UPON the undertaking of Brian Keith McMaster and Mark Francis Xavier Mentha in their capacity as joint and several receivers of the Mews Scheme (as defined in the Orders dated 28 November 2006) that they will repay any amount of the costs which they have been paid pursuant to the orders of Justice Goldberg made on 12 February 2008 but to which they may hereafter be held not to be entitled.

The Court orders that:

The application made orally by Mr Ian Martindale SC as counsel on behalf of the eighth defendant and AVS Property Pty Ltd at the hearing on 6 March 2008 to stay the operation of the said orders of Justice Goldberg of 12 February 2008 be refused.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                          Messrs Mark Mentha and Brian McMaster are the receivers who were appointed to oversee the winding up of the Mews Village, an unregistered managed investment scheme.  A parcel of land in Western Australia, registered in the name of Western Retirement Village Management Pty Ltd (in liq) (WRVM) and known as the Mews land, was an asset of the scheme.  The land, which was encumbered by two mortgages, has now been sold.  This application concerns the receivers’ claim on the proceeds of sale.

2                          On 13 March 2008 the first mortgagee, National Australia Bank Ltd (NAB), and the second mortgagees, AVS Property Pty Ltd (AVS) and Rental Fleets Australia Pty Ltd (Rental Fleets), were ordered to discharge their respective mortgages over the land so that the contract for its sale could be completed.  The order required NAB to deliver at settlement a duly executed discharge of its mortgage in exchange for payment of the amount due to the bank.  The second mortgagees were ordered to deliver at settlement a discharge of their mortgage together with a partial discharge of a charge held over the assets of WRVM on the basis that the net balance of the purchase price would be paid into court. 

3                          The order was made against NAB because it had refused to discharge the first mortgage unless it received a release of all claims the receivers or WRVM might bring against it in respect of the grant of the mortgage although there were no threatened claims.  That was an untenable position.  As regards the second mortgagees, they had refused to discharge their mortgage unless one of the mortgagees, AVS, was paid the balance of the proceeds of sale, which happens to be less than the amount which it claims is secured by the second mortgage.  The quantum of its claim is contested.  Although any overpayment could be recovered from AVS (Close v Phipps (1844) 7 Man & G 586 [135 ER 236]; National Westminster Bank Ltd v Barclays Bank International Ltd [1975] QB 654) it is not clear that it will have the capacity to effect repayment.  To protect everyone’s rights the proper course was for the court to hold the proceeds.

4                          The action in which the orders were made was not in the nature of a redemption action as asserted by the second mortgagees.  Such an action is not available in respect of Torrens land:  Perry v Rolfe [1948] VLR 297, 300-301, 303; Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265, 275; Anderson v Liddell (1968) 117 CLR 36, 48; cf In the Matter of C L Forrest Trust [1953] VLR 246; Ex parte Prackert [1987] 2 Qd R 560.  In my view a mortgagor of Torrens land has a legal right to obtain a discharge of mortgage on payment of the amount secured by the mortgage (or, subject to any rights of foreclosure, a lesser sum if the proceeds are insufficient to cover the debt) and equity applies the appropriate remedy, usually in the form of a mandatory injunction or specific performance.  The relief was granted prior to settlement because the mortgagees had indicated they would not discharge their mortgage at settlement. 

5                          It is of interest to note that in most jurisdictions the relief obtained against the mortgagees could be granted under statute.  In Victoria, for example, s 50 of the Property Law Act 1958 (Vic) (which is derived from s 5 of the Conveyancing Act 1881 (UK)) provides that when land subject to an encumbrance is sold by or out of court any party to the sale may apply for the discharge of the encumbrance upon payment into court of a sum sufficient to provide for the charge and any interest due.  Surprisingly, Western Australia, where the land is situated, has no corresponding provision.

6                          When the orders for the discharge of the mortgages were made I left outstanding a request by the second mortgagees to stay the operation of orders made by Goldberg J on 12 February 2008.  The effect of the orders was that the receivers could appropriate out of the net proceeds of sale their costs (that is their costs, charges, expenses and remuneration) incurred between 28 November 2006 and 9 December 2007, which had been assessed in the amount of $1,143,171.26.  The second mortgagees contend that the receivers are only entitled to their costs out of the assets under their control after the debt to AVS has been paid in full.  They go on to say that where, as here, the proceeds of sale will not cover their secured debt the receivers cannot have recourse to the proceeds for their costs.

