Austin & Anor v Royal & Ors

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40382/98 Comm D 50157/95

MEAGHER JA HANDLEY JA COLE AJA

Kenneth James AUSTIN & Anor v Michael ROYAL & Ors JUDGMENT 1 COLE AJA: Mr and Mrs Austin have appealed from a judgment of Giles J, Chief Judge of Commercial Division as he then was, on 14 May 1998 in which his Honour denied their claim that they were entitled to be subrogated to the extent of $364,666 to the rights of the second respondent, the ANZ Banking Group Ltd ("the bank") in consequence of their having paid the sum mentioned in partial discharge of moneys due by the third respondent, Australian Padding Company Pty Ltd (In Liquidation) (Receiver and Manager Appointed) ("APC") whose debts they had guaranteed. 2 Giles J held that clause 12 of the guarantee excluded any such right. His Honour also denied the appellants relief pursuant to the Contracts Review Act 1980. 3 His Honour held that clause 12 of the guarantee was not materially distinguishable from the clause considered by the High Court in O'Day v Commercial Bank of Australia (1933) 50 CLR 200. That authority, binding on his Honour and on this Court, resulted in any right of subrogation having been contracted away by the Austins. 4 In this appeal, the Austins seek to distinguish that authority from the clause in their guarantee although they accept that, unless distinguished, and assuming clause 12 bears the construction placed upon it by his Honour, the appeal must fail. 5 The facts are adequately set out in the judgment of Giles J at pages 1 to 10 of the judgment. In my view, the facts as found necessarily result in the appeal failing. 6 The reason for this may briefly be stated. The contention of the appellants is that clause 12 of the guarantee did not exclude the right of subrogation to the extent of the sum mentioned. They further contended that it did not exclude s.3 of the Law Reform (Miscellaneous Provisions) Act 1965 (or its statutory forebear) which provides: "3(1) A person who, being surety for the debt or duty of another, or being liable with another for a debt or duty, pays that debt, or performs that duty is entitled:

(a) to have assigned to that person, or to a trustee for that person, every judgment, specialty or other security held by the creditor in respect of that debt or duty, whether or not that judgment, specialty or other security is taken at law to have been satisfied by the payment of the debt or the performance of the duty; and

(b) to stand in the place of the creditor and to use all the remedies, and, if necessary, and on a proper indemnity, to use the name of the creditor in any proceedings to obtain from the principal debtor or any co-surety, co-contractor or co-debtor (as the case requires) indemnity for the advances made and loss sustained by the person who paid the debt or performed the duty." 7 The submissions of the appellants accept however that the issue is whether after payment in full to the bank of the customer's debt, the guarantor, making a part payment of moneys due, is entitled to be subrogated to the extent of that payment (see submissions paragraphs 12 and 40). 8 In my view the appellants must fail because the findings of the primary Judge make plain that the obligations of the debtor secured by the guarantee were never paid or discharged in full. Indeed, in light of the existing current litigation, obligations at present remain which are the subject of the mortgage debenture from APC to the bank and which are secured by the guarantee. 9 The appellants guaranteed the debt owed by APC under a mortgage debenture. Clauses 12, 22 and 24 of that mortgage debenture are as follows: "12 All moneys which the Bank may pay or expend under any power or authority herein contained or implied or in consequence of any default that may be made by the Mortgagor in the performance or observance of any covenant or condition of these presents and all costs (including costs as between Solicitor and own client), charges and expenses already or hereafter incurred by the Bank of or incidental to the preparation completion and registration of these presents or of any collateral security or for the purpose of giving effect to the security created by these presents or by any other security now or at any time hereafter held by the Bank for the moneys hereby secured or any part thereof shall be moneys hereby secured as aforesaid and shall from the time of payment of the said moneys respectively bear interest at such rate or rates as may from time to time be determined by the Bank (being a rate or rates not exceeding the highest of the rates for the time being charged on any other part of the principal money hereby secured) to accrue from day to day as aforesaid.

