (not the same counsel who appeared
on the appeal) was invited to
give the judge a brief opening, he did so, but said nothing about those issues.
Nor was anything said
about them later in the trial.
- Mr
Parker submits that the point is one that cannot be taken on appeal, because,
had it been taken below it might possibly have been
met with further evidence:
Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1; Water Board v Moustakas
[1988] HCA 12; (1988) 180 CLR 491.
- Mr
Burton's submission is to the effect that the Esbers failed to prove an
essential element of the case that they as plaintiffs were
required to prove to
succeed, and that was in issue on the pleadings. That is the type of point that,
absent any special reason why
not, a defendant to proceedings who has lost at
first instance can raise for the first time on appeal: Jovic v Lamont
[2007] NSWCA 47 at [67]- [73] and cases there cited.
- One
special reason why this situation might not obtain is if, notwithstanding the
pleadings, there has been a concession in the court
below that dispenses with
the need to prove an element of the cause of action. There was such a concession
in the present case. The
judge stated it at [23] as that Resi "accepts that
it is liable to pay equitable compensation if what it did was not in compliance
with s 58(3)" , and referred to it again at [48] in similar terms. The
transcript at 62-64 bears out his Honour's understanding of the concession,
and
also shows that the liability in question was to repay the whole amount
that Resi had paid to Kimberley. At transcript 57, the judge put to counsel for
Resi the way the judge understood Resi's position.
The judge's statement
included:
"You don't seek to establish that Kimberley was owed any money. In fact you
accept that Kimberley was not owed any money but you say
there was no breach by
your client of any trust obligation to the plaintiff or any obligation where
your client was presented with
a document albeit unregistered in Real Property
mortgage form in favour of Kimberley as the mortgagee and was called on by that
mortgagee
to pay the proceeds in its hands over to it?"
The response by Resi's counsel was "Yes" .
- At
transcript 74 the judge said to counsel for the Esbers, that Resi's counsel
"doesn't seek to challenge that there was no debt" . Resi's counsel never
corrected that statement.
- Mr
Parker also submits that the point is in any event unsound. I agree. The
obligation that Resi owed to the Esbers included an obligation
to account to
them for the Surplus Proceeds. In circumstances where there is no doubt about
the amount that Resi should have paid
to the Esbers, and no multiplicity of
dealings between the Esbers and Resi that might give rise to more than one item
that should
be taken into a statement of the balance of account between them,
the appropriate remedy is to require Resi to make the payment that
it failed to
make, together with interest for the period during which it failed to make the
payment. In the present case, the legal
costs of pursuing Kimberley have also
been added to the judgment amount. That addition is justified in principle, as
equitable compensation
for Resi's breach of its fiduciary duty. Adding that item
is consistent with the basis on which equitable remedies are granted, of
making
whatever orders are needed, crafted to meet the circumstances of the particular
case, that will so far as is practicable undo
any breach of equitable obligation
that has occurred.
- The
remedy that the Esbers obtained by suing Kimberley is not inconsistent with the
remedy it seeks against Resi. Rather, the Esbers
are entitled to obtain judgment
against both Kimberley and Resi, for the full amount of their respective claims
against each. Having
obtained both judgments, it is a matter for them to choose
which judgment they will seek to execute first. The rule against double
satisfaction will then ensure that, as a result of those two judgments, the
Esbers do not obtain more than the amount of their actual
loss. However, If they
actually obtain money as a consequence of executing one of the judgments, they
can then execute the other
judgment only to the extent that they have not
received payment under the first: Baxter v Obacelo Pty Ltd [2001] HCA 66; (2001) 205 CLR
635 at [39], [47].
- Though
Baxter was a case concerning alternative judgments in tort against joint
tortfeasors, the rule against double satisfaction is "universal" :
Haines v Bendall [1991] HCA 15; (1991) 172 CLR 60 at 63; Baxter at [57]. Whether
the source of the rule against double satisfaction is in equity ( United
Australia Limited v Barclays Bank Limited [1941] AC 1 at 20; CSR Limited
& v Maree Anne D'Arcy [1999] NSWCA 216 at [45] per Mason P (with whom
Beazley JA and Brownie AJA Agreed); Baxter v Obacelo at [58], [64] per
Gummow and Hayne JJ (cf [89] per Kirby J); Bracks v Smyth-Kirk [2009]
NSWCA 401; (2009) 263 ALR 522 at [161] per Young JA) or in the court's power to
prevent an abuse of its process ( Registrar-General (NSW) v Behn [1981] HCA 36; (1981)
148 CLR 562 at 569), it would apply as between the judgments that the Esbers
have obtained against Kimberley and against Resi. These considerations
are a
sufficient reason, quite independent of the concession made below, why it is
incorrect to argue that the failure of the Esbers
to prove the amount they are
likely to receive under their judgment from Kimberley is a reason why they
should not receive a judgment
in the present proceedings for the full amount
concerning which Resi has wrongly failed to account to them.