7                          In England it has long been the general rule that a court appointed receiver’s costs and expenses do not have priority over a fixed charge in subsistence at the time of the receiver’s appointment:  In re Marine Mansions Co (1867) LR 4 Eq 601; In re Oriental Hotels Co (1871) LR 12 Eq 126; Re Regent’s Canal Ironworks Co (1876) 3 Ch D 43; Batten v Wedgwood Coal and Iron Co (1884) 28 Ch D 317.   That is to say, the appointment of a receiver does not affect the rights of a prior encumbrancer.  In Choudhri v Palta [1992] BCC 787, a recent decision of the Court of Appeal, Scott LJ said (at 790):  “In my judgment, there was no power in the Court to order, [as the trial judge did] that a charge to secure the receiver’s remuneration and costs should rank before the [mortgagees’] existing charges.”

8                          The position in Australia is the same:  Cobb & Co Holdings Pty Ltd v Daydream Island Tourist Resort Pty Ltd (1982) 7 ACLR 463, 468; Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64, 70-71; Dean-Willcocks v Nothintoohard Pty Ltd (in liq) (2007) 25 ACLC 109.  So it is that the order appointing a receiver should (as in this case) disclaim any intention to affect prior encumbrances:  Evelyn v Lewis (1844) 3 Hare 472 [67 ER 467]. 

9                          On one view Australian Securities and Investments Commission v Lawrenson Light Metal Die Casting Pty Ltd (1999) 33 ACSR 288 is to the opposite effect.  The case looked at the priority of an interim receiver’s fees.  The receiver contended that his claim for payment for work done had priority over the claims of all secured and unsecured creditors.  Gillard J accepted this argument.  He said (at 293):

It is well established law that a receiver appointed by a court is entitled to look to the assets of the company to meet his reasonable and proper remuneration costs and expenses.  He has a right to an indemnity in respect of all liabilities incurred by him and the indemnity ranks as a first charge over the assets subject only to his costs and expenses including his remuneration.  This right of indemnity is by way of a lien over the company’s assets and it arises by operation of law and is not dependent upon statute.  …

It is also well established law that once a lien is established then a receiver who is appointed by the court has in respect of that lien priority over the claims of secured creditors: see [Moodemere Pty Ltd (in liq) v Waters [1988] VR 215] at 221 per Murphy J

In my view, Gillard J overstated the receiver’s entitlement over the rights of secured creditors.  His view is not consistent with the authorities both here and in England. 

10                        There are, of course, several circumstances in which a receiver’s costs will stand ahead of the claims of a secured creditor.  First of all, a receiver is entitled to be paid out of the proceeds of sale of mortgaged property the cost of any work that directly benefits the mortgagee.  So, for example, if the receiver has rendered services in the care, preservation and sale of the mortgaged property he is entitled to those costs as against the mortgagee.  In Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171, 174Dixon J explained, in relation to a liquidator recovering the uncalled capital and debts of a company, that the charged property had to bear the costs that were incurred by the liquidator because the chargees would have had to pay them if they had realised the debt on their own behalf.  In Shirlaw v Taylor (1991) 31 FCR 222, 228 the Full Court said that “where a party has by his efforts brought into court a fund in the administration of which various parties are interested, his costs and expenses [in establishing the fund] should be a first claim upon the fund.”  In Moodemere [1988] VR 215 Tadgell J said (at 229):

The expense properly attendant upon the realisation of the fund must be borne by it; that is to say, the portion of the proceeds of the realised fund available to the chargee can never exceed what remains after the proper expenses of its realisation have been provided for. …

It follows that the chargee ranks for payment of his principal and interest after the person who is entitled to be paid out of the fund the proper expenses of its realisation.  Thus, where property providing the security is realised in the winding up with the consent of the chargee, the liquidator’s costs, charges and expenses of the realisation are the first charge, the encumbrances rank next and the general costs of the winding up are payable only out of the surplus, if any …

11                        Another instance of a receiver having priority over a prior encumbrancer is where the prior encumbrancer is a party to the action in which the receiver is appointed and consents to the appointment and to the receiver’s administration of the charged property:  2 Clark on Receivers (3rd ed, 1992) § 638.  See also Dean-Willcocks 25 ACLC at 129 per Beazley JA (“The principle is that the legal interest will be postponed to a later equitable interest where there is some ‘assurance, declaration of trust or agreement’ [citing Meagher, Gummow & Lehane’s Equity: Doctrines and Remedies (4^th ed, 2002) para 8-220]”); Hamilton v Donovan Oates Hannaford Mortgage Corporation Ltd (2007) 61 ACSR 82, 93-94.

