FEDERAL COURT OF AUSTRALIA
Naxatu Pty Limited v Perpetual Trustee Company Limited [2012] FCAFC 163
IN THE FEDERAL COURT OF AUSTRALIA | |
NAXATU PTY LIMITED ACN 002 197 131 Appellant | |
AND: | PERPETUAL TRUSTEE COMPANY LIMITED ACN 000 001 007 Respondent |
DATE OF ORDER: | |
WHERE MADE: |
THE COURT ORDERS THAT:
1. The appeal be dismissed; and
2. the appellant pay the respondent’s costs of the appeal.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011
NEW SOUTH WALES DISTRICT REGISTRY | |
GENERAL DIVISION | NSD 1107 of 2011 |
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA |
BETWEEN: | NAXATU PTY LIMITED ACN 002 197 131 Appellant
|
AND: | PERPETUAL TRUSTEE COMPANY LIMITED ACN 000 001 007 Respondent
|
JUDGES: | DOWSETT, JAGOT AND YATES JJ |
DATE: | 16 NOVEMBER 2012 |
PLACE: | SYDNEY |
REASONS FOR JUDGMENT
DOWSETT J:
1 I have read the reasons prepared by Jagot J. As her Honour has set out the relevant evidence in detail, I need not do so.
INTRODUCTION
2 This case concerns the relative priorities of certain mortgages over strata units in a development at Camperdown in New South Wales (the “development”). At all material times the developer and owner of the development was Sterling Estates Development Corporation Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (“Sterling”). The first respondent (“Perpetual”) holds, or has held first mortgages over numerous strata units in the development (the “Perpetual properties”). On 7 August 2005 Perpetual acquired the relevant mortgages from Permanent Trustee Australia Ltd (“Permanent”). In advancing funds and taking the mortgages, Permanent had acted on behalf of other parties. They may conveniently be described as “Challenger”. Perpetual now acts as mortgagee on behalf of Challenger. Five of the Perpetual properties are also mortgaged to the appellant (“Naxatu”) as second mortgagee. They are Lots 25, 65, 71, 82 and 83 on SP 67386, (the “Naxatu properties”). Lot 78 on SP 67386 (“Lot 78”) was, at one stage also mortgaged to both Perpetual and Naxatu as first and second mortgagees respectively. It was sold on 27 July 2006 in the course of Perpetual’s realization of its securities, following default by Sterling. As far as I can see, Lot 78 is not presently relevant, although the proceeds of sale would no doubt be included in any account taken as between Naxatu and Perpetual.
3 On 2 April 2004 Permanent, Bridgecorp and Sterling entered into a deed of priority (the “deed of priority”). Pursuant to that deed twenty-four of the Perpetual properties (the “Bridgecorp properties”) were also mortgaged to Bridgecorp Finance Limited (Receiver and Manager Appointed) (In Liquidation) (“Bridgecorp”) as second mortgagee. At that time, both Bridgecorp and Permanent proposed to make separate substantial advances to Sterling. By the deed of priority, the parties agreed that in any realization of the Bridgecorp properties, Permanent’s debt, to the extent of $9,353,230, interest and enforcement costs were to take priority over Bridgecorp’s debt. The latter debt was to take priority over any other moneys owed to Permanent. None of the Bridgecorp properties has ever been mortgaged to Naxatu.
4 For the sake of clarity, I stress that the Perpetual properties include the Naxatu properties, the Bridgecorp properties and other properties.
HISTORY
5 Neither Perpetual nor Naxatu was the original holder of its respective mortgages. Naxatu acquired its interests as second mortgagee by assignment from GPC Custodian Pty Limited (“GPC”), pursuant to two transfers of mortgage, one dated 4 August 2006 and the other, undated. GPC had obtained the mortgages by assignment from Macquarie Australia Management Services Pty Ltd (“Macquarie”). These mortgages were originally granted by Sterling in July 2001. Naxatu paid only a nominal amount for the transfers. The evidence does not demonstrate the amount owing and secured on the mortgages at the time of these proceedings or at any other relevant time. On appeal Naxatu seeks to remedy this apparent deficiency by leading further evidence. I shall deal with that matter at a later stage.
6 Perpetual acquired its mortgages from Permanent by transfers dated 7 August 2005. Sterling had mortgaged the properties to Permanent by means of two documents dated 10 September 2002. The mortgages were to secure moneys owing and further advances, including interest and expenses. The original advances were in the amounts of $2,016,000 and $1,106,000. Subsequent advances have been made. On 11 September 2002 Macquarie, Permanent and Sterling agreed to postpone Macquarie’s securities to those held by Permanent (the “postponements”). Thus Perpetual, as successor in title to Permanent now ranks as first mortgagee over the Perpetual properties, including those in respect of which Naxatu ranks as second mortgagee. I have already explained the respective positions of Perpetual and Bridgecorp in relation to the Bridgecorp properties. I shall refer to the securities held by Perpetual, Naxatu and Bridgecorp as each entity’s “mortgages”. Permanent/Perpetual’s mortgages were created by two documents. Naxatu’s mortgages were created by one document and transferred to it by two documents. From time to time, my use of the singular and the plural in connection with the documentation may appear to be, or may be inconsistent or inaccurate.
THE PROCEEDINGS
7 Naxatu commenced proceedings against Perpetual in this Court, purportedly pursuant to s 423 of the Corporations Act 2001 (Cth) (the “Corporations Act”). The application focuses on the dealings between Permanent and Perpetual on the one hand, and Bridgecorp on the other, as those dealings might affect the Naxatu properties. However Naxatu also seeks discharge of Perpetual’s mortgages over the Naxatu properties and other associated relief. It seems that Naxatu impugns various aspects of Permanent and Perpetual’s conduct as first mortgagee of the Perpetual properties, including Permanent’s entering into the deed of priority and Permanent’s compliance with it. Perpetual commenced proceedings against Naxatu and Bridgecorp in the Supreme Court of New South Wales. Those proceedings were cross-vested to this Court, apparently in the expectation that they would proceed in tandem with Naxatu’s proceedings. Bridgecorp cross-claimed against Perpetual, Permanent and Naxatu. It pleaded that all of the Bridgecorp properties had been sold, and that the proceeds exceeded the amount to which Perpetual was entitled in priority to Bridgecorp. It sought an account and other relief. The cross-claim was settled prior to trial. Pursuant to the terms of settlement Perpetual was to pay to Bridgecorp the sum of $1,300,000 in full and final discharge of all claims against Perpetual and Permanent. Bridgecorp is not a party to this appeal.
8 Naxatu’s claim is, in many respects, unclear. On appeal it has focused on protection of the Naxatu properties which, as I understand it, remain unsold. Naxatu accepts that the moneys advanced by Permanent on 10 September 2002 with interest and expenses, must be repaid with priority over moneys advanced by Macquarie prior to 11 September 2002, but submits that all such moneys have been repaid. Naxatu submits that amounts advanced by Permanent after 11 September 2002 rank after any moneys advanced by Macquarie and now payable to Naxatu. However Naxatu’s counsel said, during oral argument, that in fact all moneys said to be owing to Perpetual have been repaid, save for the amount paid by Perpetual to Bridgecorp and expenses associated with the realization of assets. According to Naxatu, Perpetual proposes to recover those amounts from the proceeds of the proposed sale of the Naxatu properties. Naxatu disputes Perpetual’s right to recoup the amount paid to Bridgecorp from that source. It also alleges that various instances of misconduct or neglect in Perpetual’s realization of the Perpetual properties have caused losses which should go in reduction of any claim which Perpetual might otherwise have against the Naxatu properties. One such allegation concerns the liability of Perpetual for goods and services tax (“GST”) on the proceeds of realization of the Perpetual properties. Naxatu submits that Perpetual accounted to the Commissioner of Taxation on a basis which was unnecessarily disadvantageous to Perpetual, and therefore unduly increased the amount which it seeks to recoup from the proceeds of sale of the Naxatu properties.
9 In summary, Naxatu seeks to establish that all moneys properly owing to Perpetual have been paid, or can be paid without recourse to the Naxatu properties. In order to establish that proposition, it asserts:
that advances made by Permanent after 11 September 2002 take priority after moneys owed to Naxatu and secured on the Naxatu properties;
that in entering into the Bridgecorp transaction, Permanent breached a duty owed to Naxatu;
that in paying moneys to Bridgecorp in settlement of its claim arising out of that transaction, Perpetual breached a duty owed to Naxatu;
that in returning its GST liability on the sale of the Perpetual properties (or some of them) as it did, Perpetual breached a duty owed to Naxatu; and
that in numerous other respects in connection with such realization, Perpetual breached a duty owed to Naxatu.
Of these matters the last two were not addressed on appeal. However I suspect that in any accounting as between Naxatu and Perpetual, they will again be raised.
10 Naxatu effectively argues that each of these matters has the effect, in one way or another, of reducing the amount which Perpetual is entitled to receive from the proceeds of sale of the Perpetual properties. Naxatu anticipates that the result will be that there are presently no moneys owing to Perpetual, and that it should therefore release its first mortgage over the Naxatu properties, leaving Naxatu as first mortgagee of them.
NAXATU’S CLAIM
11 I have concluded that Naxatu’s application is misconceived, largely because it has not identified any basis upon which it can claim to have resort to the Perpetual properties, other than the Naxatu properties, for repayment of any moneys owing to it and secured on the Naxatu properties. Naxatu seems to assume that it is entitled to rank as second mortgagee over all of the Perpetual properties (particularly the Bridgecorp properties), or that Perpetual owes duties to it which are akin to those owed by a first mortgagee to a second mortgagee. Clearly, Naxatu is not the second mortgagee of any of the Perpetual properties other than the Naxatu properties. Hence some other basis must be found for Naxatu’s assertion that such duties are owed to it by Perpetual. The only attempt by Naxatu to identify any such basis appears to be contained in a document entitled “Statement in Clarification of Claim: Duties and Remedies”. The primary Judge did not refer to the document in his reasons, but I infer from the fact that it was filed shortly before Permanent’s defence, and that it is included in the appeal book, that it is in some way relevant to the appeal.
12 The document does not seem to distinguish clearly between the remedies which may be available pursuant to s 423 and the duties upon which Naxatu relies. There is some reference to s 420 of the Corporations Act. That section imposes upon a controller a duty, in exercising a power of sale, to obtain market value or the best price reasonably attainable. I do not understand Naxatu to challenge Perpetual’s conduct in this respect, at least on appeal. Otherwise the alleged duties seem to be those outlined in Part C of the document under the heading, “Synopsis of Duties relied on by Plaintiff”. The duties are too numerous to mention here. It is sufficient to say that with one exception, all of the duties are duties which a first mortgagee might well owe to a second mortgagee or to a mortgagor. However Naxatu advances no justification for imposing those duties upon Perpetual other than in connection with the Naxatu properties.
13 The exception is the third “duty”, namely the:
Duty to account for the proceeds of sale in respect of all securities realised purportedly for the purpose of discharging the first-ranking mortgage over [Naxatu’s] securities, including sales of 23 and 26 SP 71747 and 54 SP 71745.
14 Lots 23 and 26 on SP 71747 are two of the Bridgecorp properties. Lot 54 on SP 71745 was not subject to a second mortgage. See the judgment at first instance at p 12. (The paragraph numbering in this part of the judgment is a little difficult to follow.) The “first ranking mortgage” is, of course, that held by Perpetual. I do not immediately recognize any basis for the duties spelt out in that paragraph, although they may owe something to the doctrine of marshalling. I shall return to that matter at later stage.
SECTION 423
15 Section 423 of the Corporations Act provides as follows:
(1) If:
(a) it appears to the Court or to ASIC that a controller of property of a corporation has not faithfully performed, or is not faithfully performing, the controller's functions or has not observed, or is not observing, a requirement of:
(i) in the case of a receiver-the order by which, or the instrument under which, the receiver was appointed; or
(ii) otherwise-an instrument under which the controller entered into possession, or took control, of that property; or
(iii) in any case-the Court; or
(iv) in any case-this Act, the regulations or the rules; or
(b) a person complains to the Court or to ASIC about an act or omission of a controller of property of a corporation in connection with performing or exercising any of the controller's functions and powers;
the Court or ASIC, as the case may be, may inquire into the matter and, where the Court or ASIC so inquires, the Court may take such action as it thinks fit.
(2) ASIC may report to the Court any matter that in its opinion is a misfeasance, neglect or omission on the part of a controller of property of a corporation and the Court may order the controller to make good any loss that the estate of the corporation has sustained thereby and may make such other order or orders as it thinks fit.
(3) The Court may at any time:
(a) require a controller of property of a corporation to answer questions about the performance or exercise of any of the controller's functions and powers as controller; or
(b) examine a person about the performance or exercise by such a controller of any of the controller's functions and powers as controller; or
(c) direct an investigation to be made of such a controller's books.
16 The cases suggest that provisions of this kind are designed for “disciplinary” purposes, that is, as mechanisms for supervision by the Court of persons involved in the administration of insolvent estates. As much appears from the decision of McLelland J in Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434 at 438. In that case, his Honour considered a similar provision applying to liquidators, observing that:
Section 420 is concerned with aspects of the conduct of liquidators which are liable to attract sanctions or control for what might broadly be described as disciplinary reasons. Although the section applies to any liquidator it has particular significance in the case of a liquidator appointed by the court who is, in that sense, an officer of the court, and to a liquidator whose qualification for office is that he is a registered official liquidator or a registered liquidator with the public accreditation that such registration involves and who is in that sense a public officer.
In such circumstances the legislature may well have taken the view that it is not in the public interest to limit the class of persons who might bring a complaint to the court of misconduct by a liquidator. The phrase “any person” must, I think, be taken to have its literal meaning. Therefore Northbourne has standing to make a complaint to the court under s 420.
17 In Hall v Poolman (2009) 75 NSWLR 99 at [67]-[68], the Court of Appeal said, also concerning a section dealing with liquidators:
67 The court’s supervisory role is recognised in the frequently cited observations of McLelland J in Northbourne Developments (at 438), where his Honour said of the predecessor to s 536 that it “is concerned with aspects of the conduct of liquidators which are liable to attract sanctions or control for what might broadly be described as disciplinary reasons.” For subsequent applications of this approach, see, for example, Re Glowbind Pty Ltd (In Liq); Takchi v Parbery (at 217 [21]; 465 [21]), per Burchett AJ; Australian Securities and Investments Commission v Forestview Nominees Pty Ltd (Receivers and Managers Appointed) (2006) 236 ALR 652 at 656 [15]; 24 ACLC 1567 at 1570 [15]; Leslie v Hennessy (at 656 [4]); Australian Securities and Investments Commission v Edge (2007) 211 FLR 137 at 152 [48], per Dodds-Streeton J; Vink v Tuckwell, per Robson J.
68 The characterisation of the basis for intervention as “disciplinary reasons” is, as McLelland J said, “broadly” apt. Particularly with respect to the unfettered power in s 536(3), it is not appropriate to limit the power to a concept of impropriety. It extends at least to the full range of “duties” referred to in s 536(1)(a). Questions of skill and diligence, as well as questions of improper conduct or improper purpose, can give rise to “disciplinary reasons” in the sense that McLelland J was applying the concept (see, for example, the duties in ss 180, 181, 182 and 183 of the Corporations Act (Cth)).