Disentitling Delay?
- Mr
Burton submits that, if it is the case that Kimberley can no longer pay or no
longer pay except to a limited extent, then that
situation has been brought
about by the Esbers taking no action for six years, notwithstanding their
knowledge, on 28 February 2002,
that the money was about to be paid to
Kimberley, and, soon after, that it had actually been so paid.
- There
seem to be two separate arguments intertwined in this submission. The first is
to the effect that the Esbers are the authors
of their own loss, because they
failed to seek relief from the court to protect the Surplus Proceeds pending a
determination of their
claim. Such a contention was explicitly raised in para 6B
of the Second Amended Commercial List Response in the court below. It was
also
referred to at [40] of Resi's written submissions below. However the concession
by Resi's counsel (para [178] above) dispensed
with it as a live issue.
- In
any event, the argument is unsound. For Resi to pay the Surplus Proceeds to
Kimberley was a breach of its duty to the Esbers. The
victim of such a breach of
duty is not denied a remedy for that breach of duty on the ground that it failed
to seek interlocutory
relief to prevent the breach of duty occurring, or to
require the recipient to set aside in a separate account the money that was
wrongfully paid to it.
- The
second argument in effect raises a laches defence. No such argument was
foreshadowed in the Second Amended Commercial List Response
of Resi, in its
Statement of Issues, in its Outline of Submission. Nor was it made in oral
argument in the court below. That the
point, if taken below, could have been met
by evidence (para [176] above) is a sufficient reason for not permitting it to
be taken
at this stage.
Wrongful Inclusion of Costs of Pursuit of Kimberley?
- Mr
Burton points out that the Esbers' litigation against Kimberley occurred in the
self-same proceedings as those that Hammerschlag
J decided. While admittedly the
expenditure occurred in litigation that was a determination of separate issues
in those proceedings,
and an appeal from one of those separate issues, it was
nonetheless in the same proceedings. He submits that in deciding which of
the
parties to proceedings should bear the costs of those proceedings, the court
should proceed by exercising the discretion concerning
costs that is conferred
by section 98 Civil Procedure Act 2005 . He submits that there has
been no attempt to identify the costs that the Esbers incurred concerning the
issue of whether any money
was secured by the Kimberley mortgages (and thus to
what extent Kimberley had received an overpayment that it was obliged to pay
to
the Esbers) as opposed to the other issues that McDougall J determined. He
submits that the costs incurred in determining whether
any money was secured by
the Kimberley mortgage, and if so how much, ought not be payable by Resi because
those questions would have
had to be determined even if Resi had paid the money
into court rather than paying it to Kimberley.
- Resi's
counsel in the court below made a concession on this topic. The judge recorded
it in [24] of his reasons:
"The second defendant also accepts that if the Esbers are otherwise entitled
to succeed, the equitable compensation to which they
are entitled includes the
costs of its unsuccessful pursuit of Kimberley. There is, however, an issue
between the parties as to what
should properly be included in those costs. The
Esbers chose to have a separate hearing against Kimberley before finally
pursuing
the second defendant. Cleary there was some benefit in doing so because
they established (and it is now not disputed) in that hearing
that nothing was
owed by them to Kimberley. But the second defendant says that costs would have
been saved if the Esbers had chosen
to have one hearing against both. The
parties are agreed the exercise of quantifying the costs should be referred to a
referee for
investigation and report."
- That
concession was made in the course of a lengthy discussion between Resi's counsel
and the judge on 7 December 2009, transcript
9-11. That discussion included:
"HIS HONOUR: ... You say that if the plaintiff succeeds here part of its loss
and damage attributable to the second defendant's breach
is the cost of the
plaintiff incurred in pursing Kimberley, but what those costs are, having regard
to the fact that two sets of
proceedings were run when all issues could have
been determined in one hearing, is a matter for assessment.
COUNSEL: Yes
...
HIS HONOUR: What that really means is that you say that the costs that they
would have been incurred in pursuing you and Kimberley
in the same proceedings
would have meant that the costs against you here may not be as high as the costs
there, that there might
have been some savings if these proceedings had run
together?
COUNSEL: Yes.
...
HIS HONOUR: ... You want me to refer out the quantum of the loss but on the
footing that you accept that if the plaintiff succeeds
here, whatever loss and
damage it suffered as a consequence of pursuing Kimberley in separate
proceedings is to be referred?
COUNSEL: Yes."
- The
orders that the judge made included an order referring to a referee, who was
expert in costs determinations, a question:
"What is the amount representing the costs properly and reasonably incurred
by Marcel Esber and Casanda Pty Ltd in their unsuccessful
pursuit of Kimberley
Securities Ltd; including
(a) in these proceedings; 50110 of 2006; and
(b) in the NSW Court of Appeal; 40150 of 2008."