12                        Yet another instance where the rights of a prior encumbrancer may be postponed in favour of a receiver is when the prior encumbrancer is guilty of “unconscientious” conduct: Dean-Willcocks 25 ACLC at 111 per Spigelman CJ.  By way of example, it may be unconscientious for a mortgagee to insist on his legal rights if there has been some conduct the effect of which is to induce the receiver to incur costs in the belief he will be paid out of the assets under his control.

13                        There is another (often overlooked) circumstance, not confined to a claim by a receiver, in which a fund that belongs to a secured creditor may be charged with another person’s costs.  It is a long settled rule that the costs incurred for the benefit of all persons having an interest in an asset (usually a fund that is subject to various claims) must be borne by the fund.  The rule is sometimes described as the rule in Ford v Earl of Chesterfield (1856) 21 Beav 426 [52 ER 924], a decision of the Master of the Rolls, Lord Romilly. 

14                        In Wright v Kirby (1857) 23 Beav 463, 467 [53 ER 182, 184] the rule was further explained by Lord Romilly: 

It may be, and it does sometimes happen, that a subsequent mortgagee institutes proceedings to realize and distribute a fund, which, but for such exertions, would have been unavailable for the purpose of paying the incumbrances, and which proceedings would have to be taken at all events.  If this be done by a puisné incumbrancer, and the other incumbrancers, both prior and subsequent, take the benefit of it, and make use of the Plaintiff’s proceeding for their advantage, then the Plaintiff’s costs ought to be paid first.  To hold otherwise would be to say that in the case of a deficient security, unless the first incumbrancer will take such proceedings, they shall not be taken at all.

15                        In Batten, Proffitt & Scott v Dartmouth Harbour Commissioners (1890) 45 Ch D 612 Kekewich J ordered that a junior secured creditor, whose actions obtained the appointment of a receiver and produced a fund from the sale of assets taken under the receiver’s control, should have those costs he expended which had the effect of yielding a benefit for all secured creditors of the debtor.  Kekewich J said (at 618-619): 

I do not think it is altogether clear that the Plaintiffs have throughout acted for the benefit of the other incumbrancers, whose title, to some extent certainly, they were disputing.  On the other hand, there can be no doubt that, whether they intended it or not, they have done much good to them.  They have obtained the appointment of a receiver, and have caused a fund to be brought into Court, and an inquiry has been directed and answered, so that the parties entitled to that fund have been ascertained.  So far, certainly, the Plaintiffs have laboured for the advantage of others. …

I shall direct the Taxing Master in taxing the costs of the Plaintiffs to distinguish the costs of which the other parties, except the Commissioners, have had the benefit in securing the fund in Court and ascertaining or determining the rights of the parties to it.  Those costs I think the Plaintiffs are entitled to in priority …

See also Daniell’s Chancery Practice (7^th ed, 1901) vol 1, 1000 and the cases cited therein at fn (k); In re Wrexham, Mold & Connah’s Quay Railway Co [1900] 1 Ch 261, 271-272; Re A Boynton Ltd [1910] 1 Ch 519, 525. 

16                        The general limitation on a receiver’s right to look to charged assets for his costs puts a prospective receiver into a difficult position when asked to accept office in respect of assets the value of which are uncertain or unknown.  If the prospective receiver believes there is a risk that the assets will not cover his costs, the only practical solution may be for the receiver to require the moving party to provide him with an indemnity.

17                        In this connection I note that in England it has been held that if there is insufficient money to meet a receiver’s costs, there is no power to require any party to an action, including the party at whose instance the receiver has been appointed, to meet those costs.  The rule seems to derive from Boehm v Goodall [1911] 1 Ch 155, 161 where it was said that it would be an extreme hardship to parties if they were held personally liable for the receiver’s costs.  It was explained that the receiver is not the agent of the parties, nor a trustee for them and they cannot control him. 

18                        While there may be good reason not to order a party to pay the receiver’s costs by an interlocutory order (as to which see Evans v Clayhope Properties Ltd [1988] 1 WLR 358, 360, 363; Evans v Clayhope Properties Ltd [1987] 1 WLR 225, 230), it is far from clear why an appropriate order could not be made at the conclusion of the litigation by which time the rights and wrongs of the parties’ actions will have been established.  I see no principle that stands in the way of an order being made at that point, which subjects one of the parties to pay the receiver’s costs. 