69 One of the considerations relevant to the exercise of the discretion under each of the powers in s 536 is whether or not there is another appropriate remedy: see Leslie v Hennessy (at [6]). Accordingly, where an issue is raised as to whether a decision made by a liquidator should be reversed or modified, the appropriate procedure is under s 1321: see Belvista Pty Ltd v Murphy (at 630), per McLelland CJ in Eq: Re Glowbind (at 465 [21]), per Burchett AJ. Section 536 should not be used to assist a person engaged in litigation with a liquidator akin to discovery, at any rate where the litigation does not involve the kind of supervisory issues characterised by McLelland CJ as “disciplinary reasons”: see Re Bauhaus Pyrmont Pty Ltd ((In Liq) [2006] NSWSC 742 per Barrett J.
70 By reason of the historical origins of statutory regulation of corporate insolvency in general bankruptcy legislation, it has always been the case that the development of case law with respect to the supervision of liquidators has drawn upon the parallel case law arising in the courts’ supervision of trustees in bankruptcy. Thus, the exercise of the powers in s 536 and s 423 of the Corporations Act (Cth) can be informed by the case law for s 179 of the Bankruptcy Act 1966 (Cth).
18 At [76] the Court of Appeal referred to the decision of French J (as his Honour then was) in Macchia v Nilant (2001) 110 FCR 101 at [50]. That case concerned a provision dealing with trustees in bankruptcy. His Honour said:
Section 179 operates in aid of the Court’s supervision of trustees who are its officers. That operation, however, is subject to restraint against undue interference and to discretionary considerations including the practical benefit likely to be derived from the conduct of any inquiry. Like s 178, it may be invoked by a bankrupt after discharge and in part for the same reason, namely that the trustee’s powers continue in the various ways referred to by Merkel J at first instance in Cheesman. It may also be the case that the trustee should be held to account for conduct in the administration of the estate which has affected the bankrupt in some way. As is the case with s 178, it is not a vehicle for pressing claims for common law damages under the general law. That is a matter for a court of appropriate jurisdiction. In addition the court will also have in such cases the discretion to determine the utility of an inquiry and its likely outcomes. For “although the court is given a broad discretion under s 179 of the Act, that discretion must be exercised in the interests of the orderly administration of the bankrupt’s estate” … .
19 Naxatu’s reliance upon s 423 depends upon the definition of the term “controller of property of a corporation”. The term “controller” is defined in s 9 of the Corporations Act to include, in relation to property of a corporation:
(a) a receiver, or receiver and manager, of that property; or
(b) anyone else who (whether or not as agent for the corporation) is in possession, or has control, of that property for the purpose of enforcing a charge … .
There has been a recent minor amendment to the definition, but it is not relevant for present purposes.
20 The definition extends the role traditionally performed by courts in supervising liquidators and trustees in bankruptcy to include the supervision of receivers and mortgagees in possession. However it does not follow that all of the relief which a second mortgagee might seek against a first mortgagee should necessarily be sought pursuant to s 423. The Court may order an inquiry if it appears that a controller:
has not faithfully performed, or is not faithfully performing its functions; or,
has not observed, or is not observing a requirement of an instrument under which it entered into possession, or took control of the relevant property.
21 The Court may also order an inquiry if a person complains about an act or omission of a controller in performing or exercising its functions and powers. Naxatu asserts that Perpetual has not faithfully performed, or is not faithfully performing its duties. It also complains of acts or omissions by Perpetual in connection with performance of its functions and powers as mortgagee in possession.
22 The Court’s power to order an inquiry pursuant to s 423(1) is discretionary. In my view the Court should not generally order an inquiry for the sole purpose of enforcing individual legal or equitable rights. Such matters will generally be more efficiently dealt with by well-established procedures, in courts having appropriate jurisdiction. On the other hand, where the relevant conduct is likely to affect creditors or shareholders generally, or classes of creditors or shareholders, it may well be appropriate to proceed pursuant to s 423. Such a course may also be justified where there is reason to suspect serious misconduct. That is not the present case.
THE RULE IN HOPKINSON v ROLT
23 In submissions, Naxatu placed emphasis upon the decision in Hopkinson v Rolt (1861) 11 ER 829. That decision addressed the priority of a first mortgagee whose mortgage secured all moneys due, or to become due by the mortgagor, including further advances, as against a second mortgagee of whose mortgage the first mortgagee had notice prior to the making of the further advances. Broadly speaking, Hopkinson v Rolt establishes that in those circumstances, advances made by the first mortgagee, after notice, are deferred in priority to the second mortgagee’s debt. Reduced to its essentials, Naxatu submits that to the extent that moneys were advanced by Permanent after 11 September 2002, the repayment of such advances, interest and associated expenses should be deferred in priority to moneys advanced by Macquarie prior to 11 September 2002 and secured on the Naxatu properties. In the present case the rule may apply to the realization of the Naxatu properties over which Naxatu holds second mortgages. However it is difficult to see how, as between Naxatu and Perpetual, it may apply in connection with the other Perpetual properties, including the Bridgecorp properties, over which Naxatu has no security.
AT FIRST INSTANCE
24 At [18] the primary Judge identified the issues as being:
(a) Whether the Court should order an inquiry in respect of:
(i) Alleged waste in respect of the application of the proceeds of sale of home units mortgaged to Perpetual to the detriment of Naxatu’s securities;
(ii) Perpetual’s failure to discharge its mortgages;
(iii) Bridgecorp’s entitlements under the Deed of Priority upon the true construction of that Deed;
(iv) Whether, upon the true construction of Perpetual’s first mortgage over those home unit properties over which Naxatu holds a second registered mortgage, … Perpetual is entitled to recover any liability to Bridgecorp from those securities or any of its costs, charges, remuneration or expenses relating to the claim;
(v) Whether Perpetual’s assumption of liability to Bridgecorp in respect of the Deed of Priority is a liability for which it is entitled to claim or assert priority over Naxatu’s securities;
(vi) Whether the postponement of Naxatu’s mortgage in favour of Permanent’s mortgages operated to postpone Naxatu’s mortgage in respect of further loans made by Permanent and Perpetual after the postponement, in respect of the proceeds of sale of securities for such further loans released by Permanent and Perpetual to Sterling and Bridgecorp and in respect of the proceeds of sale of securities for such further loans that Permanent and Perpetual agreed to release, pay or make available to Bridgecorp;
(vii) Whether s 58(3) of the Real Property Act 1900 (NSW) trumps the Deed of Priority;
(viii) Whether Perpetual breached its obligation of good faith in relation to its treatment of GST and the Margin Scheme, in relation to its levying of administration fees, early discharge fees and other imposts and in relation to its treatment of the sale proceeds from the sale of home units covered by its first mortgage;
(b) Whether any consequential orders are appropriate assuming that an inquiry is ordered.
25 Having concluded that “there was no real dispute” as to the Court’s power to proceed pursuant to s 423, the primary Judge noted that in order that there be an inquiry, there must be some relevant subject matter for inquiry. His Honour identified the potential subject matter as being:
Naxatu’s claim that Perpetual had been paid its entitlement under its mortgages and Perpetual’s denial of the assertion;
Naxatu’s claim for the release of Perpetual’s mortgages over the Naxatu properties and for an account; and
Naxatu’s other allegations of default by Perpetual.
26 In connection with Naxatu’s challenges to Perpetual’s right to recoup the amount paid to Bridgecorp from any proceeds of the future sale of the Naxatu properties, his Honour observed as follows at [63]-[66]:
63 The effect of clauses 2 and 3 is:
(a) Permanent is to be accorded first priority in respect of the mortgaged properties and the sale proceeds thereof up to the amount of $9,353,230 “… plus interest and all moneys costs charges and expenses which [Permanent] may incur or pay in or incidental to enforcing its first mortgage”;
(b) After Permanent has been paid the total amount specified in (a), Bridgecorp is to be paid out of the proceeds of sale of the mortgaged properties “… all moneys secured by …” its second mortgage;
(c) After payment of the amounts specified in (a) and (b), if any other sums are due to Permanent under its first mortgage, those sums are then to be paid to it;
(d) The priorities laid down in clause 2 override any general law principles of the type described in clause 3;
(e) As necessary, in order to give effect to the agreed priorities, each of Permanent and Bridgecorp agreed to provide a partial discharge of their respective mortgages upon settlement of bona fide sales of any of the mortgaged properties for fair value; and
(f) The first priority amount is to be regarded as permanently reduced by the principal amount received by Permanent upon each such discharge.
64 The Deed of Priority contemplated that each of Permanent and Bridgecorp could make further advances to Sterling and could do so without notice to the other (clause 4).
65 No fresh obligation to make payments to either Permanent or Bridgecorp was imposed upon Sterling by the Deed of Priority. Its obligations to its lenders continued to be embodied in the relevant primary security documents.
66 Naxatu contends that, by honouring their commitments to Bridgecorp under the Deed of Priority, Permanent and Perpetual paid out moneys to Bridgecorp which they should have retained. Naxatu goes on to contend that, had those moneys been retained, Sterling’s debts to Permanent/Perpetual would have been lower than the accounting between Permanent/Perpetual and Sterling would suggest. The reduction of the indebtedness of Sterling to Permanent/Perpetual would enure for the benefit of Naxatu because the Naxatu securities would yield a return for Naxatu which was greater than would be the case if Permanent/Perpetual proceeded in accordance with the Deed of Priority, as it has done.
27 Naxatu’s characterization of the payment to Bridgecorp seems to conceal, rather than express its true nature. As I understand it, Bridgecorp’s claim was for its share, as second mortgagee, of the proceeds of sale of the Bridgecorp properties, being the amount payable pursuant to the deed of priority. Again, Naxatu seems not to have explained the basis upon which it claims to be entitled to any benefit from the sale of the Bridgecorp properties.
28 At [67]-[72] the primary Judge disposed of this aspect of Naxatu’s case. His Honour pointed out that the mortgages granted by Sterling to Permanent (and assigned by Permanent to Perpetual) were “all moneys” mortgages, securing all moneys which the mortgagor was, or was at any time to become actually or contingently liable to pay to the mortgagee. Thus his Honour concluded at [69]-[71]:
69 … as between Permanent (and, later, Perpetual), all of the properties mortgaged by Sterling stood as security for all of the loans made to it by Permanent/Perpetual … . There was nothing in the security documents or in the surrounding circumstances that would suggest otherwise. The mere fact that separate Deeds of Loan and separate mortgage documents were executed does not alter this conclusion.
70 The Deed of Priority did not have any impact on those arrangements as between Sterling and Permanent/Perpetual. It simply regulated priorities as between Permanent/Perpetual and Bridgecorp in respect of moneys secured by their respective mortgages.
71 It follows from this analysis that Naxatu cannot complain about the way in which Perpetual has interpreted its own mortgages (it having done so correctly) nor can it complain about the existence of the Deed of Priority or the performance of its terms by Permanent/Perpetual and Bridgecorp.
29 The introductory words at [69] are a little misleading. It seems that his Honour meant to refer to the position as between Permanent/Perpetual and Sterling. The primary Judge considered that these conclusions disposed of the issues identified at subparas (a)(i) to (iv) of [18] in his reasons. In effect his Honour held that Naxatu had no proper interest in the way in which Perpetual dealt with the Bridgecorp properties. The primary Judge then turned to the question of the postponements and the decision in Hopkinson v Rolt. At [73] and [74] his Honour said:
73 Naxatu contended that all advances made by Permanent or Perpetual after 11 September 2002, when the Postponements were signed, were made with notice of Naxatu’s mortgage and of its terms. This proposition is then used as a springboard for the further proposition that those further advances must rank behind advances made under the Naxatu mortgage—even those made prior to 11 September 2002.
74 This cannot be.
30 His Honour advanced two reasons for this conclusion. The first was that the postponements had the effect of deferring Macquarie’s priority to that of Permanent. The second was that:
… mere notice of the existence of the Macquarie mortgage could never be enough. There would have to be further advances in order to engage the principle in Hopkinson v Rolt … . There was no evidence of any such advances.
31 His Honour seems to have meant that neither Macquarie nor its successors in title had made further advances after 11 September 2002. It may be implicit in this observation that the rule in Hopkinson v Rolt only governs the relative priorities of further advances made by first and second mortgagees. I shall deal with this proposition at a later stage.
32 The primary Judge then turned to an argument based upon s 58(3) of the Real Property Act 1900 (NSW) (the “Real Property Act”). That section deals with the application of the proceeds of sale by a mortgagee exercising power of sale. It relevantly provides:
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.
33 Naxatu submitted that once Perpetual had sold any of the Bridgecorp properties, this provision overrode any contractual arrangements between the parties. His Honour considered that s 58(3) “simply provides an order of payment which subsumes and has regard to the parties’ contractual arrangements”. He therefore rejected that argument.
34 His Honour then dealt with the submission concerning GST liability. Naxatu had argued that Perpetual had returned its GST liability on a basis that unnecessarily increased such liability. The primary Judge found no legal error in Perpetual’s decision, nor any reckless, imprudent or negligent conduct in that regard. On appeal Naxatu did not challenge that finding. Under the heading “Other Matters” the primary Judge recognized that “the levying of fees and penalty interest are legitimate matters of concern to Naxatu and that there may have been mistakes made by Perpetual in levying those charges”. However his Honour considered that there should be only one account, that the appropriate time for it had not yet arisen, and that it would not arise until all properties had been sold and expenses paid. As I have said, Naxatu did not address those matters on appeal. His Honour dismissed the application for an inquiry.
ON APPEAL
35 The notice of appeal contains eight grounds as follows:
1. The primary judge erred in failing to hold that by reason of the fact that the respondent had been paid in full by April 2008 the amount owing under loans 2197 and 2198 that the appellant was entitled to become the first mortgagee in respect of lots 25, 65, 71, 82 and 83 within SP 67386.
2. The primary judge erred in failing to hold that the respondent and/or its receivers had spent excessive amounts in and about the realisation and enforcement of its securities such that the appellant should have an inquiry pursuant to section 423 of the Corporations Act with respect to such expenditure.
3. The trial judge erred in construing the mortgages given by Sterling to Permanent as having the effect that as between Permanent (and later Perpetual), all of the properties mortgaged by Sterling stood as security for all of the loans made to it by Permanent/Perpetual on behalf of Challenger.
4. The trial judge erred by finding or assuming that any liability of Perpetual to Bridgecorp arising out of the Deed of Priority fell within the definition of Secured Moneys or was otherwise a liability which Perpetual was entitled to debit against the Naxatu Securities.
5. The trial judge erred by failing to find that the claims by Bridgecorp were not capable of altering the statutory requirements for application of the proceeds of sale of the various securities under section 58(3) of the Real Property Act 1900 (NSW).
6. The trial judge erred by failing to find that Bridgecorp’s claims against Perpetual were insufficient to create a proprietary interest in the proceeds of sale of any property mortgaged to Perpetual.
7. The trial judge erred in failing to find that any claim of Bridgecorp was postponed under the rules relating to tacking and in particular the rule in Hopkinson v Rolt (1861) 9 HL Cas 514; 11 ER 829.
8. The trial judge erred by failing to order that there be an inquiry under section 423 of the Corporations Act and in failing to make orders for the discharge of Perpetual’s mortgages so far as they affected the Naxatu Securities.