22 All moneys received by any such Receiver or by the Bank under or by virtue of these presents shall be applied in manner following namely:

(a) in payment of all rents rates taxes and other outgoings having priority to the charge hereby created or which such Receiver or the Bank shall think fit to pay;

(b) in keeping down all annual sums or other payments (if any) and the interest on all principal sums (if any) having priority to the charge hereby created;

(c) in payment of all costs charges expenses and outgoings properly incurred in or incidental to the exercise or performance or attempted exercise or performance of any of the powers or authorities hereby conferred such costs in the case of legal costs being charged as between Solicitor and own client;

(d) in payment of the remuneration of the Receiver;

(e) in payment to the Bank of the moneys hereby secured.

The surplus (if any) shall belong to the Mortgagor but such surplus shall not carry interest. And the Receiver or the Bank shall be at liberty to pay the same to the credit of an account in the name of the Mortgagor in the books of the Bank and shall thereupon be under no further liability in respect thereof.

24 Neither the Bank nor any Receiver shall be answerable or accountable for any involuntary losses of any kind whatsoever which may happen in or about the exercise or execution of any of the powers or authorities herein contained and shall not by reason of the Bank or such Receiver entering into possession of the mortgaged premises or any part thereof be liable to account as mortgagee in possession or for anything except actual receipts or be liable for any loss upon realisation or for any default or omission for which a mortgagee in possession may be liable and every Receiver duly appointed under these presents shall be deemed as regards responsibility for loss damage or misconduct to be the agent of the Mortgagor which shall be solely responsible for his actions." 10 The appellants' guarantee, given contemporaneously with the mortgage debenture on 20 November 1987, guaranteed by clause 1 the payment by the customer to the bank: "… of all sums of money whatsoever which shall for the time being be owing or unpaid by the Customer to the Bank … including all costs and expenses (computed as between Solicitor and own client) of or incidental to obtaining or enforcing or attempting to obtain or enforce payment of all or any of such moneys as aforesaid under or by virtue of this Guarantee or otherwise together with interest on all such sums of money the time being remaining unpaid computed until payment at the rate or rates from time to time usually charged by the Bank to its other customers on accounts of similar nature … ." 11 The obligation so undertaken by APC is a continuing one. Shortly put, the bank will not be repaid the moneys due to it by APC under the mortgage debenture and the obligations thereunder will not be fully discharged until all the legal costs and remuneration of the receivers appointed pursuant to that mortgage debenture have been paid. That event has not yet occurred. 12 The appellants claim that after sale of their home in November 1992 the sum of $364,666 was paid to the bank and credited to APC's account. They further claim that "APC's indebtedness to ANZ was discharged in October 1993 and a surplus was obtained over the indebtedness of APC from the realisation of the respective securities". 13 Giles J held (at red appeal book 51): "By mid October 1993 the indebtedness of APC and Griptex to ANZ was fully discharged. The last payment to ANZ was a payment of $223,108.67 on 15 October 1993 from the proceeds of sale of the factory, which sum was credited to APC's account and discharged its indebtedness to ANZ. … After 15 October 1993, and until May-June 1994, Mr Royal and Mr Allan both held funds in their respective APC receiverships. The amounts held were not well disclosed in the evidence." 14 However, his Honour made plain in the subsequent four pages of his judgment that, notwithstanding what he called "the discharge of indebtedness", the receiverships properly continued from October 1993 until the date of the trial. This necessarily involved expenses being incurred by the receivers which constituted part of the indebtedness of APC to the bank. As his Honour said, "Mr Royal's receivership could not terminate". 15 The many reasons for this including the involvement of the receiver and the bank in this litigation brought by the Austins are set forth in pages 4 to 10 of the judgment. At the date of trial, proceedings known as the CBFC proceedings had not resolved. This Court was informed today they continue to this date. 16 His Honour's review of this continuing involvement by potential liability of and incurring of costs by the receiver under the mortgage debenture up to the date of trial and, indeed, the receiver's involvement in the trial, made plain that he did not intend to suggest that the obligation of APC to the bank under the mortgage debenture or of the guarantors' liability under the guarantee of APC's liability had been discharged. The principal debt as demanded in the notice of demand may have been paid but there were continuing monetary obligations of APC secured by the mortgage debenture. 17 The continuing proper expenditure of money by the receiver and the bank results in it not being able to be said that the obligations under the mortgage debenture of APC to the bank have been paid in full. That will occur, if ever, only when all proper costs of the bank and the receiver including costs of this litigation (including the appeal) have been paid to the bank from any funds remaining in the hands of the receiver. Only then could any possible claim for subrogation arise for it is only then that the "debt" has been paid. 18 Quite apart from litigation brought by the appellants against the receiver and the bank, there was no point of time from mid October 1993 onwards when there was no litigation in respect of APC in which the receiver was involved with attendant potential liabilities and costs. In my view, the time at which any question of possible subrogation might arise has not yet been reached. 19 The theory underlying the equitable concept of subrogation is that a creditor, having no use for a security over his debtor's assets because the creditor's debts have been paid and obligations discharged by the guarantor, is obliged to transfer that security to the guarantor who may then enforce it to recover the moneys from the debtor which he, the guarantor, has paid to the creditor. It has been said that the statutory provisions "artificially keeps alive the security" for the benefit of the guarantor (see D and J Fowler (Aust) Ltd v Bank of New South Wales (1982) 2 NSWLR 879 per Helsham CJ in Eq). This notion was explained recently by Hoffman L against the background of the concept of unjust enrichment. His Lordship said: "In my view, the phrase "keeping the charge alive" needs to be handled with some care. It is not a literal truth but rather a metaphor or analogy; see Birks, An Introduction to the Law of Restitution , pp 93-97. In a case in which the whole of the secured debt is repaid, the charge is not kept alive at all. It is discharged and ceases to exist. In a case like the present, in which part of the secured debt is repaid, the charge remains alive only to secure the remainder of the debt for the benefit of the original chargee. Nothing can affect his rights and there is no question of competition between him and the party claiming subrogation. It is important to remember that, as Millett LJ pointed out in Boscawen v Bajwa [1996] 1 WLR 328, 335, subrogation is not a right or a cause of action but an equitable remedy against a party who would otherwise be unjustly enriched. It is a means by which the court regulates the legal relationships between a plaintiff and a defendant or defendants in order to prevent unjust enrichment. When judges say that the charge is "kept alive" for the benefit of the plaintiff, what they mean is that his legal relations with a defendant who would otherwise be unjustly enriched are regulated as if the benefit of the charge had been assigned to him. It does not by any means follow that the plaintiff must for all purposes be treated as an actual assignee of the benefit of the charge and, in particular, that he would be so treated in relation to someone who would not be unjustly enriched." ( Banque Financiere de la Cité v Parc (Battersea) Ltd [1998] 2 WLR 475 at 487)