19                        The position in the United States is far more satisfactory.  There the general rule is that a receiver’s costs are, first of all, payable from the funds in his hands and no part is chargeable against the party at whose instance the receiver was appointed.  But where there is no fund out of which the expenses can be paid, or the fund is insufficient, the usual rule is that the party at whose instance the receiver was appointed is required to provide the means of payment:  Brill v Southerland 14 A2d 408 (Del 1940), 413 citing 1 Clark on Receivers (2nd ed, 1929) 890; Beach on Receivers § 773 and 4 Pomeroy’s Equity Jurisprudence (4th ed, 1919) 3879.

20                        Earlier I indicated that AVS claims the whole of the net proceeds of sale.  Nevertheless, I do not propose to stay the operation of Goldberg J’s orders.  There are several reasons, which I will now briefly explain. 

21                        First, a significant part of the receivers’ claim is to costs incurred in the realisation of the Mews land; that is to say, costs which, on any view, they are entitled to take out of the proceeds.  Second, the order appointing the Mews receivers (made on 28 November 2006) required them to carry out enquiries so as to identify all persons who might have a claim upon the fund created by the sale of the Mews scheme assets, and all persons who were prior encumbrancers of the Mews land.  Without these enquiries it would not be possible to distribute the fund produced on the sale of the land.  The cost of conducting those enquiries, which will not be significant, must also come out of the fund in accordance with the rule in Ford v Earl of Chesterfield.  Third, the receivers have given an undertaking that, if it turns out they are not entitled to all they have taken (and there may be a small amount involved), they will return that amount to the fund.  I asked for the undertaking in case Goldberg J’s orders were final.  Fourth, for quite some time the second mortgagees were asserting that only approximately $4 million was owed to AVS.  It is only in the last few weeks that the claimed amount was substantially increased.  The receivers may well have a good argument that they incurred costs in the belief (fostered by the second mortgagees) they would be met out of uncharged assets, and that the second mortgagees are bound by that position, at least until they give notice of the full quantum of their claim.  Fifth, there is doubt that AVS has a good claim to the whole of the net proceeds.  That point needs some development.

22                        AVS has broken down its claim into the following categories:  (a) advances, interest and other amounts of approximately $5.857 million pursuant to a facility agreement; (b) development costs with interest for the planned  property development on the Mews land incurred before 18 May 2005 of about $51,000; (c) development costs with interest for the Mews development incurred after 18 May 2005 of approximately $1.424 million; (d) a project management fee of about $660,000; and (e) a share of the profits of the Mews development of around $6.273 million. 

23                        Each claim is contested.  I propose to discuss only the claim for a profit share because if that claim cannot be sustained, there will be an uncharged surplus sufficient to meet all the receivers’ costs.  The Mews scheme was to operate in the following way.  By a contract dated 18 April 2000 WRVM sold the Mews land to Mews Village Nominees Pty Ltd (Mews Village Nominees) for $93,425,000.  At the time of the sale the land was worth approximately $2.85  million.   The balance of the consideration was paid in exchange for a promise by WRVM that it would construct a retirement village on the Mews land.  The plan was to construct a village comprising 50 three-bedroom duplexes, 50 four-bedroom duplexes, 105 three-bedroom free standing units, 115 four-bedroom free standing units and 80 serviced apartments.  In the event, no building work was ever undertaken.  In these circumstances it is likely that Mews Village Nominees has a significant claim in damages against WRVM for breach of contract.  However that may be, the second mortgagees’ claim is that WRVM is entitled to a profit from the venture and that, in turn, AVS is entitled to a share of the profit, with the payment of that share secured by mortgage and a charge over WRVM’s assets.

24                        Under heads of agreement dated 18 May 2005, WRVM and Mario Salvo (a director of AVS and the general manager of Rental Fleets) entered into a joint venture to develop the Mews land in accordance with WRVM’s obligations under the sale contract.  A recital to the agreement describes Mario Salvo “and his businesses [as] developers with experience in managing large property developments and securing project finance for developments from banks”.  The agreement contemplated that Statewide Developments Pty Ltd (Statewide Developments), another company controlled by Mr Salvo, would oversee the development.  It also provided for AVS to advance moneys to WRVM to discharge an existing first mortgage over the Mews land in favour of Westpac Banking Corporation Ltd and (on one reading of the relevant clause) provide an additional amount of up to $4 million.  These loans were to be secured by a first mortgage over the Mews land.  Then on 24 May 2005 WRVM and AVS entered into a facility agreement in respect of the money to be advanced by AVS.  The facility agreement provided that the advance was to be made in two tranches, one of $1 million and the other of $3 million.  The mortgage and the charge were subsequently granted to secure that debt and, at least according to their terms, any money owing then or in future to the second mortgagees, which might include AVS’ claim for a share of profits.