36 The appellant presses only grounds 1, 5, 6, 7 and 8.
37 Ground 1 depends upon Naxatu’s submission that, having regard to the rule in Hopkinson v Rolt, the postponements gave priority over Macquarie’s debt only to amounts owing to Permanent at the date of the postponements, and not to further advances made thereafter. It seems that further advances were made between May 2003 and August 2005, the total of these further advances being $13.424 million. Naxatu submits that all moneys so advanced have, in fact, been recouped by Perpetual, other than the amount paid to Bridgecorp and, possibly, expenses associated with the realization of the Perpetual properties. Ground 5 reflects Naxatu’s submission that s 58(3) of the Real Property Act prescribes the way in which proceeds of sale are to be distributed and, in so doing, overrides any agreement of the parties. Ground 6 seems to be associated with Ground 5. Ground 7 seems to be a restatement of Ground 1. Ground 8 may be a generalized attack upon the primary Judge’s exercise of the discretion conferred by s 423.
38 By its notice of appeal Naxatu seeks a declaration that it is entitled to become the first mortgagee of the Naxatu properties, an order for an inquiry pursuant to s 423 and further or other relief.
NAXATU’S SUBMISSIONS ON APPEAL
39 Whatever position Naxatu adopted at first instance, it now accepts that any moneys owing to Macquarie as at 11 September 2002 were, by the postponements, deferred in priority to moneys owing to Permanent at that date. However Naxatu then submits that:
by entering into the deed of priority and making further advances to Sterling, Permanent “significantly reduced the security value of the Macquarie mortgage”;
Perpetual further reduced the value of such security by sharing the proceeds of sale of the Bridgecorp properties with Bridgecorp and Sterling, and making further advances to Sterling;
Perpetual has resisted releasing its mortgages over the Naxatu properties by purporting to rely upon Permanent’s “breach” of the deed of priority;
pursuant to s 56A of the Real Property Act, Naxatu’s mortgages over the Naxatu properties had “the same protection” as they would have had if they had been registered after the mortgages over the Perpetual properties; and
hence Perpetual was subject to the “restraints analysed by Holland J” in Matzner v Clyde Securities Ltd (1975) 2 NSWLR 293.
40 Section 56A(1) relevantly provides:
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 land is concerned.
41 Subsection 56A(4) provides:
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 which by the memorandum they are expressed to have priority.
42 Naxatu submits that Holland J held that:
… in general, a mortgagee to whom the property is mortgaged cannot, after receiving notice of the 2nd mortgage, have priority over the 2nd mortgagee for further advances upon the first mortgage, even if the first mortgage, to the knowledge of the 2nd mortgagee, is expressed to be security for further advances which may be made.
43 Naxatu apparently understands this to be the rule in Hopkinson v Rolt. It then argues that:
… the considerations of justice and fair dealing as between competing mortgagees … precludes [Perpetual] from asserting an entitlement to tack the liability for repayment of the April 2004 loan and the liability assumed to Bridgecorp based on the Deed of Priority onto its first ranking mortgages over the [Naxatu properties].
44 In support of this proposition Naxatu submits that:
… the rule of fairness and justice preventing tacking of further advances without the consent of the 2nd ranking mortgagee in these circumstances also precludes the mortgagee from tacking liabilities it has voluntarily incurred through subsequent dealings of the mortgagor (and Bridgecorp in this case) that are calculated to and do have the equivalent detrimental effect on the value of the second ranking mortgagee’s interest.
45 At paras 13-16 of its written outline of submissions Naxatu expands upon these concepts. It submits, in effect, that the rule in Hopkinson v Rolt precluded and precludes Permanent and Perpetual from increasing “the liabilities secured by the deemed first mortgage”. The deed of priority “significantly affected” Naxatu as second mortgagee in a way that was “practically equivalent to the first mortgagee making further advances after notice of the second mortgagee’s interest.” It is said that his Honour’s conclusion that Naxatu could not complain about the deed of priority or the performance of its terms:
failed to recognize that the rule (in Hopkinson v Rolt) is dependent on considerations of justice and fairness, not questions of form; and
failed to address the additional lending that was made at that time, both by Challenger and by Bridgecorp, as being within the scope of the rule.
46 These submissions seem simply to assume that Naxatu was the second mortgagee of all of the Perpetual properties, particularly the Bridgecorp properties.
47 Naxatu then challenges his Honour’s finding that there would “have to be further advances in order to engage the principle in Hopkinson v Rolt”. Naxatu seems to have understood this to be a reference to further advances by Macquarie or its successors in title. It submits that the absence of such advances is irrelevant. As will be seen, I accept Naxatu’s submission on that point.
48 Naxatu submits that the primary Judge erred:
In holding that, as the securities in favour of Permanent secured “all moneys” advanced by Perpetual, such further advances were not deferred in priority to Naxatu’s debt;
In holding that the deed of priority did not have any impact upon arrangements between Sterling and Permanent/Perpetual; and
In rejecting Naxatu’s submission that the transaction was “practically equivalent to … further advances after notice of [Naxatu’s] interest.”
49 Naxatu also submits that s 58(3) of the Real Property Act imposes a statutory trust upon the proceeds of sale of mortgaged property, which trust displaces any contrary agreement of the parties. This submission is said to be based on the proposition that statutory trusts are not to be overridden by private arrangements on the part of the trustee to allocate trust property in discharge of its own liability.
PERPETUAL’S SUBMISSIONS ON APPEAL
50 Perpetual submits that:
pursuant to s 56A, Perpetual’s mortgages rank, in relation to Naxatu’s mortgages, “in the order in which by the (postponements) they are expressed to have priority”;
as recognised in Hopkinson v Rolt, the rule established by that case “necessarily gives way to any contrary agreement between the parties …”;
Naxatu has demonstrated only that, at the date of the postponements, Permanent knew that Macquarie held a registered mortgage, but has led no evidence as to any amounts actually advanced and secured on the mortgages from time to time, nor evidence as to whether Permanent had notice of any such advances;
there is no evidence of amounts presently owing to Naxatu.
51 In conclusion, Perpetual submits that:
Absent any notice of advances having been made under the Macquarie/Naxatu mortgage, all advances made from time to time under the Permanent mortgages necessarily enjoyed undiminished security entitlements under the first ranking mortgages.
52 I observe at this stage that the absence of evidence of any amount advanced to Sterling by Macquarie or its successors in title is obviously relevant to the exercise of the s 423 discretion. One would not expect the Court to order an inquiry on the application of a person who does not claim to be owed anything by the relevant corporation.
53 At some stages in argument Perpetual seemed to suggest that Naxatu had asserted that advances made by Macquarie prior to the postponements took priority over all advances made by Permanent, including those made on 10 September 2002. I do not understand Naxatu to have made that submission. I understand its case to deal primarily with the relative priorities of moneys secured pursuant to the Naxatu mortgages on the one hand, and the Bridgecorp payment and outstanding expenses, on the other. However it may be that Naxatu contemplates that any accounting as between it and Perpetual will deal with the whole history of advances made by Permanent to Sterling, and all moneys received and outgoings incurred in realizing the Perpetual properties.
54 Finally, Perpetual submits that its obligations to Bridgecorp under the deed of priority related, and relate only to the Bridgecorp properties in which Naxatu has no interest, secured or otherwise. In those circumstances, it submits that Naxatu can derive no assistance from s 58A.
RELIEF PURSUANT TO S 423
55 At [54] the primary Judge observed that there was “… ultimately no real dispute about the Court’s power to invoke s 423 …”. Nonetheless the parties have, on appeal, treated it as a live issue. At the end of its written submissions, Perpetual observed that it was “far from clear” that s 423 offered an appropriate method for enforcing Naxatu’s claims. In para 2 of Naxatu’s supplementary submissions it submitted:
In any event it is submitted that a threat by a first mortgagee to seek to obtain by a further advance priority over a second mortgage of which it has notice is sufficient to attract the section. Moreover, to utilise the first mortgage to pay debts due by the first mortgagee to Bridgecorp, if the amount is not in the category of a further advance to the mortgagor and not otherwise secured by the first mortgage is also a case within the section.
56 To these propositions Perpetual responded as follows:
…
(2) The current dispute was never apt or appropriate to be agitated by Naxatu under s 423 of the Corporations Act. It ought to have been brought as a suit for redemption and the taking of accounts in equity as between first and second competing mortgagees when all necessary parties, such as, for example, the mortgagor Sterling Estates Development Corporation Pty Ltd (Sterling) would have been required to be before the Court and it would have been necessary for Naxatu to establish and quantify the debt alleged by it to be owing by Sterling under its second mortgage. However a registered mortgage often secures nothing and a common example of this is where a mortgagor has repaid the mortgage debt yet the mortgage for a variety of possible reasons remains discharged … It is not a necessary or required supposition in this case that Naxatu is owed anything under its second mortgage.
(3) In these circumstances, when Naxatu has adopted an inappropriate procedure and deliberately elected not to prove any state of indebtedness between Sterling and itself it fails in limine to establish any utility or propose for a section 423 inquiry and has further left the matter at a level of distraction which renders the formulation by the Court of any relief (to which in any event it is not entitled) inconclusive and problematical.
(4) Finally it is not correct to categorise (Perpetual) as having made further advances under its first mortgage to pay amounts owing by it to Bridgecorp. Rather, Bridgecorp was simply being repaid from the relevant secured properties monies which it had itself lent to Sterling.
57 Clearly, there was at first instance some challenge to the appropriateness of Naxatu’s purported reliance on s 423. As much may be inferred from his Honour’s statement that there was “no real dispute” concerning the matter. Whatever may have been the position at the trial, the appropriateness of proceedings pursuant to s 423 is a live issue on appeal. I shall consider that question after I have dealt with the substantive issues.
THE STATUTORY PROVISIONS
58 Section 56A of the Real Property Act gives statutory effect to the postponements. The section might well be construed as simply allowing a postponement of one registered mortgage to a later registered mortgage, leading to the conclusion that with effect from registration of the postponements, Permanent’s mortgages (now Perpetual’s) took priority in all respects over Macquarie’s (now Naxatu’s) mortgages. In other words, the section might be construed as necessarily excluding the rule in Hopkinson v Rolt. However, at least since the decision in Matzner (supra), it has been accepted that the rule applies to mortgages of land under the Real Property Act. Assuming that the rule has not been excluded, it must operate in its entirety. At ER 838 (HLC 536), the Lord Chancellor contemplated the possibility that the second mortgagee might, by agreement, forego the benefit of the rule. See also the observations by Lord Chelmsford at ER 845 (HLC 554). I proceed on that basis.
59 As to s 58(3), I accept Perpetual’s submission that the section regulates the application of proceeds of sale amongst persons holding charges over property inter se, and between each of them and the mortgagor. The section, on its face, confers no interest on other persons. Naxatu has demonstrated no such interest in the Bridgecorp properties. If Naxatu has no charge over the Bridgecorp properties, then s 58(3) does not assist it in these proceedings.
THE BRIDGECORP TRANSACTION
60 Bridgecorp’s claim was for its agreed share of the proceeds of realization of the Bridgecorp properties pursuant to the deed of priority. The disputed payment was made in settlement of that claim. Naxatu seems to argue that all of the proceeds ought to have been applied in discharge of Sterling’s debt to Perpetual so as to minimize Perpetual’s recourse to the Naxatu properties. Naxatu seems also to assert that in entering into the deed of priority, Permanent breached its duty to Naxatu. As I have said, Naxatu has not demonstrated any clear basis for its claim to have any interest in the Bridgecorp properties. It seems that Naxatu simply equates its position to that of a second mortgagee of all of the Perpetual properties without explaining why that should be so. However it may be that Naxatu’s case tacitly reflects aspects of the doctrine of marshalling, to which doctrine I now turn.
THE DOCTRINE OF MARSHALLING
61 In the correspondence between the parties, there was some mention of marshalling. The primary Judge set out the relevant correspondence in his reasons, but did not otherwise refer to the subject. It was not mentioned on appeal. However, as far as I can see, that doctrine is the only possible basis for Naxatu’s claim concerning the proceeds of sale of the Bridgecorp properties and other Perpetual properties. Out of an abundance of caution I shall say something about it, particularly in view of the decision of McPherson J in Westpac Banking Corporation v Daydream Island Pty Ltd [1985] 2 Qd R 330 at 332. His Honour there held that in taking accounts as between first and second mortgagees, the doctrine will be applied despite the absence of any special claim or direction, equitable doctrines being applied “without the need for express exhortations in that behalf”. See also Fisher & Lightwood’s Law of Mortgage (2nd Aust ed, LexisNexis Butterworths, 2005), at 30.16.
62 Neither the theoretical basis for the doctrine of marshalling, nor its precise ambit of operation is clear. See Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (4th ed, LexisNexis Butterworths, 2002), especially at 11-05 to 11-030 and 11-70 to 11-95. At paras 11-005 and 11-015, the authors describe the doctrine as follows:
11-005 Suppose A (called “the double claimant”) has the right to satisfy a claim for $1000 against X from funds (1) and (2), valued each at $1000, while B (called “the single claimant”) has the right to satisfy his claim of $500 from fund (1) only. In such a case, A may select the security he wishes to enforce. If he chooses to go against fund (1) and satisfies his claim in full, then he will have prejudiced B by exhausting the only fund subject to his security. In such a case B will be left with his covenant in debt from X, along with the general body of unsecured creditors. As A will have satisfied his claim, fund (2) will be released from the security and be available to the general creditors; but this will be of little use to B where there is an insufficiency of assets for general creditors, as, for example, in an administration of X’s estate in bankruptcy. Thus B will recover only part of his claim as an unsecured creditor, whereas if A had elected to proceed against fund (2) he could have satisfied himself in full, and so left fund (1) available to B who would have been paid in full. The precise position will vary with the respective amounts of the secured claims of A and B and funds (1) and (2), so that, for example, if fund (2) is too small for the double claimant he could be expected to make up the balance from fund (1), and thus perhaps not leave sufficient for full satisfaction of B’s claim.
…
11-015 But suppose, in the example given, after A had satisfied his double claim from fund (1), and fund (2) was not fully released to general creditors, equity permitted the single claimant B to have the benefit of the double claimant’s security. There would be no prejudice to A whose claim has been satisfied, but there would be less available to general creditors and (in the event of any surplus) ultimately to X as debtor. This is the essence of the doctrine of marshalling. It does not interfere with the exercise by A of his security rights, as double claimant, but, by a species of subrogation, places B in the place of A so far as necessary to permit B to recoup himself from fund (2), otherwise closed to him, to the extent that fund (1) would have satisfied his claim but for its depletion by A. So, if A satisfied his claim for $1000 by exhausting fund (1), B will be able to satisfy his claim for $500 from fund (2). On the taking of accounts between mortgagor and first and second mortgagee, since equity regards as done that which ought to be done, the accounts will be taken on the footing that the first mortgagee has marshalled the securities as equity requires: Westpac Banking Corp v Daydream Island Pty Ltd … per McPherson J.