However, where a creditor is still properly exercising rights under his security, it cannot be said that the creditor has no further use for or entitlement to hold the security. It remains "alive" for his benefit. Where an appointed receiver, being a creature of the security, is continuing properly to exercise powers given by the security, it cannot be said that the creditor no longer has need for further use of the security. That is because it is indicative that the debt or obligations under the security have not been paid or satisfied in full. In such circumstances, no entitlement in the guarantor to subrogation in the sense of an entitlement to receive the security can arise. 20 Under the guarantee, the guarantors were obliged to pay to the bank the sum demanded from them and contained in a notice served upon them requesting such payment. The sum here demanded was $2,733,469.58 but the guarantors paid only a portion of that sum, namely $364,666. By mid October 1993 the sum of $2,733,469.58, being the sum demanded from the guarantors, had been paid to the bank from realisation of assets by the receivers and from the moneys of the guarantors. If the situation was that at that point in time, there was no remaining indebtedness or continuing obligations of APC to the bank, then, subject to the terms of any contract between the parties, the guarantors would be entitled to subrogation and have the securities held by the bank assigned to them at least to the extent of the sum paid by the guarantors in discharge of the debtor's obligation. The reasoning underlying the right to have securities transferred to the guarantor who has paid the debtor's obligation to the creditor is to enable the guarantor using the securities so transferred to seek recovery of the moneys paid by him (see O'Donovan & Phillips The Modern Law of Guarantee at page 666 and following). The basis for the guarantor having that entitlement was enunciated by Aiken J in Buckeridge v Mercantile Credits Ltd (1981) 147 CLR 654 at 668-9 where his Honour, quoting from Rowlett on Principle and Surety, and from Lord Blackburn in Sterling v Forrester [1821] 4 ER 712 at 717 wrote: "A surety paying off the debt has always been held entitled to any securities which may have been given for the debt by the principal to the creditor. This right does not depend upon contract but upon the equity that the surety should not have the whole thrown upon him by the choice of the creditor not to resort to the remedies in his power. … If several persons are indebted, and one makes the payment, the creditor is bound in conscience (if not by contract) to give to the party paying the debt all his remedies against the other debtors."