25                        Later WRVM signed a guarantee in favour of NAB for a debt owing to the bank by Salvern Investments Pty Ltd, another entity controlled by Mr Salvo.  Pursuant to a deed of priority executed by the second mortgagees, NAB became the first ranking mortgagee over the Mews land.

26                        The heads of agreement were superseded by two development agreements, one dated 23 December 2005 and the other dated 16 January 2006.  Among other things, the agreements substituted AVS for Mario Salvo as the joint venturer and substituted AVS for Statewide Developments as the manager of the joint venture.  The two agreements are identical in all material respects save that the later agreement has a term entitling AVS to take a charge or mortgage over the assets of WRVM to secure payments made or expenses incurred by AVS in relation to the development.

27                        The operative clause of each agreement is cl 2.  That clause states that “WRV and AVS have formed a joint venture … for the development of the land with each party entitled to 50% of the profits.”  Neither agreement defines the term “profits” except to the extent that cl 8 states: “Forecast Profit before tax [must be] at least 30% of (Development Costs plus Land Value) to be considered a viable development”.  Both agreements were preliminary, in the sense they required that the arrangement be documented “as soon as possible” by a “formal joint venture agreement.”

28                        A formal agreement – where one might have expected the term “profit” to be defined – does not appear to have come into existence.  However, the heads of agreement did define “profit” by reference to a formula.  In broad terms, profit was the “gross sales” less “development costs” less “land value”.  It is not clear whether this definition could be applied to the term “profit” in the development agreements.  In any case, the definition does no more than state what the profit of such a venture would be according to ordinary accounting principles. 

29                        AVS’ claim for a share of profits is not calculated according to the formula in the heads of agreement or according to its ordinary meaning.  It calculates the profit to be the sale price of the Mews land ($22,863,636), less the agreed costs base of the Mews land ($8,000,000), less development costs ($1,424,378) and other other expenses and adjustments (to which no figure has been attributed at this stage, but which is likely to be around $893,258).  AVS claims 50 per cent of the resultant amount.  But this calculation does not seem to be an assessment of the profit made by Mews Village Nominees.  While WRVM is the vendor under the sale contract it holds nothing more than the bare legal title to the land and, on no view, is it entitled to any part of the proceeds of sale.  So much has already been determined by the court. 

30                        Moreover, on my present understanding of the facts, WRVM can never show a profit from the construction of a retirement village.  This is for the obvious reason that no village has ever been constructed.  As things presently appear, the activities undertaken by WRVM are likely to be loss making when one takes into account the claim for breach of contract that Mews Village Nominees has against WRVM. 

31                        The only other potential avenue for profits to be earned by WRVM under the Mews scheme of which I am aware is under a “Marketing Management and Profit Share Agreement” between WRVM and Mews Village Nominees entered into around April 2000.  Their agreement contemplated that WRVM would provide marketing and management services at the retirement village and in return would receive a fixed remuneration and a share of the profit of the business.  It was anticipated that the retirement village business would receive “loan licence” fees from residents in return for the right to occupy units.  However, there being no retirement village, there was no such income.  The agreement, then, can be ignored. 

32                        When I had reached the view that the stay application should be refused I made formal orders to that effect so that the receivers could recover their costs as soon as possible.  The order was made on the basis that reasons would follow. 

Associate:

Dated:         4 April 2008

SCHEDULE OF PARTIES

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

Plaintiff

GDK FINANCIAL SOLUTIONS PTY LTD (IN LIQUIDATION)

First Defendant

WINDSOR VILLAGE MANGEMENT PTY LTD (IN LIQUIDATION)

Second Defendant

WESTERN RETIREMENT VILLAGE MANAGEMENT PTY LTD

(IN LIQUIDATION)

Third Defendant

THE MEWS VILLAGE NOMINEES PTY LIMITED (IN LIQUIDATION)

Fourth Defendant

PERIDON MANGEMENT PTY LTD (IN LIQUIDATION)

Fifth Defendant

ROSEDALE VILLAGE NOMINEES PTY LTD (IN LIQUIDATION)

Sixth Defendant

PETER HASTINGS WARNE

Seventh Defendant

RENTAL FLEETS AUSTRALIA PTY LTD

Eight Defendant

JOHN MONTGOMERIE

Ninth Defendant

ANDREW REGINALD YEO

Tenth Defendant

GUISEPPE DE SIMONE

Eleventh Defendant

SEACHANGE MANAGEMENT PTY LTD

Twelfth Defendant

ZMB AUSTRALIA

Thirteenth Defendant