63 In Miles v Official Receiver in Bankruptcy (1963) 109 CLR 501, the High Court (Dixon CJ, Menzies and Windeyer JJ) considered the doctrine, particularly at pp 510-511 where their Honours said:
The equitable principle [of marshalling] is stated by Lord Eldon … in these words:- “If a party has two funds … a person having an interest in one only has a right in equity to compel the former to resort to the other, if that is necessary for the satisfaction of both . … The principle in some degree is, that it shall not depend upon the will of one creditor to disappoint another. In Jenkins v Brahe and Gair … a’Beckett J, after observing that the Court would not control the choice of a creditor, said:-“that it appears to be settled law that the jurisdiction of the court is not ousted by the act of the mortgagee” (that is, in resorting to one fund rather than the other) “when the court can obtain control of the assets which the mortgagee could have applied to the discharge of his debt and out of which other creditors can be satisfied. ‘If the mortgagee having a double fund has exercised his option in such a way as to disappoint a creditor by taking the only fund to which he could resort, such exercise of option will not have the effect of disappointing the creditor with one fund only, who will therefore be entitled to stand pro tanto in the place of the former’.
64 The Australian case most frequently cited in connection with marshalling is the decision of Neasey J in Commonwealth Trading Bank v Colonial Mutual Life Assurance Society Ltd [1970] Tas S R 120. The facts appear in the headnote. I shall, to some extent, paraphrase it. A debtor borrowed from Colonial Mutual, giving a first mortgage over land and assigning to it, one of its own life policies. Subsequently the debtor borrowed from the Bank, giving it a second mortgage over the same land. When the debtor defaulted, Colonial Mutual sold the land for more than the amount owing, recouped its debt from the proceeds, reassigned the policy to the debtor, accepted a surrender and paid him the surrender value. It paid the balance of the proceeds of the sale of the land to the Bank. The amount was insufficient to discharge the Bank’s debt. The Bank claimed that Colonial Mutual, knowing of the second mortgage, and that the proceeds of sale might be insufficient to discharge it, should not have given up its charge over the policy. Those facts seem essentially similar to the facts of the present case. Colonial Mutual’s action in giving up the policy was equivalent to Permanent’s action in agreeing to make the proceeds of sale of the Bridgecorp properties available to meet the indebtedness of Bridgecorp ahead of some of its own debt, and Perpetual’s action in subsequently honouring that agreement. The thrust of the Bank’s argument appears at 121-122 where Neasey J said:
The argument submitted for the Bank, if I understand it correctly, is simply this: that upon the sale of the land taking place, [Colonial Mutual], knowing of the existence of a second mortgage, and knowing of a possibility that the balance of the proceeds of sale of the land after satisfying [Colonial Mutual’s] debt might be insufficient to pay off the Bank in full, became a trustee for the Bank in respect of the policy, in which the Bank now had an equitable interest. It was argued that [Colonial Mutual] as such trustee should have taken one of two courses – it should have conveyed to the mortgagor the legal interest in the policy, reserving thereout the Bank’s equitable interest in it; or it should have declined to reassign the policy on the ground that the effect of the assignment would be to destroy the Bank’s equitable interest therein.
There is no direct authority for the Bank’s contention, because counsel were unable out of the very many cases on marshalling to be found in the books to cite one case in which a prior encumbrancer was held liable to a subsequent encumbrancer for damages for breach of trust where the subsequent encumbrancer had not sought the court’s intervention before the reconveyance of the security upon which he relied for marshalling.
65 At 126 his Honour continued:
Marshalling of assets is unquestionably a matter of a court of equity adopting remedial rules in the administration of estates for the purpose of doing equal justice between all legatees, descendants and creditors as far as possible; and there the assets are normally within the control of the court. It would seem to follow that the same applies in relation to marshalling of securities … .
66 At 128 his Honour said:
It seems therefore that the operation of the marshalling principle depends upon the assets being subject in some way to the control of the court, which reinforces the view that the doctrine depends not upon the creation of any equitable right of property in the fund over which the claimant has otherwise no security, but upon the grant by the court of an equitable remedy in certain circumstances, and I so hold.
67 At 130, his Honour observed:
But in any event I think there is difficulty in any concept of enforcing an equity to marshal against the first mortgagee, because it is basic to the principle that he has been paid off. The equity to marshals is ‘enforced’ against the person who is disadvantaged and dispossessed by its operation. The Court does not interfere with the first mortgagee’s choice as to which security he will realize. That is not to say that he will not be bound by a marshalling order of the Court, if for example he is in possession of the fund upon which the rule is to operate. Of course he would be bound, insofar as his participation was necessary for carrying out the rule.
68 At [11-030] the authors of Meagher, Gummow & Lehane say:
The position in Australia appears to be that marshalling must be understood as a doctrine effectuated only by the exercise of a remedy akin to subrogation to securities otherwise still on foot at the time concerned, although there are implications in some decisions which suggest the matter may be taken further in some circumstances.
69 The authors then set out the facts of Colonial Mutual and continue:
The Supreme Court of Tasmania held that the [Bank] had no claim to call [Colonial Mutual] to account upon the basis that it should not have, by its acts, extinguished any access of the [Bank] to the policy by a process of marshalling. But this is not the end of the matter, for it still appears uncertain as to whether as between the [Bank] and the debtor the insurance policy had to be treated as discharged. There is much to be said for the proposition that as between them the surrender was to be treated as ineffective, so as to keep alive the recourse by subrogation in the name of [Colonial Mutual]. The principles as to subrogation with vendor’s lien appear to operate in this way, and it does not conflict with the decision in the instant case as to the liability of [Colonial Mutual] to the [Bank].
70 The authors then speculate as to the position if, Colonial Mutual having satisfied its own indebtedness, the Bank moved to restrain surrender of the policy whilst it was still on foot. The authors observe that:
The actual decision in the case shows that at that stage the equity of the [Bank] to marshal was in jeopardy of destruction or, perhaps, that there was a threat to act such as to prevent it arising. There may therefore have been sufficient to support an injunction quia timet.
71 At [11-070]-[11-095] the authors discuss the decision in Webb v Smith (1885) 30 Ch D 192, a case which was referred to by Neasey J in Colonial Mutual. In that case Brett MR observed that the doctrine of marshalling applied only if “the funds are in Court and when the Court can exercise a jurisdiction over them”. At [11-085] the authors suggest that this concept of “control” might be best understood by reference to the judgment in Lawrance v Goldsworthy (1857) 3 Jur NS 1049. The authors describe the facts of the case as follows:
In that case B held a first mortgage from G over an insurance policy on his life and over household effects to secure ₤187 owing by B, while the plaintiff held the second mortgage over the effects, but not the policy, to secure ₤300. Upon default B exercised his security over the effects (but not the policy) and realized ₤263 which exceed the indebtedness of G to him. However B then sold the policy to the defendant in circumstances indicating a fraudulent exercise of the power of sale. The debtor G was then made bankrupt and died in Peru. This made the moneys payable under the policy. The plaintiff then instituted a suit to which all interested parties, including the insurance company which still held the policy moneys, were joined, and in which he sought, inter alia: (a) to set aside the sale of the policy of the defendant; and (b)a declaration that he, as second mortgagee of the effects, was entitled to have the policy proceeds first applied in payment of any moneys to have dued to B as first mortgagee and double claimant and then to stand in the place of B against the proceeds of the policy up to an amount equal to the proceeds of the effect; that is, if the effects had realized less than the debt of the plaintiff, then he could not have recovered any greater sum from the insurance moneys.
72 Sir John Stuart VC held that if a third party, having control of the fund in dispute, was a party to the suit, then there was, in the relevant sense, a fund in court, the third party being bound by any order concerning the fund. The authors observe that the same approach was taken by Neasey J and seem generally to approve it. All of this suggests that any claim pursuant to the doctrine of marshalling must be against a particular fund.
73 Three other Australian cases support the view that the doctrine of marshalling imposes no duty upon the first mortgagee. In Bank of New South Wales v City Mutual Life Assurance Society Ltd [1969] VR 556, (to which Neasey J referred), Gillard J discussed the doctrine. The facts of the case appear at 551-557 as follows:
Mr Steed had two assurance policies on his life with the City Mutual Life Assurance Society Limited. In or about 1963 that society advanced him a loan taking as a security, first, a registered instrument of mortgage under the Transfer of Land Act 1958 over certain real property owned by him, and secondly, an assignment of the above policies. Mr Steed also gave a second mortgage over the real estate to the Bank of New South Wales early in 1964 to secure a payment for advances made by the bank to him. Default having been made on the first mortgage, the society under its power of sale sold the land for $16,010.35 thereby enabling it to satisfy the indebtedness to itself both on the mortgage and in relation to premiums payable under the policy. This left a balance of $858.26 which the society paid to the bank as second mortgagee, who at the material time was owed the sum of $8,031.00 by Steed.
In consequence of the receipt by the society of the proceeds of the sale of land the two policies, the surrender value of which at the material time amounted in all to about $5,204.00, have now been freed by the society from all encumbrances to it. The bank, accordingly, seeks in this action to invoke the equitable principle of marshalling securities whereby the proceeds of the policies would become available to pay its indebtedness secured by the second mortgage.
74 After reference to the judgment of Cotton LJ in Webb v Smith, Gillard J said at 557:
It should be added that from this statement it may be suggested that the doctrine of equity requires the first mortgagee to act in favour of the second mortgagee and accordingly that the second mortgagee’s equity is against the first mortgagee. However, in Flint v Howard (1893) 2 Ch 54 at p 73, Kay LJ pointed out the true position when he said: The right of a subsequent mortgagee of one of the estates to marshal – that is, to throw the prior charge on both estates upon that which is not mortgaged to him – is an equity which is not enforced against third parties, that is, against anyone except the mortgagor and his legal representatives claiming as volunteers under him. It is not enforced against the mortgagee or purchaser of the other estate … .
….
This dictum suggests that the doctrine of marshalling is closely aligned to the doctrine of subrogation. Both appear to have the same broad equitable principle as its foundation … .
75 In Mir Bros Projects Pty Ltd v Lyons (1977) 2 NSWLR 192, Waddell J referred to the then current edition of Meagher, Gummow and Lehane and to the decision of Gillard J, observing at 196:
In the case of the doctrine of marshalling it is, in my opinion, as is submitted for the defendants, well established that the doctrine does not prevent an early mortgagee satisfying his charge against whichever fund or security he thinks fit. …. This is the view established in Meagher Gummow and Lehane above … . It is established by a number of authorities cited for the defendants … . Meagher Gummow and Lehane draw attention to the remarks of Cotton LJ in Webb v Smith, where he spoke as if the double claimant, that is the first mortgagee of two properties, could be restrained by the single claimant, that is the second mortgagee of one of them, from first resorting to the joint fund, that is the fund the subject of charge, both to the double claimant and the single claimant. The whole of the passage in question does seem to bear this interpretation, because, at the end of it, reference is made to the application of the doctrine to funds in court, as if it were a separate head of jurisdiction. Contrary to what is said by Meagher Gummow and Lehane, I do not think that this dictum was quoted with approval by Gillard J in Bank of New South Wales v City Mutual Life Assurance Society Ltd. His Honour undoubtedly adopted this statement as an example of how the doctrine of marshalling may be applied as security. But he went on, in the following paragraph, to dismiss any implication from the statement that the doctrine of marshalling requires the first mortgagee to act in favour of the second mortgagee. The dictum of Cotton LJ was obiter, and is contrary to the great wave of authority and, in my opinion, should not be followed.
76 In Across Australia Finance Pty Ltd v Kalls [2008] NSWSC 783, 14 BPR [26,265], Bryson AJ considered the doctrine at [30]. After referring to the decisions in Mir and Chase Corporation (Australia) Pty Ltd v North Sydney Brick & Tile Co Ltd (1994) 35 NSWLR 1, his Honour observed at 30:
As the judgment of Cohen J showed, marshalling took an altogether different course as it developed in the United States of America in the 19th century and since, and there rests on the basis of an equity which the claimant can enforce against the prior mortgagee, conceivably extending to injunctions or other judicial remedies controlling the exercise by the prior mortgagee of his rights. If the law developed in this way, the will and motivations of the prior mortgagee, and the state of a prior mortgagee’s knowledge of the interest of a claimant would be prominent considerations. The law in England and Australia developed in a completely different way; the prior mortgagee can exercise his rights as he sees fit and the claim for marshalling does not depend on impugning the prior mortgagee’s decision or conduct. In my opinion it is not correct in principle to treat the will or election of a prior mortgagee as a significant part of the ground for a claim for marshalling.
77 The textbooks seem generally to support this approach. See Sykes (The Law of Securities, 5th ed) at 182-183; Fisher & Lightwood (2nd Aust ed) at 30.10 and 30.14; the 13th UK edition of the same work at 45.8 and 45.11; the Laws of Australia (LawBook Co.) at 15.3.640; and Halsbury’s Laws of Australia (LexisNexis) at 295-8476, and 295-8490.
78 However the authors of Meagher, Gummow & Lehane suggest a “middle ground” as follows:
There is the middle ground of attaching to the double claimant a personal liability of a fiduciary character to account to a single claimant for loss occasioned by release of the first charge or a proprietary interest in moneys received by the double claimant upon exercise of that charge, without conceding any proprietary interest in the property against the parties.
79 The suggestion has attracted some support. In Sarge Pty Ltd v Cazihaven Homes Pty Ltd (1994) 34 NSWLR 658 at 665 Young J said:
… Thus the probabilities are the doctrine rests on a principle of conscience and if this is so, then there is usually no proprietary right involved until the court makes a decree. There is, in my view, no proprietary right with respect to the land over which the claim for marshalling is held until the court makes an order and in that respect I agree with the result of Neasey J’s decision [in Colonial Mutual]. However, I feel that the middle ground suggested by Meagher, Gummow & Lehane is probably closer to the true juristic nature of the right and that despite its apparent thoroughness, the judgment of Neasey J may not have considered all the ramifications that arise out of this complex subject matter.
80 However this observation played no part in his Honour’s resolution of the case.
81 In Chase Corporation at 20-21, Cohen J said:
There is an attraction in the suggestion of the middle ground as proposed in Meagher, Gummow & Lehane, but it would seem that if it is to apply, it could only be in circumstances where it would be regarded as inequitable or unconscionable to release the security, that is, with full knowledge of the right being asserted by the other mortgagee. If the double claimant has a right to realise either of the securities, it will have a duty to the mortgagor, in the absence of other claims having been made, to release what is no longer encumbered. This might be otherwise if it has knowledge that another creditor is claiming a right against that property by subrogation. This is in some way similar to a creditor releasing a security given by a debtor after payment of the debt by the surety, and before any claim of subrogation in respect of that security has been made by the surety. The principles relating to guarantors are based upon contract as is also the relationship of mortgagor and mortgagee. I do not see that an equitable principle of marshalling would cast upon the double claimant a duty not to give a discharge to a mortgagor if there has been no notice of a claim by the second mortgagee.
His Honour disposed of the case on other grounds.
82 In Oamington Pty Ltd (Receiver & Manager Appointed) v Commissioner of Land Tax (1997) 98 ATC at 5051 Hamilton J referred to the relevant passage in Meagher, Gummow & Lehane and to Sarge and Chase without deciding the point. In Daydream Island (supra) McPherson J appears to have made an order against a first mortgagee. However his Honour observed that “at the trial there has been very little dispute about the plaintiff’s right to relief or even about the form that it should take”.