- That
order was in accordance with the way the case had been conducted. It cannot now
be the basis for altering the judgment on appeal.
Orders
- I
propose that:
(1) Leave to appeal be granted, if necessary;
(2) The appeal be dismissed with costs.
- If
the effect of those orders is that some of the costs of the first-instance
proceedings have not been provided for, the parties
are free to approach
whichever of McDougall J or Hammerschlag J determined the questions concerning
which costs have not been provided
for.
- MACFARLAN
JA : I agree with Campbell JA.
- SACKVILLE
AJA : I have had the privilege of reading the detailed judgment prepared by
Campbell JA. I agree with the orders proposed by his Honour.
- The
present case, unlike Adams v Bank of New South Wales [1984] 1 NSWLR 285
and Bofinger v Kingsway Group Ltd [2009] HCA 44; 239 CLR 269, does not
concern the obligation of a first mortgagee to account for the proceeds of sale
derived from the exercise of the mortgagee's
power of sale. This case concerns
the obligation of a registered second mortgagee to account for surplus funds
that have come into
its hands following the sale of the mortgaged property by
the first mortgagee.
- As
Campbell JA has explained, the first mortgagee (" Permanent Trustee ")
paid to the second mortgagee (" Resi ") the surplus funds remaining after
Perpetual Trustee had exercised its power of sale. Resi, after appropriating the
amount due to
it under the second mortgage, held what Campbell JA has described
as " the Surplus Proceeds ". Resi paid the Surplus Proceeds to an
unregistered third mortgagee (" Kimberley "), which, in fact, was owed no
moneys. The mortgagors (" the Esbers ") succeeded in their claim that
Resi was obliged to compensate for its failure to pay the Surplus Proceeds to
them, the moneys paid
to Kimberley being irrecoverable.
- Campbell
JA concludes that s 58(3) of the Real Property Act 1900 (NSW) (" RP
Act") applies to a non-selling mortgagee (in this case, Resi). However, his
Honour also concludes that s 58(3) does not oblige a non-selling mortgagee to
account to a subsequent unregistered mortgagee. This is so because the direction
in s 58(3) that the purchase money arising from the sale of the property be
applied to the " payment of subsequent mortgages ", applies only to
subsequent registered mortgages and does not include subsequent unregistered
mortgages.
- Campbell
JA further concludes that, independently of s 58(3), Resi was obliged in
accordance with equitable principles to account for any moneys in fact due to
Kimberley as the unregistered
third mortgagee. Since Kimberley was not owed any
moneys under its unregistered third mortgage, s 58(3) required Resi to account
to the Esbers, as the mortgagors, for the balance of the Surplus Proceeds.
- In
Bofinger (at 287 [35]), the High Court approved the holding in Adams v
Bank of New South Wales that s 58(3) is to be:
"read in a manner consistent with the equitable duty of the first mortgagee
to account to puisne mortgagees as trustee for any surplus."
- The
equitable principles applied in Bofinger were not confined to the
specific case of a first mortgagee being held liable to account to puisne
mortgagees. In Bofinger itself, the first mortgagee paid surplus moneys
resulting from the exercise of a power of sale to a registered second mortgagee.
The
first mortgagee was held liable to account to guarantors who had partially
paid out the first mortgage and had thereby acquired priority
over subsequent
mortgagees under the doctrine of subrogation. The High Court held (at 290 [49])
that the first mortgagee:
"was obliged in good conscience both to account to [the guarantors] the
surplus moneys and securities it held and not to undertake
or perform any
competing engagement in that respect without prior release by the [guarantors].
These obligations were fiduciary in
character."
- On
applying the principles in Bofinger , it makes no difference to the
present case whether s 58(3) of the RP Act applies to a non-selling
mortgagee. If it does, Bofinger holds that the sub-section is to be
construed in conformity with equitable principles which oblige Resi, the
non-selling mortgagee,
to account to the Esbers, the mortgagors beneficially
entitled to the Surplus Proceeds. If s 58(3) does not apply to a non-selling
mortgage, equitable principles nonetheless require Resi to account to the
Esbers, as the persons
beneficially entitled to the Surplus Proceeds.
- I
agree with Campbell JA that Resi was subject to a fiduciary duty to account to
the Esbers for the Surplus Proceeds (see at [167]).
- In
these circumstances, it is not necessary to decide whether s 58(3) of the RP
Act applies to a non-selling mortgagee. Nor is it necessary to decide
whether the order of priority set out in the sub-section is intended
to cover
the position of a subsequent unregistered mortgagee. I prefer to express no
opinion on these questions.
- I
otherwise agree with Campbell JA.
**********
Amendments
24 May 2011 Correction of the name of the first respondent Paragraphs:
Coversheet
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