However, this underlying reason can have no application if the creditor remains entitled to retain the securities notwithstanding the payment of the sum demanded from the guarantor because the securities apply to a further or newly arising debt or obligation. It is only when the total obligations or debts of the debtor have been paid to the creditor and that the creditor, the securities being of no further use to him for his debts have been paid and obligations met, is obliged to transfer the securities to the guarantor pursuant to the guarantor's rights of subrogation. 21 It necessarily follows that if the securities of a creditor secure an ongoing liability, the fact that a guarantor may pay a sum demanded by the creditor as being payable at a point in time cannot give rise to a right of subrogation in that guarantor if in the period between demand and payment further obligations of the debtor to the creditor arise which are the subject of the security given by the debtor to the creditor. That is the situation here. Whilst demand was made on 25 August 1992, the demand was not satisfied by payment until 15 October 1993. In the intervening fourteen months between August 1992 and October 1993 the bank and the receiver properly incurred expenses. As the trial Judge found, the receiver had to address the claims of trade creditors for liabilities incurred during the receivership. There were ongoing proceedings brought by Gelman Sciences Pty Ltd in which the receiver and APC were defendants, and there was the possibility of a liability to Deputy Commissioner of Taxation in respect of unpaid group tax of approximately $483,000, no clearance from the Deputy Commissioner having been obtained. It is true, as was found, that the receiver had funds in hand. However there was no precise quantification, either of the funds in hand or the actual or potential liabilities of the receiver. The activities of the receiver, being activities resulting in expenditure by the bank or the receiver (which expenditure fell within both clause 12 and clauses 24 of the mortgage debenture), entitled the bank as secured creditor to retain the securities until there was ultimate discharge by payment to the bank of the total indebtedness and payment of all expenses of or associated with the receivership. The ongoing nature of the proper activities of the receiver and the bank mean that that point in time has not yet arrived. It follows, in my view, that the guarantors had no right to claim subrogation because there had not been a complete payment of the debt or a meeting of the obligations to the creditor under the terms of the mortgage debenture. In my view, no question of subrogation can arise until that point in time is reached. It follows that the appeal must fail. 22 In those circumstances it is unnecessary for the Court to consider the other matters raised in the notices of appeal. 23 In my opinion the appeal should be dismissed with costs. 24 MEAGHER JA: I agree. 25 HANDLEY JA: I agree and I will only add this. The appellants' case depended on the equitable doctrine of subrogation as it operates in favour of a surety. It is well established that the doctrine does not operate to cut down the rights of the secured creditor. As Lord Hoffman said in Banque Financier de la Cité v Park (Battersea) Ltd (1998) 2 WLR 475 at 487 there is no question of competition between the secured creditor and the party claiming subrogation. Until all the obligations of the receivership have been ascertained and discharged, the security will remain enforceable by the secured creditor and any claim by the surety for the benefit of that security will involve a claim in competition with the rights of the secured creditor. 26 That is the situation in this case and for that reason and the reasons expressed comprehensively by Cole AJA the appellants' present claim to the remaining proceeds of the securities in the hands of Mr Royal must fail. 27 MEAGHER JA: The order of the Court therefore is that the appeal is dismissed with costs.

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