83 It is clear that once a first mortgagee’s debt has been paid, a second mortgagee is entitled to recoup any unpaid part of its debt from other assets which are mortgaged to the first mortgagee, but not to the second mortgagee, or from surplus proceeds of sale of such assets. The first mortgagee will generally be a necessary party to proceedings to enforce the second mortgagee’s rights, given the well-established view that the doctrine of marshalling is based upon the second mortgagee’s right of subrogation to the first mortgagee’s security. There also seems to be no reason why proceedings could not be maintained by the second mortgagee against the first mortgagee to recover a fund in the latter’s possession, but to which it made no claim. The mortgagor would probably also be a necessary party to such proceedings. The real dispute would generally be between the second mortgagee and the mortgagor. The matters in doubt are:
whether a second mortgagee can compel the first mortgagee to realize available assets in a way which is more favourable to the second mortgagee than would be any available alternative; and
whether a second mortgagee can, in any circumstances, seek an appropriate remedy against a first mortgagee which has acted in a way which is less favourable to the second mortgagee than would be another alternative.
84 The courts have traditionally declined to impugn a first mortgagee’s choice as to the order of realization of securities. To adopt a different approach would probably have quite significant commercial consequences. Perhaps it is simply too late to create a fiduciary relationship between first and second mortgagees in respect of properties over which the second mortgagee has no security interest. It may be significant that the authors of Meagher, Gummow & Lehane first suggested the “middle ground” in their first edition, published in 1975. Colonial Mutual, Mir, City Mutual Life and Across Australia all suggest that the second mortgagee cannot claim relief against the first mortgagee. The principal textbooks, including Meagher, Gummow & Lehane, itself, support that view. The authors of that work merely assert a possible future development in the law. Despite the passing of almost forty years, that possibility has not yet eventuated. Indeed, the most recent decision, Across Australia, takes a step in the other direction. Had Naxatu raised the question, this Court may have had to resolve it. However it was not raised, and we have no way of knowing how Naxatu would have put its case. In my view, on the current state of the law, the doctrine of marshalling is of no assistance to Naxatu.
HOPKINSON V ROLT – AMBIT AND OPERATION
85 Naxatu has shown no basis for any claim against the proceeds of sale of the Bridgecorp properties, or any other of the Perpetual properties apart from the Naxatu properties. Its claim for an inquiry into Perpetual’s conduct concerning the realization of those properties must fail for that reason alone. However there are other compelling reasons for refusing such relief based, as it apparently is, on the rule in Hopkinson v Rolt.
86 In Sykes at 394, the rule is stated as follows:
There is, furthermore, a third form of tacking which is dependent not on the possession of the legal estate but on contract (so called). This occurs when the first mortgage is expressed to cover further advances. The first mortgagee then, by virtue of the contract, could tack a further advance in priority to the interest of a second encumbrancee. As this type of tacking is not dependent on the possession of the legal estate, it is possible even when the mortgage which is the source of the right is equitable only. It is, however, still necessary for the first mortgagee to have no notice of the subsequent encumbrancee at the time he or she made her or his further advance. This principle, the famous rule of Hopkinson v Rolt, was held to be so even where the mortgage in question cast a positive obligation upon the mortgagee to make further advances.
87 In Fisher and Lightwood (2nd Aust ed) there is an extensive discussion of the rule, commencing at para 25.7. In connection with mortgages securing contemporaneous and further advances the authors state:
As previously mentioned (see 25.3), a legal mortgagee who made a further advance without notice of a second mortgage could take the further advance by virtue of the legal estate; but there was, in addition, a form of tacking which was independent of the legal estate.
This occurred when the first mortgage was expressed to cover the advance made at the time and also further advances. In such a case the mortgagee could, by virtue of the contract, tack a further advance to the original advance as against a subsequent mortgagee who had not got the legal estate, provided that, at the time of the further advance, the mortgagee had no notice of the subsequent mortgage; and a mortgage to secure a current account was on the same footing … .
88 Holland J considered the doctrine in Matzner (supra). At 298 his Honour stated the rule as follows:
The rule on which the plaintiffs rely is that a mortgagee to whom the property is mortgaged for advances already made cannot, after receiving notice of a second mortgage, have priority over the second mortgagee for further advances upon the first mortgage, even if the first mortgage, to the knowledge of the second mortgagee, is expressed to be a security for further advances that may be made.
89 At 300 his Honour said:
Whilst reference is made in those of the above cases which dealt with mortgages of land to the respective legal and equitable estates of the mortgagors and mortgagees and to the mortgagor’s right to further encumber his equity of redemption, all of the judgments emphasize, in one way or another, that the rule is founded on principles of justice and fair dealing as between the mortgagor and the mortgagees, and as between the competing mortgagees.
90 Holland J adopted the following passage from the judgment of Lindley MR in West v Williams [1899] 1 Ch 132 at 142:
… A first mortgagee, whose mortgage is taken to cover what is then due to him, and also further advances, cannot claim the benefit of his security for further advances in priority to a second mortgagee of whose mortgage he had notice before the further advances were made. This rule was ultimately established in the well-known case of Hopkinson v Rolt … .
91 Lindley MR referred to other cases and continued at 143:
These three cases shew very clearly that the principle which underlies the rule established in Hopkinson v Rolt is simply this, that an owner of property, dealing honestly with it, cannot confer upon another a greater interest in that property than he himself has. The rule rests on no technicality of English law; it is based on the plainest good sense, and it is as much the law of Scotland as the law of England. When a man mortgages his property he is still free to deal with his equity of redemption in it, or, in other words, with the property itself subject to the mortgage. If he creates a second mortgage he cannot afterwards honestly suppress it, and create another mortgage subject only to the first. Nor can any one who knows of the second mortgage obtain from the mortgagor a greater right to override it than the mortgagor himself has. On the other hand, the first mortgagee has no right to restrain the mortgagor from borrowing money from some one else, and from giving him a second mortgage, subject to the first. …
92 Perpetual submits that the rule is subject to two limitations. Firstly, it submits that the rule must give way to any contrary agreement between the parties. Secondly, it submits that the notice which the first mortgagee must have in order that the rule be engaged is knowledge of an advance or advances by the second mortgagee. It submits that a further advance by the first mortgagee, without notice of a particular advance by the second mortgagee, will not be deferred to that advance. The primary Judge seems to have understood Perpetual also to have submitted that the rule applies only to priorities as between further advances. I do not understand Perpetual to have advanced that submission on appeal. However I shall say something about the proposition.
93 As to the first limitation, I accept that the rule must give way to agreement between the parties. The decision in Hopkinson v Rolt, itself, demonstrates as much. I have already said something about this subject in considering the operation of s 56A. Naxatu says that any such agreement must be clear. That may be so but, in the present case, I see no lack of clarity in the postponements. I shall return to that question at a later stage.
94 As to the second limitation, that the relevant notice must be of actual advances, Perpetual submits at para 25:
Secondly, it is quite clear that, properly understood, the priority afforded to a subsequent mortgagee is priority in respect to the amount of advances made by a subsequent mortgagee, actual notice of which is given to the first mortgagee before the first mortgagee, who thereafter makes further advances to the mortgagor. As was put in Hopkinson v Rolt (at page 524) “Is the prior mortgagee entitled to priority for these advances over the antecedent advance made by the subsequent mortgagee?” (See also at pages 535, 553). In the latter passage, Lord Chelmsford said, “The simple answer to these suggestions is that the advances must have priority according to the order in which they are made.” (emphasis in Perpetual’s submissions)
95 This submission is contrary to my understanding of the cases. Perpetual relies upon the following passage from the decision of White J in Westpac Banking Corporation v Adelaide Bank [2005] NSWSC 517 at [75]:
Although the authorities do not all speak with one voice, their effect is that before equity will regard it as fraudulent for a first mortgagee to insist on its priority for subsequent advances, it is necessary that it have had actual notice of an intervening equitable interest. It is apparent from Deeley v Lloyds Bank Limited [1912] AC [at 768] that it is not necessary to show that at the time of the subsequent advance, the first mortgagee has knowledge, in the sense of an actual awareness, of the second mortgagee’s interest. Although it is sufficient for the second mortgagee to show notice, and not knowledge, it must show that actual notice of its having made an advance on second mortgage was given to the person or persons who represent the mind of the first mortgagee. … .
96 White J was there discussing the difference between actual awareness and notice, rather than the subject matter of the notice. The cases generally suggest that the relevant notice is notice of the second mortgage. White J himself, makes this clear in his reasons. At [37] his Honour cites a passage from Matzner which refers to the first mortgagee “receiving notice of a second mortgage”. At [54] his Honour refers to a passage from the decision of the Full Court of the Supreme Court of South Australia in Commonwealth Bank of Australia v Grubic (27 August 1993 – unreported on this point; BC 9300359). There, Debelle J said at 65, Cox and Duggan JJ agreeing:
The rule [in Hopkinson v Rolt] was designed to achieve two objects. The first was to leave the mortgagor in a position to raise further moneys on his property … . The second … was to prevent the first mortgagee with notice of the second from diminishing the value of the security for the second mortgage … .
97 Similar passages appear in the judgment of White J at [59], [62], [64], [67], [68], [69], [70] and other paragraphs. Although his Honour refers to many of the relevant authorities, I should give some more specific references.
98 Both Sykes and Fisher and Lightwood (2nd Aust ed) refer to notice of the mortgage or other encumbrance. See also the passage from Matzner cited above. In Hopkinson v Rolt, itself, at ER 833 (HLC 523-524) the Lord Chancellor stated the relevant question to be:
… prior mortgage for present and further advances; a subsequent mortgage of the same description; each mortgagee has notice of the other’s deeds; advances are made by the prior mortgagee after the date of the subsequent mortgage and with full knowledge of it; is the prior mortgagee entitled to priority for these advances over the antecedent advances made by the subsequent mortgagee?
99 At ER 840 (HLC 539) Lord Cranworth said:
The question, therefore, to be considered, is, what is the general rule or law of the Court as to the priority of two incumbrances standing in the position of these parties i.e., of a first mortgagee holding a mortgage to secure a present debt and future advances not exceeding a fixed amount and a second mortgagee, there being at the time of the execution of the second mortgage, notice to both mortgagees of both securities.
100 In West v Williams Lindley MR stated the rule as follows at 142:
A first mortgagee, whose mortgage is taken to cover what is then due to him, and also further advances, cannot claim the benefit of his security for further advances in priority to a second mortgagee of whose mortgage he had notice before the further advances were made. …
101 In my view the relevant notice, on the part of the first mortgagee is notice of the mortgage, not of an advance made thereunder. It is for that reason that, as Perpetual points out, the cases indicate that where each mortgagee knows of the other’s mortgage, advances will take effect in the order in which they are made. Each mortgagee, knowing of the other’s mortgage, ought make enquiries as to the amount owing to the other before making a further advance. This may be an example of the operation of the maxim that where the equities are equal, the first in time will prevail. It is not necessary, in this case, that I consider the additional complication which arises where there is an obligation to make further advances.
102 I should say something about the third point, the proposition that the rule applies only to priorities as between further advances. At [76] the primary Judge seemed to accept that only further advances by the second mortgagee would be protected by the rule in Hopkinson v Rolt. However the cases cited above do not support that proposition. In considering the question of priorities, the cases generally speak of priorities as between further advances by the first mortgagee and the moneys advanced at the time of the second mortgage.
103 Finally, even if the rule otherwise applied, the postponements demonstrate that the parties intended that Permanent’s securities take priority over Macquarie’s securities. Permanent’s securities secured the repayment of moneys owing, and to become owing, including further advances. There is no lack of clarity about these documents, executed by large commercial entities, no doubt having competent legal and financial advice available to them. Whether one looks at the strict legal situation or considers matters of justice and fair dealing, the result is that the parties should be held to the terms of their deed.
THE DISCRETION – FRESH EVIDENCE
104 Naxatu and Perpetual seek to lead further evidence. Naxatu did not plead that any money was owing to it and secured on the Naxatu properties. However Perpetual pleaded that it did not admit that any amount was owing to Naxatu and so secured. Naxatu led no evidence of any debt. In addresses at first instance, Perpetual relied upon the absence of debt, no doubt as going to the exercise of the discretion to order an inquiry. We were told on appeal that counsel for Naxatu responded by indicating that his instructions were that the amount owing was well in excess of the value of the Naxatu properties. Apparently counsel also suggested that if the absence of evidence was a discretionary problem, he would be content if any order was made “provisionally on demonstrating that.” In other words counsel asked the primary Judge to make an order for an inquiry, dependent upon evidence being subsequently provided as to indebtedness, in the event that his Honour thought such evidence to be necessary. Clearly, counsel was not entitled to take that position.
105 On appeal, counsel for Naxatu submitted that Perpetual could not take the point (absence of evidence of debt) on appeal because they “… had the principal of Naxatu in the witness box and didn’t suggest to him there was nothing due under the mortgages and that these mortgages did not secure substantial amounts and failed to demonstrate that Naxatu did not give valuable consideration to the mortgages.” In my view that submission unjustifiably shifts the onus of proof from Naxatu to Perpetual. It is most unlikely that the Court would order an inquiry at the suit of a person who was owed no money. If Naxatu wished to allege that it was owed money it should have done so in evidence. It cannot complain that Perpetual failed to raise the issue. It was plainly raised by the express non-admission and in addresses.
106 Naxatu seeks to tender two documents which are said to remedy this evidentiary shortcoming. The first is a proof of debt addressed to Sterling’s administrators. It is dated 6 February 2006 and signed by Edwin Yeung, whoever he may be. It asserts that on 30 January 2006, and at the date of the proof of debt, Sterling was indebted to GPC Custodian Proprietary Limited in the amount of $18,982,704.63, and that such debt arose out of a facility and guarantee agreement dated 20 July 2001. The facility and guarantee agreement is attached. Clearly, it is the document which created the charges over the Naxatu properties in favour of Macquarie. Attached to the proof of debt is a table setting out the calculation of the debt. It demonstrates a balance owing, as at 21 July 2004 of $10,724,358.12 and the accumulation of interest and other amounts thereafter, producing a total of $18,982,704.63. The proof of debt is obviously not in admissible form in that there is no supporting affidavit. However Perpetual did not take that point. In signing the priorities, Mr Yeung apparently acted on behalf of GPC Custodian Proprietary Limited, Naxatu’s predecessor in title.
107 Perpetual seeks to tender two documents, a draft letter dated 24 September 2009, and a second letter dated 6 October 2009. It is accepted that a letter in the form of the draft was sent. The letter was from Perpetual’s solicitors to Naxatu’s solicitors. It read as follows:
We refer to the above matters.
We note that your client is second registered mortgagee behind our client Perpetual of units in the above development.
Please advise what amount(s) your client asserts is owing and secured under the said mortgage(s) for principal, interest and costs and the circumstances of how the relevant indebtedness for the principal said to be owing first arose.
108 By the letter of 6 October 2009, Naxatu’s solicitors replied as follows:
We refer to your faxed letter dated 24 September 2009.
In our view your request is not a proper or appropriate matter for your client’s inquiry, and it does not arise on the pleadings in the Federal Court proceedings presently pending.
We are instructed nevertheless to confirm that the amount outstanding under the plaintiff’s mortgage is considerably in excess of the value of the remaining securities. The debt secured by the plaintiff’s mortgage was in excess of $18,000,000.00 in January 2006 and interest, fees and enforcement and preservation expenses subsequently accrued are substantial.
109 This correspondence was exchanged shortly after the filing of the defence on 14 September 2009, and before the hearing at first instance, which commenced in May 2010. The letters have also not been strictly proven. Perpetual seeks to tender the correspondence in order to demonstrate that Naxatu made a forensic decision not to call evidence as to any debt.
110 In my view the Court should not now receive fresh evidence concerning this issue. Even without reference to the two letters, it is quite clear that Naxatu chose not to lead evidence of any debt owing to it. The reference in the statement of claim to its status as second mortgagee, the absence of any allegation as to debt, Perpetual’s non-admission and the absence of evidence at the trial lead inevitably to that inference. In those circumstances the letters add nothing. As to Naxatu’s evidence, no explanation has been offered by Naxatu as to why it did not lead this evidence at first instance. There can be no suggestion that it was not available. As I have said it is clear that Naxatu decided neither to plead, nor seek to prove the existence of any debt. Perpetual has been deprived of any opportunity to investigate the matter, and Mr Yeung has not been cross-examined on it. In the circumstances, the parties should be held to the consequences of their conduct of the proceedings at first instance.
111 In some circumstances one might infer, from the existence of a mortgage, that a debt is owing. However Naxatu’s securities are very old. No inference could properly be drawn that any amount was owing. In those circumstances, the absence of evidence as to debt means that its application was bound to fail.
OUTCOME OF THE APPEAL
112 As I have previously noted, the primary Judge concluded that the postponements “operated according to their terms”, reversing the ranking of the Macquarie and Permanent mortgages. In so doing his Honour effectively held that the rule in Hopkinson v Rolt was excluded by the postponements. I agree. His Honour seems also to have concluded that the rule would only apply if there had been further advances by the second mortgagee. In my view, that conclusion is not justified by the decision in Hopkinson v Rolt itself, subsequent cases or the textbooks. Had his Honour disposed of the matter on that basis, the exercise of the discretion would have miscarried. However, as I read the reasons, his Honour correctly disposed of the matter on the basis that if the rule applied, its operation was excluded by the postponements.
113 In any event, as I have demonstrated, Naxatu’s application is misconceived for a number of reasons. First, the rule in Hopkinson v Rolt cannot apply to the proceeds of sale of the Perpetual properties, other than the Naxatu properties because Naxatu is not second mortgagee of those properties. Secondly, Naxatu’s major complaint seems to be as to Permanent’s conduct in entering into the deed of priority, and Perpetual’s conduct in complying with it. However there is no apparent basis for challenging the validity of the deed. Hence there is also no basis for challenging Perpetual’s conduct in giving effect to it.
114 As Naxatu holds second mortgages over the Naxatu properties it may, when they are sold, be entitled to an account as to the application of the proceeds. However the properties have not yet been sold. In any event, if Naxatu wishes to seek such an account it may make an application in the usual way and without recourse to s 423. It may also be entitled to an account in connection with Perpetual’s application of the proceeds of sale of Lot 78. Again, recourse to s 423 will not be necessary.
ORDERS
115 The appeal must be dismissed with costs.
I certify that the preceding one hundred and fifteen (115) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett. |
Associate:
IN THE FEDERAL COURT OF AUSTRALIA | |
NEW SOUTH WALES DISTRICT REGISTRY | |
GENERAL DIVISION | NSD 1107 of 2011 |
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA |
BETWEEN: | NAXATU PTY LIMITED ACN 002 197 131 Appellant
|
AND: | PERPETUAL TRUSTEE COMPANY LIMITED ACN 000 001 007 Respondent
|
JUDGES: | DOWSETT, JAGOT AND YATES JJ |
DATE: | 16 NOVEMBER 2012 |
PLACE: | SYDNEY |
REASONS FOR JUDGMENT
Jagot J:
THE APPEAL
116 In this appeal the appellant, Naxatu Pty Limited (Naxatu), contends that the primary judge erred in dismissing the proceeding in which Naxatu sought an inquiry under s 423 of the Corporations Act 2001 (Cth) (the Corporations Act) into the performance by the respondent, Perpetual Trustee Company Limited (Perpetual), of its functions as the controller (by virtue of being the first mortgagee) of certain properties and associated declarations including, in effect, that Perpetual furnish to Naxatu a discharge of Perpetual’s first mortgage. The primary judge’s reasons for judgment are published in Naxatu Pty Limited v Perpetual Trustee Company Limited; In the Matter of Sterling Estates Development Corporation Pty Limited (Receivers and Managers Appointed) (Subject to a Deed of Company Arrangement) [2011] FCA 669.
FACTS
117 The issues in the appeal are best understood in the context of the facts as presented to the primary judge.
118 Sterling Estates Development Corporation Pty Limited (Sterling Estates) is, or was, a development company.
119 On 20 July 2001 Sterling Estates granted a mortgage over some strata lots in Sterling Estates’ proposed development to Macquarie Australia Management Services Pty Limited (Macquarie), being registered mortgage 7805323.
120 On 10 September 2002 Sterling Estates entered into a series of transactions.
121 First, Sterling Estates granted two mortgages over some strata lots in Sterling Estates’ proposed development (including but not limited to the lots the subject of the mortgage to Macquarie) to Permanent Trustee Australia Limited (Permanent), being registered mortgages 8965248 and 8968538 respectively. Permanent was the custodian of a trust known as the Howard Mortgage Trust and held the mortgages in this capacity. Permanent was subsequently replaced by Perpetual as custodian of the trust (now known as the Challenger Howard Mortgage Trust) as a result of which all securities held by Permanent were transferred to Perpetual including registered mortgages 8965248 and 8968538. Registered mortgages 8965248 and 8968538 secured “Secured Moneys” as defined, being:
…all moneys which the Mortgagor or a Borrower (whether alone or with any other person) is or at any time may become actually or contingently liable to pay to or for the account of the Mortgagee or the Lender (whether alone or with any other person) for any reason whatsoever. It includes moneys at any time owing by way of principal, interest, fees, costs, Guarantee, indemnities, charges, duties or expenses or payment of liquidated or unliquidated damages under or in connection with, or as a result of any breach of or default under or in connection with, any Transaction Document or any other document or agreement.
122 Transaction Document is also defined in the mortgages as follows:
“Transaction Document” means any Facility Agreement, this Mortgage, any Collateral Security or any document defined as a Transaction Document in a Facility Agreement or any document or agreement entered into under, or for the purpose of amending or novating, any of them.
123 Second, Challenger Managed Investments Limited (Challenger), as the responsible entity and trustee of the Howard Mortgage Trust, pursuant to deeds of loan, advanced two loans to Sterling Estates, loan 2197 for $2,016,000 and loan 2198 for $1,106,000.
124 Third, Macquarie and Permanent as mortgagees entered into and registered memoranda of postponement of mortgage under s 56A of the Real Property Act 1900 (NSW) (the Real Property Act). Section 56A provides that:
(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.
…
(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.
125 The memoranda provide as follows:
Mortgage No. 7805323 is postponed in its entirety so that the priority of the mortgages shall be as if they had been registered in the order below:
1. Mortgage No. 8965428 dated 10-9-2002 to Permanent Trustee Australia Limited (ACN 008 412 913)
2. Mortgage No. 7805323 dated 20 July 2001 to Macquarie Australia Management Services Pty Limited (ACN 008 640 168)
Mortgage No. 7805323 is postponed in its entirety so that the priority of the mortgages shall be as if they had been registered in the order below:
1. Mortgage No. 8968538 dated…to Permanent Trustee Australia Limited (ACN 008 412 913)
2. Mortgage No. 7805323 dated 20 July 2001 to Macquarie Australia Management Services Pty Limited (ACN 008 640 168)
126 By s 36(11) of the Real Property Act the memoranda of postponement, on registration, took effect as a deed between Permanent and Macquarie. Section 36(11) provides that:
Upon registration, a dealing shall have the effect of a deed duly executed by the parties who signed it.
127 Between May 2003 and August 2005 Challenger made four further loans to Sterling Estates, each secured by a registered first mortgage over strata lots in Sterling Estates’ proposed development and each mortgage containing the same definition of “Secured Moneys” and “Transaction Documents” as set out above. By these loans the total principal amount that Sterling Estates owed Challenger was $16,546,030 (inclusive of the moneys advanced under the first two loans as set out above).
128 On 2 April 2004, Sterling Estates, Permanent and Bridgecorp Finance Limited (Receiver and Manager Appointed) (In Liquidation) (Bridgecorp) entered into a deed of priority concerning the payment of proceeds of sale from lots secured by the mortgages to Permanent and, in furtherance of the deed, to be secured by a mortgage to Bridgecorp. These lots did not include the lots the subject of the mortgage to Macquarie. At about the same time, Bridgecorp lent to Sterling Estates $6,585,000 in order to facilitate completion of the development.
129 Sterling Estates had defaulted under its loan obligations to Challenger by September 2005. On 30 January 2006 Sterling Estates went into voluntary administration. On 1 February 2006 Perpetual (which had succeeded to Permanent’s rights as mortgagee on 7 August 2005) appointed receivers and managers to Sterling Estates.
130 As described by the primary judge at [39] and [40], as at “August 2006, Bridgecorp held a second ranking registered mortgage over several properties in respect of which Perpetual held a first registered mortgage (the Bridgecorp securities). The Bridgecorp securities comprised different home units from those which comprised the Naxatu securities. Those home unit properties were part of four separate strata plans. Strata Plan 67386, in which the Naxatu securities were registered, was not one of the strata plans in which the Bridgecorp securities were to be found”. There is no suggestion by Naxatu in the appeal that this description by the primary judge was inaccurate in any way.
131 In the meantime Macquarie had transferred its mortgage 7805323 to GPC Custodian Pty Limited (GPC). On 11 August 2006, for consideration of $1.00, GPC transferred to Naxatu mortgage 7805323 (the mortgage granted by Sterling Estates to Macquarie on 20 July 2001). As the primary judge put it at [24], “Perpetual’s first ranking mortgages [over at least 18 strata lots in Sterling Estates’ development] attached to all of Naxatu’s securities [the latter being lots 25, 65, 71, 82 and 83 in strata plan 67386, within Sterling Estates’ development]”.
132 The foundation of Naxatu’s complaints (by reason of which it sought the inquiry under s 423 of the Corporations Act and various declarations) are Naxatu’s contentions that by application of the rule in Hopkinson v Rolt [1861] 9 HL Cas 519; (1861) 11 ER 829 (Hopkinson v Rolt) and/or s 58(3) of the Real Property Act Naxatu’s interests under mortgage 7805323 have priority over the further advances made by Challenger to Sterling Estates after 10 September 2002 (the date on which the memoranda of postponement were executed) and over what Naxatu described as the further advances to Bridgecorp under the deed of priority. According to Naxatu the primary judge erred in rejecting these contentions. Section 58(3) of the Real Property Act, it may be noted, regulates the application of the proceeds of a sale by a mortgagee in these terms:
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.
PRIMARY JUDGE’S REASONING
133 The primary judge rejected Naxatu’s claims in respect of priority over the further advances subject to the Perpetual mortgages in these terms:
73 Naxatu contended that all advances made by Permanent or Perpetual after 11 September 2002, when the Postponements were signed, were made with notice of Naxatu’s mortgage and of its terms. This proposition is then used as a springboard for the further proposition that those further advances must rank behind advances made under the Naxatu mortgage—even those made prior to 11 September 2002.
74 This cannot be.
75 The Postponements operated according to their terms. They reversed the ranking between Macquarie’s mortgage (now Naxatu’s mortgage) and those of Permanent (now Perpetual).
76 Second, as Senior Counsel for Perpetual submitted, mere notice of the existence of the Macquarie mortgage could never be enough. There would have to be further advances in order to engage the principle in Hopkinson v Rolt (1861) 11 ER 829. There was no evidence of any such advances.
77 This argument advanced by Naxatu (Issue (a)(vi)) should be rejected.
134 The primary judge also rejected Naxatu’s claims based on the deed of priority involving Bridgecorp as follows:
57 As mentioned earlier in these Reasons, the parties to the Deed of Priority were Permanent, Bridgecorp and Sterling. As at 2 April 2004, Naxatu was not involved, although one or other of its predecessors, Macquarie or GPC, was a secured lender to Sterling. As at 2 April 2004, Sterling was not in default under its various loan arrangements. Nor was there any suggestion that it was insolvent at that time.
58 In Recital A, the parties to the Deed of Priority acknowledged that Sterling had mortgaged the properties identified in that Recital to Permanent “… to secure repayment of all moneys lent or advanced by Challenger as trustee of the Howard Mortgage Trust from time to time to or at the request of [Sterling]”. The properties identified in that Recital were the Bridgecorp securities.
59 Recital B contained an acknowledgement that Sterling was prohibited from creating any further mortgages over the mortgaged properties without the prior consent of Permanent.
60 Recital C recited the proposal for Sterling to grant a second mortgage over the Bridgecorp securities. Recital D recorded Permanent’s consent to that proposal.
61 The operative clauses (clauses 1 to 8 of the Deed of Priority) are in the following terms:
1. The First Lender and the Second Lender hereby consent to the execution and registration of the First Mortgage and the Second Mortgage.
2. The First Lender and the Second Lender hereby agree with each other that the respective priorities to be afforded to the First Mortgage and the Second Mortgage shall be as follows
(1) First Priority – to the First Lender Nine Million, Three Hundred and Fifty Three Thousand, Two Hundred and Thirty Dollars and Zero Cents ($9,353,230.00) plus interest and all moneys costs charges and expenses which the First Lender may incur or pay in or incidental to enforcing the First Mortgage.
(2) Second Priority – to the Second Lender for all moneys secured by the Second Mortgage.
3. The First Lender and the Second Lender agree with each other that the priorities set out in Clause 2 of this Deed shall enure to the First Lender and the Second Lender notwithstanding any payment or credit which may be received or allowed by the First Lender or the Second Lender or any fluctuations in the amount or amounts secured by the First Mortgage or the Second Mortgage or any application of the rule in Clayton’s case or the rule in Hopkinson v Rolt (1861) 9 HLC 514 and notwithstanding any notice heretofore or hereafter received by the First Lender or the Second Lender or any other fact or circumstance which might otherwise impair or postpone the said priorities. The First Lender and the Second Lender agree in favour of each other to provide a partial discharge in respect of their respective Mortgages upon settlement of bona fide sales of a Mortgaged Property for fair value. Notwithstanding anything else in this Deed, the First Lender agrees that the First Priority amount shall be permanently reduced by the principal amount received by it upon such a discharge.
4. The First Lender and the Second Lender agree with each other that nothing in this Deed shall be construed as obliging either of them to give any notice to the other of any advances or accommodation which may in the future be made to any person or the incurring of any liability which are secured or intended to be secured by the First Mortgage or the Second Mortgage.
5. Subject only to the priorities referred to in Clause 2 hereof the execution of this Deed by the First Lender and the Second Lender is without prejudice to the respective rights powers and remedies of the First Lender and the Second Lender as regards the Mortgaged Properties and as regards the personal covenants of the said Mortgagor (if any) pursuant to the First Mortgage or the Second Mortgage and all sureties (if any) pursuant to the First Mortgage or the Second Mortgage or under any other security instrument or document given by the said Mortgagor in favour of the First Lender or the Second Lender (as the case may be).
6. The First Lender and the Second Lender hereby agree that neither will transfer, assign or otherwise deal with their respective security without first causing any transferee, assignee or other party thereby obtaining an interest therein to enter into a Deed by which it undertakes to be bound by the provisions of this Deed in so far as they relate to the party hereto from which its interest is derived.
7. The Mortgagor covenants and agrees to the terms and conditions herein contained and further covenants and agrees to pay the costs and expenses of the First Lender and Second Lender in relation to the preparation and execution of this Deed.
8. Notwithstanding anything else contained in this Agreement the Second Lender acknowledges and agrees that the First Lender has entered into this Agreement in its capacity as the custodian of the Howard Mortgage Trust (“the Trust”) and in no other capacity and that the First Lender is not liable to pay or satisfy any of its obligations under this Agreement, and shall have no liability to the Second Lender except to the extent of the First Lender's right of indemnity out of the assets of the Trust and that if those assets are insufficient, the Second Lender shall not seek to recover any shortfall by bringing proceedings against the First Lender personally or applying to have the First Lender wound up and the Second Lender waives its rights and releases the First Lender from any personal liability whatsoever in respect of any loss or damages which cannot be paid or satisfied out of the, assets of the Trust.
62 The Deed of Priority operates as a contract. It binds only the parties to that contract.
63 The effect of clauses 2 and 3 is:
(a) Permanent is to be accorded first priority in respect of the mortgaged properties and the sale proceeds thereof up to the amount of $9,353,230 “… plus interest and all moneys costs charges and expenses which [Permanent] may incur or pay in or incidental to enforcing its first mortgage”;
(b) After Permanent has been paid the total amount specified in (a), Bridgecorp is to be paid out of the proceeds of sale of the mortgaged properties “… all moneys secured by …” its second mortgage;
(c) After payment of the amounts specified in (a) and (b), if any other sums are due to Permanent under its first mortgage, those sums are then to be paid to it;
(d) The priorities laid down in clause 2 override any general law principles of the type described in clause 3;
(e) As necessary, in order to give effect to the agreed priorities, each of Permanent and Bridgecorp agreed to provide a partial discharge of their respective mortgages upon settlement of bona fide sales of any of the mortgaged properties for fair value; and
(f) The first priority amount is to be regarded as permanently reduced by the principal amount received by Permanent upon each such discharge.
64 The Deed of Priority contemplated that each of Permanent and Bridgecorp could make further advances to Sterling and could do so without notice to the other (clause 4).
65 No fresh obligation to make payments to either Permanent or Bridgecorp was imposed upon Sterling by the Deed of Priority. Its obligations to its lenders continued to be embodied in the relevant primary security documents.
66 Naxatu contends that, by honouring their commitments to Bridgecorp under the Deed of Priority, Permanent and Perpetual paid out moneys to Bridgecorp which they should have retained. Naxatu goes on to contend that, had those moneys been retained, Sterling’s debts to Permanent/Perpetual would have been lower than the accounting between Permanent/Perpetual and Sterling would suggest. The reduction of the indebtedness of Sterling to Permanent/Perpetual would enure for the benefit of Naxatu because the Naxatu securities would yield a return for Naxatu which was greater than would be the case if Permanent/Perpetual proceeded in accordance with the Deed of Priority, as it has done.
67 These arguments advanced by Naxatu ignore the fact that all of the mortgages granted by Sterling to Permanent were “all moneys” mortgages. The standard expression is “Secured Moneys” and took the following form:
“Secured Moneys” means all moneys which the Mortgagor or a Borrower (whether alone or with any other person) is or at any time may become actually or contingently liable to pay to or for the account of the Mortgagee or the Lender (whether alone or with any other person) for any reason whatsoever. It includes moneys at any time owing by way of principal, interest, fees, costs, Guarantee, indemnities, charges, duties or expenses or payment of liquidated or unliquidated damages under or in connection with, or as a result of any breach of or default under or in connection with, any Transaction Document or any other document or agreement.
68 The definitions of “Security Interest” and “Transaction Document” are also pertinent. Those definitions provide:
“Security Interest” means any mortgage, pledge, lien or charge or any security or preferential interest or arrangement of any kind, or any other right of or arrangement with any creditor to have its claims satisfied prior to other creditors with, or from the proceeds of, any asset (including retention of title other than in the course of day-to-day trading and any deposit of money by way of security) but excluding any charge or lien arising in favour of any Governmental Agency by operation of statute provided there is no default in payment of the moneys secured by such charge or lien.
“Transaction Document” means any Facility Agreement, this Mortgage, any Collateral Security or any document defined as a Transaction Document in a Facility Agreement or any document or agreement entered into under, or for the purpose of amending or novating, any of them.
69 The effect of these definitions in the mortgages, when read with the security clauses in the standard memorandum given by Sterling to Permanent (esp clause 6), is that, as between Permanent (and, later, Perpetual), all of the properties mortgaged by Sterling stood as security for all of the loans made to it by Permanent/Perpetual on behalf of Challenger. There was nothing in the security documents or in the surrounding circumstances that would suggest otherwise. The mere fact that separate Deeds of Loan and separate mortgage documents were executed does not alter this conclusion.
70 The Deed of Priority did not have any impact on those arrangements as between Sterling and Permanent/Perpetual. It simply regulated priorities as between Permanent/Perpetual and Bridgecorp in respect of moneys secured by their respective mortgages.
71 It follows from this analysis that Naxatu cannot complain about the way in which Perpetual has interpreted its own mortgages (it having done so correctly) nor can it complain about the existence of the Deed of Priority or the performance of its terms by Permanent/Perpetual and Bridgecorp.
135 The primary judge did not accept Naxatu’s claim about the operation of s 58(3) of the Real Property Act, concluding as follows:
78 Naxatu argued that, read literally, s 58(3) of the Real Property Act overrides or renders nugatory the contractual arrangements between the parties once a mortgagee in possession effects sales of the mortgaged property. Naxatu then suggested that it overrides the Deed of Priority.
79 But s 58(3) simply provides an order of payment which subsumes and has regard to the parties’ contractual arrangements.
80 This argument too must be rejected.
DISCUSSION
Hopkinson v Rolt
136 It is apparent that the primary judge considered that Hopkinson v Rolt was not engaged on the facts of the present case because there was no evidence or even suggestion that any money had been advanced to Sterling Estates under mortgage 7805323 after registration of the memoranda of postponement of mortgage under s 56A of the Real Property Act by which Permanent (and thus its successor Perpetual) was put on notice of the existence of Naxatu’s mortgage 7805323 and which, by operation of the memoranda of postponement, became a mortgage second in time to each of Perpetual’s mortgages 8965248 and 8968538.
137 Naxatu contended that the primary judge’s conclusion is incorrect because the rule in Hopkinson v Rolt is engaged whenever a first mortgagee (in this case, by operation of the memoranda of postponement, Perpetual) knowing of a second mortgagee’s security (in this case, also by operation of the memoranda of postponement, Naxatu’s mortgage), makes further advances. In such a case the first mortgagee cannot tack the further advances made after notice of the second mortgagee’s security (in this case, the four further loans made between May 2003 and 7 August 2005) to any advances made before such notice (in this case, loan 2197 for $2,016,000 and loan 2198 for $1,106,000 made on 10 September 2002) so as to obtain priority of those further advances over the second mortgagee’s interest. According to Naxatu this result follows whether or not moneys were advanced by the second mortgagee before or after the first mortgagee was put on notice of the second mortgagee’s security and itself made further advances thereafter. In Naxatu’s words:
Where, as here, the new first mortgagee knows at the time of making a discretionary further advance that the effect of applying the all moneys clause to the further advance will detract from the security position of the new second mortgagee, it is submitted that the same rule against tacking is applicable.
138 According to Naxatu, Hopkinson v Rolt itself involved an advance by a person in the position of the second mortgagee (although, in fact, the third mortgagee in that case) before the making of the further advances which the first mortgagee then sought to tack to earlier advances the first mortgage had made given before receiving notice of the subsequent (third) mortgage.
139 It is true that the headnote for Hopkinson v Rolt in the House of Lords Cases reports expresses a principle in broad terms (at 513) as follows:
A first mortgagee, whose mortgage is taken to cover what is then due and also future advances (within a fixed amount), cannot claim the benefit of such advances in priority over a second mortgagee, of whose mortgage he had notice at the time of its execution, and before he made these new advances.
140 However, analysis of the reasoning of the Lord Chancellor, Lord Campbell, and Lord Chelmsford (in the majority; Lord Cranworth dissenting) supports Perpetual’s submission in the appeal and before the primary judge that the principle established in Hopkinson v Rolt regulates the priorities as between competing advances by first and second mortgagees after notice. The rule is not engaged in circumstances where, as here, there was no evidence or suggestion before the primary judge that any advance was made pursuant to Naxatu’s mortgage after the parties’ predecessors in title were on notice of the existence of each other’s mortgages by reason of execution of the memoranda of postponement.
141 In Hopkinson v Rolt itself the appellants represented a bank. A merchant, Mare, had granted a first mortgage over his estates on 6 January 1855 and a second mortgage to the bank on 26 January 1855. The bank’s mortgage was given with the knowledge of Mare’s father-in-law and business backer, the respondent Rolt. The bank’s mortgage secured money which was then or at any time thereafter due or owing to the bank. On 12 February 1855 Mare granted a third mortgage over the same property to his father-in-law Rolt to secure the repayment by Mare to Rolt of “money then due, or of money which the Respondent should be called on to pay on account of Mare” (at 515). After the date of this third mortgage and with knowledge of it the bank made further advances to Mare. Mare was later declared bankrupt. Rolt was called upon to pay Mare’s dishonoured bills. Rolt claimed that his third mortgage took priority over the further advances the bank had made after the date of his third mortgage.
142 At 523 the Lord Chancellor, Lord Campbell, identified the issue for resolution in these terms:
Independently of any particular agreement between these parties, either express or to be implied from their dealings, beyond what is to be found in the written documents, I think the question is accurately as well as tersely stated by Lord Chancellor Chelmsford in the judgment appealed against, “A prior mortgage for present and future advances; a subsequent mortgage of the same description; each mortgagee has notice of the other’s deeds; advances are made by the prior mortgagee after the date of the subsequent mortgage, and with full knowledge of it; is the prior mortgagee entitled to priority for these advances over the antecedent advance made by the subsequent mortgagee?”
143 After a detailed analysis of the reported versions of Gordon v Graham (1716) 2 Eq Cas Abr 598, pl. 16; 22 ER 502 (Gordon v Graham) Lord Campbell concluded (at 532) that the decision did not support the proposition of law for which it had been cited as authority, namely, that a first mortgage, with a mortgage expressed to cover further advances, has priority not only for what might be owing at the time of a second mortgage but also for all further advances made after notice of the second mortgage. At 535 Lord Campbell examined the principles underlying this proposition, noting that: – (i) a mortgagor retains an equity of redemption which is the mortgagor’s property and with which the mortgagor is free to deal consistently with the first mortgage, (ii) a first mortgagee, knowing the extent of the second mortgage, can decide either to make or not to make further advances, and (iii) a second mortgagee, knowing of the first mortgage, can also decide to make or not to make advances – there is no fraud on the first mortgagee because each decides whether to advance moneys or not on notice of the other’s security. On this basis Lord Campbell decided that Gordon v Graham should be overruled. His Lordship then asked (at 535) whether there was any agreement between Rolt and the bank that Rolt “should not use his mortgage, so as to have a preferable security for farther advances to Mare”. The bank argued that if by his subsequent mortgage Rolt obtained “a priority as to future advances” the bank’s mortgage would be “wholly useless”. Lord Campbell dismissed this as a fallacy on the basis that the bank’s mortgage secured all past advances (that is, those made before notice of Rolt’s third mortgage) absolutely and the further advances to the agreed maximum sum absolutely until notice of the subsequent mortgage.
144 Lord Chelmsford agreed with the Lord Chancellor. At 551 Lord Chelmsford described Gordon v Graham as based on the proposition that it is “perfectly just and reasonable...that a person advancing money on a second mortgage with notice of a prior mortgage, covering future as well as present advances, must always be postponed to the first mortgagee…”. According to Lord Chelmsford at 553 the effect of such a proposition would be that a mortgagee, by taking a security for advances which may never be made, may “effectually preclude a mortgagor from afterwards raising money in any other quarter”. Lord Chelmsford continued:
And, as the first mortgagee is not bound to make the stipulated farther advances, and with notice of a subsequent mortgage, he can always protect himself by inquiries as to the state of the accounts with the second mortgagee, if he chooses to run the risk of advancing his money with the knowledge, or the means of knowledge, of his position, what reason can there be for allowing him any priority? What injustice is done to him by postponing him to the second mortgagee under such circumstances? But, on the other hand, if it is to be held that he is always to be secure of his priority, a perpetual curb is imposed on the mortgagor’s right to encumber his equity of redemption.
Difficulties were raised in argument as to the mode in which the alternating priorities between the respective mortgagees might have to be adjusted. But the simple answer to these suggestions is, that the advances must have priority according to the order in which they are made. No difficulty of this kind, however, arises in the present case,
…
I admit that special circumstances may vary the rights of the parties, but these must bear equally on the position of both mortgagees. The second mortgagee might waive his priority in respect of certain advances and insist upon it with respect to others.
145 Naxatu submitted that it was apparent from the references to money “then due” under the third mortgage to Rolt and “antecedent advances” at 515 and 523 respectively of Hopkinson v Rolt that the principle operated to give priority to Rolt’s mortgage over the bank’s further advances in respect of not only further advances by Rolt but also any initial advance by Rolt. Naxatu submitted that this was the same in terms of principle as the present case in which moneys were advanced to Sterling Estates under mortgage 7805323 and before the grant of the mortgages 8965248 and 8968538 and the further advances made by Challenger after the execution of the memoranda of postponement.
146 However, there are indications in Hopkinson v Rolt that it is concerned with priorities between advances made by a first and a second mortgagee after each has obtained notice of the other’s security. The indicators are both textual and arise by reason of principle. As to the textual indicators, it is not at all clear that any moneys were in fact “then due” to Rolt by Mare at the time the third mortgage was granted. Indeed, the headnote to the judgment in (1861) 11 ER 829 expresses the principle for which the case stands in these terms:
Where a mortgage is executed to secure present and future advances to a specified amount made and to be made by A, and afterwards B, with notice, advances money, and then A, with notice of B’s mortgage, advances further sums within the amount specified in his first mortgage, A is not entitled to priority over B in respect of such further advances made with notice of B’s mortgage.
147 In other words, the “antecedent advances” by Rolt, in context, are not advances made before the grant of the second mortgage to the bank. They are advances made after that mortgage but before the bank’s own further advances to Mare. So much appears from the references to farther or future advances by Rolt at 535. It is also apparent from the description of Gordon v Graham (which Hopkinson v Rolt overruled) at 551 concerning “a person advancing money on a second mortgage with notice of a prior mortgage…”. In other words, the very issue with which Hopkinson v Rolt was concerned was the competition between advances by two mortgages made with notice of each other’s mortgages. Gordon v Graham would permit the first mortgagee to tack all further advances after notice of the second mortgage to the initial advance made without notice in priority to the second mortgagee’s advances after notice of the first mortgage. Hopkinson v Rolt does not permit tacking in these circumstances; but for the principle to operate at all there must be an advance by the second mortgagee with notice of the first mortgage.
148 As to issues of principle, the decision in Hopkinson v Rolt is based on concepts of justice and fairness as between the mortgagor and mortgagees. Fairness requires that a mortgagor be able to deal with their remaining equity after the grant of a first mortgage. A mortgagor should not be captive to a first mortgagee who may or may not make further advances. A first mortgagee, once notice of the existence and extent of a second mortgagee’s security is obtained, can look after their own interests. So can a second mortgagee who, with notice of the existence and extent of the first mortgagee’s security, is also free to make or not make further advances. The principle thus resolves the priority of advances by each mortgagee after notice of each other’s interest is obtained.
149 The scope of the principle in Hopkinson v Rolt has not subsequently been expanded and there is no reason which would support its expansion. In Deeley v Lloyds’ Bank Ltd [1912] AC 756 at 784 Lord Shaw cited with approval the description of the principle by Lord Blackburn in London and County Banking Co v Ratcliffe (1881) 6 App Cas 722 at 738 that:
A mortgage to secure future advances not exceeding a certain amount, though perfectly good as against the mortgagor, gave the mortgagee no equity to postpone advances made by the second mortgagee with notice to the first to advances made by the first mortgagee after notice of the second mortgage.
150 In Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293 Holland J accepted that the rule in Hopkinson v Rolt applied to Torrens title land but excluded the rule in a case where the first mortgagee was bound to make further advances and the further advances (to be used to improve the mortgaged property by completing building works thereon) had the effect of increasing, not decreasing, the value of the mortgaged property. At 299 Holland J observed that the rule must be based on considerations of justice as between the competing mortgagees. The same explanation for the existence of the rule was given by King CJ (with whom Millhouse J agreed) in Mercantile Credits Ltd v Australia and New Zealand Banking Group Ltd (1988) 48 SASR 407 at 408-409. In Westpac Banking Corporation v Adelaide Bank Limited (2005) 12 BPR 22,919; [2005] NSWSC 517 at [75] White J explained that:
Although the authorities do not all speak with one voice, their effect is that before equity will regard it as fraudulent for a first mortgagee to insist on its priority for subsequent advances, it is necessary that it have had actual notice of an intervening equitable interest. It is apparent from Deeley v Lloyds Bank Ltd [1912] AC (at 768), that it is not necessary to show that at the time of the subsequent advance, the first mortgagee has knowledge, in the sense of an actual awareness, of the second mortgagee’s interest. Although it is sufficient for the second mortgagee to show notice, and not knowledge, it must show that actual notice of its having made an advance on second mortgage was given to the person or persons who represent the mind of the first mortgagee.
151 In the present case, it is common ground that there was no evidence before or suggestion to the primary judge of any advance made under mortgage 7805323 after 10 September 2002, the date on which the predecessors in title to Perpetual and Naxatu, on Naxatu’s case, were put on notice of the existence of each other’s securities. As Perpetual put it, there is simply nothing in this case to which the principle in Hopkinson v Rolt can attach. There is no advance under mortgage 7805323 after the grant of mortgages 8965248 and 8968538 upon which the principle in Hopkinson v Rolt can operate.
152 In any event, the memoranda of postponement gave mortgages 8965248 and 8968538 priority over mortgage 7805323. By s 56A(4) of the Real Property Act mortgages 8965248 and 8968538 became entitled in priority over mortgage 7805323 “as if they had been registered in the order in which by the memorandum they are expressed to have priority”. By s 41 of the Real Property Act the land over which the mortgages are secured became “liable as security in manner and subject to the covenants, conditions, and contingencies set forth and specified in” the mortgages. The memoranda of postponement did not otherwise create a fiction in which money advanced under mortgage 7805323 before mortgages 8965248 and 8968538 were granted (a fact or asserted fact to which further reference is made below) became money advanced after mortgages 8965248 and 8968538 were granted but before the four further advances between May 2003 and August 2005 were made. As such, there was no relevant competition between Perpetual and Naxatu as mortgagees for the rule in Hopkinson v Rolt to resolve.
153 Naxatu’s contention, that the rule operates to give whatever debt is due to it under mortgage 7805323, priority over the debts due under mortgages 8965248 and 8968538, is misconceived. It attempts to take a principle intended to achieve fairness between mortgagees, engaged when there are, on the one hand, advances made by the second mortgagee with notice to the first mortgagee and, on the other hand, advances made by the first mortgagee after notice of the second mortgage, to a situation which bears no resemblance to these circumstances. One may ask, what possible consideration of fairness is engaged in the present case, where (assuming in Naxatu’s favour) money was lent under mortgage 7805323, second mortgages are then granted, the mortgagees as between themselves agree that the second mortgages take priority over the first, moneys are advanced under the second (now deemed to be the first) mortgages, and no further moneys whatsoever are advanced under the first (now deemed to be the second mortgage). If the foundation of the rule is fairness as between mortgagees Naxatu’s case falls well outside what the possible scope of the rule might be.
154 Accordingly, the primary judge was correct to conclude as he did at [73]-[77] of his reasons for judgment. For these reasons it is not necessary to consider whether the rule in Hopkinson v Rolt may apply or is necessarily excluded where mortgages are postponed pursuant to s 56A of the Real Property Act.
Bridgecorp
155 Naxatu also contended in the appeal that the rule against tacking in Hopkinson v Rolt precluded Perpetual from “tacking liabilities it has voluntarily incurred through subsequent dealings with the mortgagor (and Bridgecorp in this case) that are calculated to and do have the equivalent detrimental effect on the value of the 2nd ranking mortgagee’s interest”.
156 This also seems misconceived. References to Naxatu’s interest being devalued are beside the point in circumstances where no advances were made after the grant of Perpetual’s mortgages. The obligations of Perpetual to account to Bridgecorp under the deed of priority have nothing to do with priorities as between competing advances resolved by the rule in Hopkinson v Rolt. Naxatu appeared to rely on a reference in the transcript in which senior counsel for Perpetual referred to “a further advance” in the context of the deed of priority. Apart from the fact that senior counsel seems to have been referring to the advances by Perpetual and Bridgecorp to Sterling Estates and not Perpetual’s accounting to Bridgecorp as required by the deed of priority, nothing can be gained by attempting to characterise Perpetual’s obligations to Bridgecorp by reference to the transcript. As Perpetual put it:
The Deed of Priority was made between Sterling Estates, Permanent and Bridgecorp on 5 April 2004. It related to some 24 strata lots in which no other mortgagee (including Macquarie) had any interest. It reflected the fact that actual advances were made by each of Permanent and Bridgecorp to Sterling Estates at the time, under respective first and second mortgages. Permanent’s eventual obligation to account to Bridgecorp could hardly be described as a “further advance”; it was the payment of moneys to which it was agreed Bridgecorp was entitled, which necessarily had the effect that Sterling Estates’ indebtedness to Permanent/Perpetual had not been reduced by the proceeds of sale of mortgaged properties, to the extent that Bridgecorp was entitled to share in those proceeds.
157 The primary judge was thus correct to dismiss Naxatu’s case insofar as it depended on this complaint.
Section 58(3) Real Property Act
158 Section 58(3) of the Real Property Act also provides Naxatu with no assistance in the appeal.
159 Naxatu submitted that s 58(3) operates according to its terms and cannot be overridden by the deed of priority. It may be accepted that s 58(3) operates according to its terms. So much is a given. But the primary judge was plainly right in stating that “s 58(3) simply provides an order of payment which subsumes and has regard to the parties’ contractual arrangements”. Moreover, and as Perpetual noted, the deed of priority concerned properties secured by the mortgages of Perpetual and Bridgecorp, not Naxatu’s mortgage. Naxatu had no right, title or interest in the properties the subject of the deed of priority. Naxatu’s mortgage, accordingly, is not a “subsequent mortgage’ within the meaning of s 58(3) because it is secured over other lots. In these circumstances, Naxatu’s references to the statutory trust which s 58(3) creates are disconnected from the facts of the case. Moreover, nothing in s 58(3) gives the section the effect for which Naxatu contended – the setting aside of the deed of priority as between the persons bound by that deed.
Other matters
160 During the hearing of the appeal Naxatu sought to tender fresh evidence (which s 27 of the Federal Court of Australia Act 1976 (Cth) permits), being a formal proof of debt asserting an indebtedness of Sterling Guardian Pty Ltd to GPC arising on 20 July 2001 pursuant to a facility and guarantee agreement in the sum of $18,982,704.63, said not to be secured in any way, as well as a facility and guarantee agreement. Naxatu said it did not seek to rely on these documents as evidence on which this court might make any finding of fact in the appeal but, rather, that the documents proved the existence of a debt under mortgage 7805323 so that, if Naxatu succeeded in the appeal, it would have a proper basis for submitting that the proceeding should be remitted to the primary judge to ascertain the competing priorities.
161 Perpetual opposed the tender on the following grounds: – (i) as the transcript shows Naxatu made a conscious forensic decision not to lead this evidence before the primary judge, (ii) the evidence Naxatu now seeks to adduce was always available to it, (iii) Perpetual made an explicit inquiry about this very issue in November 2009 but Naxatu chose not to plead anything other than the mere existence of the mortgages as opposed to any indebtedness of Sterling Estates under the Naxatu mortgage, (iv) Naxatu confirmed its forensic decision during closing submissions when this very issue was raised by Perpetual, (v) s 423 of the Corporations Act does not authorise a roving inquiry and the hearing before the primary judge cannot be treated as a dress rehearsal, (vi) the documents are inconclusive and do not come near cogently proving any present indebtedness under the Naxatu mortgage, and (vii) the Naxatu mortgage was transferred to Naxatu for $1.00 which speaks against it securing any debt.
162 I have not resolved this appeal on the basis (put by Perpetual in its submissions to the primary judge and in the appeal) that Naxatu failed to prove any indebtedness at all under the Naxatu mortgage. Nor did the primary judge determine the case on that basis. In this sense, the fresh evidence is immaterial. The fact that Naxatu was forced to attempt to tender this evidence during the appeal, however, discloses a misconception in Naxatu’s approach from the outset. Naxatu was seeking to demonstrate a proper basis for an inquiry under s 423 of the Corporations Act and the making of declaratory relief in its favour. It was always a matter for Naxatu to adduce sufficient evidence to provide a proper basis for the relief it sought. It was not incumbent upon Perpetual to deny any debt due under the Naxatu mortgage in order for this most basic of facts to be in issue before the primary judge. Naxatu’s apparent belief that it could assert the mortgages and nothing more without proving the existence of any debt at all was unfounded and plainly wrong in principle. Similarly, Naxatu’s apparent assumption that it was entitled to a discharge of Perpetual’s mortgages (the rights it claimed to have been denied) was also wrong. Even if Naxatu’s claims had the benefit of a sound legal and factual foundation (which they do not) the result could not have transformed the money owed to Perpetual into an unsecured debt. Naxatu’s reliance on what it described as the practical position (based on its assertion of indebtedness under the Naxatu mortgage exceeding the value of the secured property) was not a proper foundation for the relief it sought in this regard. As the fresh evidence is immaterial it should not be permitted to be tendered. Indeed, even if it were material in some way, I would have reached the same conclusion for all of the reasons which Perpetual identified as set out above.
Conclusion
163 For these reasons, the appeal should be dismissed with costs.
I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot. |
Associate:
Dated: 16 November 2012
IN THE FEDERAL COURT OF AUSTRALIA | |
NEW SOUTH WALES DISTRICT REGISTRY | |
GENERAL DIVISION | NSD 1107 of 2011 |
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA |
BETWEEN: | NAXATU PTY LIMITED ACN 002 197 131 Appellant
|
AND: | PERPETUAL TRUSTEE COMPANY LIMITED ACN 000 001 007 Respondent
|
JUDGES: | DOWSETT, JAGOT AND YATES JJ |
DATE: | 16 NOVEMBER 2012 |
PLACE: | SYDNEY |
REASONS FOR JUDGMENT
Yates J:
164 I agree that the appeal should be dismissed with costs, substantially for the reasons given by Dowsett J. I wish to add the following remarks.
165 The rule in Hopkinson v Rolt (1861) 9 HLC 514; 11 ER 829 must give way to the agreement of the relevant parties. The rationale for the rule is based on considerations of justice and fair dealing between competing mortgagees and, in particular, the prevention of equitable fraud affecting the interests of a subsequent mortgagee: West v Williams [1899] 1 Ch 132 at 143-144 and 146; Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293 at 299; Central Mortgage Registry of Australia Ltd v Donemore Pty Ltd [1984] 2 NSWLR 128 at 132. Here the appellant’s (Naxatu’s) security (Mortgage 7805323) – which it had acquired through a chain of transfers – had been postponed in its entirety to Mortgages 8965248 and 8968538 (the Permanent mortgages) by agreement between the original mortgagee Macquarie Australia Management Services Pty Limited (Macquarie) and Permanent Trustee Australia Limited (Permanent), as mortgagee of the Permanent mortgages. It is manifest that, at the time of that agreement, the Permanent mortgages were “all moneys” mortgages. The postponement of Mortgage 7805323 to the Permanent mortgages was made under the provisions of s 56A of the Real Property Act 1900 (NSW) (the Real Property Act) by a dealing in registrable form. Upon registration, that dealing had effect as a deed between Permanent and Macquarie: s 36(11) of the Real Property Act. As Dowsett J has observed, those parties should be held to the terms of their deed. There is nothing that has been put before us that would impugn the validity of the transaction between Permanent and Macquarie or which could have maintained, in those circumstances, any intervening equity in Macquarie. When it acquired its interest in Mortgage 7805323, Naxatu could have been in no better position than Macquarie as against Permanent or its transferee, Perpetual Trustee Company Limited (Perpetual), the current proprietor of the Permanent mortgages and the respondent in this appeal.
166 Moreover, I am unable to see how, in any event, the arrangements between Permanent, Bridgecorp Finance Limited (Receiver and Manager Appointed) (In Liquidation) (Bridgecorp) and Sterling Estates Development Corporation Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (Sterling) under the deed of priority – as those arrangements have now come to govern the respective priority entitlements of Perpetual and Bridgecorp to the proceeds of sale of the Bridgecorp properties – represented, in the case of the priority then afforded to Bridgecorp by Permanent, an “advance” by Permanent to Sterling that would attract and be governed by the rule, so as to affect the respective rights of Perpetual and Naxatu in relation to the Naxatu properties.
167 Further, the provisions of s 58(3) of the Real Property Act do not assist Naxatu. Naxatu had no proprietary interest in the properties that were sold (that is, the Bridgecorp properties). Thus there is, and was, no occasion for those provisions to operate in its favour in respect of the proceeds of sale of those properties.
168 Finally, I agree that the Court should not now receive fresh evidence on the question of whether Naxatu is presently owed money secured by Mortgage 7805323.
169 Naxatu has not succeeded on the particular bases on which it has advanced its appeal. It follows that the appeal must be dismissed with costs.
I certify that the preceding six (6) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates. |
Associate:
Dated: 16 November 2012
