Australian Securities and Investments Commission, in the matter of GDK Financial Solutions Pty Ltd (in liq) v GDK Financial Solutions Pty Ltd

REASONS FOR JUDGMENT 1 Receivers were appointed under s 601EE of the Corporations Act 2001 (Cth) to wind up an unregistered managed investment scheme known as the Mews Retirement Village: Australian Securities and Investments Commission, in the matter of GDK Financial Solutions Pty Ltd v GDK Financial Solutions Pty Ltd (2006) 236 ALR 699. The receivers were directed to sell the principal asset of the scheme, a parcel of land at Lot 4, Railway Parade, Upper Swan, a semi-rural area on the outskirts of Perth (Mews land). The receivers found a purchaser and with court approval entered into a contract to sell the land for $24 million. To enable completion of the sale the mortgagees, National Australia Bank Ltd as first mortgagee and Rental Fleets Australia Pty Ltd and AVS Property Pty Ltd as second mortgagees, were ordered to deliver up duly executed discharges of mortgage. Out of the proceeds of sale the NAB was paid the amount due under its mortgage, being the sum of $9,647,925.35. The balance (after deducting the costs and expenses of sale) was about $13 million. This was less than the amount claimed by AVS to be secured by the second mortgage: it claimed it was owed in excess of $14 million. In those circumstances it was ordered that the balance be paid into an interest bearing account in the name of the receivers pending the determination of what was due to AVS: Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (in liq) (No 3) (2008) 246 ALR 580. On the taking of accounts it was established that the principal due to AVS was $4,100,282.64 and that interest calculated to 17 March 2008 (the day the money was paid into the receivers' account) was $1,573,613.32: Australian Securities & Investment Commission v GDK Financial Solutions Pty Ltd (in liq) (No 4) [2008] FCA 1071. Those amounts were paid to AVS on 22 September 2008. The question in issue is whether AVS is also entitled to interest on its debt from 17 March 2008 to 22 September 2008 either at the rate specified in the mortgage (14.71 per cent per annum) or at the rate accruing on the deposit. 2 To resolve the issue raised it is necessary to deal with two questions. The first is whether the interest due under the mortgage ceased to run when the second mortgagees discharged their mortgage and the proceeds of sale were paid into the receivers' account. If the answer to that question is 'yes', the second question is who is entitled to the interest that has accrued on the debt, being a portion of the money in the receivers' account. 3 On the first question, the general rule is that until a mortgage is discharged by the actual payment and acceptance of the amount due, the rights and obligations imposed by the mortgage remain in force: Samuel Keller (Holdings) Ltd v Martins Bank Ltd [1971] 1 WLR 43, Megarry J and CA; Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161, 164-165. One result of this rule is that interest continues to run until the principal is paid out. 4 But the requirement to pay interest until the mortgage is discharged can be displaced. For instance, if the mortgagor tenders the amount due under the mortgage in return for a discharge and the tender is refused, interest will cease to run: Bank of New South Wales v O'Connor (1889) 14 App Cas 273, 284; Rourke v Robinson [1911] 1 Ch 480. There is authority which holds that even if there has been a tender of the amount due the tender does not stop interest running unless the sum has been set aside. There is a conflict whether the money tendered should be paid into court (Kinnard v Trollope (1889) 42 Ch D 610, 615-616) or kept in a separate account (Barratt v Gough-Thomas [1951] 2 All ER 48, 49). In Graham v Seal (1919) LJ Ch 31, 36the Court of Appeal said that the tender need not be such that would afford a defence to an action in law. I take this to be authority for the proposition that the money need only be put aside. 5 Another instance where interest will cease to run before discharge is where the mortgagee wrongfully states or indicates that it will not discharge the mortgage on the due date. The old cases suggest that even in that circumstance a tender is an essential pre-requisite to stop interest from running: Bishop v Church (1751) 2 Ves Sen 371, 372 ("if a strict tender is not made, the court cannot stop the interest: though cases may be, where the court would wish to do it"); Garforth v Bradley (1755) 2 Ves Sen 675, 678 ("the rule is so strict, that, where a certain security is taken by the mortgagees, their interest shall not stop but upon a proper tender and notice" - the reference to notice is to the rule of equity which required six months notice to be given of the mortgagor's intention to pay the mortgage debt). 6 It is clear, however, that tender of the amount due is not always required. That was settled in Scarfe v Morgan (1838) 4 M&W 270. There Parke B said (at 279) that a mortgagee could agree to waive the necessity of a tender. In Kerford v Mondel (1859) 28 LJ Ex 303, after referring to Scarfe v Morgan, Bramwell B said (at 306) that if a mortgagee "goes on, and so conducts himself as to indicate that a tender of the one amount had been nugatory, he dispenses with the tender". This is consistent with modern authority. For example in Mahoney v Lindsey (1980) 55 ALJR 118 the High Court considered the need for a purchaser to tender the purchase price in order to obtain an order for the specific performance of a contract for the sale of land. Gibbs J (with whom the other judges agreed) said (at 603): "But a plaintiff may be dispensed from performing a condition by the defendant expressly or impliedly intimating that it is useless for him to perform it and requesting him not to do so", citing Dixon CJ in Turnbull (Peter) & Co v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235, 246-247. 7 In the case at bar the second mortgagees made it clear that they would not discharge the second mortgage at the settlement unless AVS received the whole of the proceeds. It was for this reason that the vendor, Western Retirement Village Management Pty Ltd (in liq), took proceedings to obtain the discharge of the second mortgage and to have determined what was due under that mortgage. The money was paid into the receivers' account to protect AVS in the event it could establish a claim. It was placed into an interest bearing account rather than being paid into court as this would result in a better return. In substance, if it matters, the payment into the receivers' account was the equivalent of a payment into court. At that point, the obligation to continue paying interest under the mortgage was discharged. 8 This brings me to the second question which is whether AVS is entitled to the interest which has accrued on amount found to be due. The answer depends, in the first place, upon the right to trace. AVS had a proprietary interest in the Mews land by way of security for the payment of the mortgage debt. It is entitled to trace its interest into the money for which the land was exchanged. It did not lose that right when the money was paid into the receivers' account. In other words, it retained its security interest over the substituted asset. 9 The reason is this. The right to trace is not a claim or a remedy. It is the process by which a person discovers what has happened to his property. It enables the person tracing to substitute the traceable proceeds for the original asset: see generally Foskett v McKeowan [2001] 1 AC 102; Buhr v Barclays Bank Pty Ltd [2001] EWCA Civ 1223. In AVCO Financial Services Ltd v Commonwealth Bank of Australia [1989] 17 NSWLR 679, 682 Young J said: "[I]t is clear that if a person has an equitable charge over land and that land is sold by a mortgagee, that the equitable charge attaches to the fund that is produced as a result of there being a surplus on the sale". In Dick v Harper [2006] BPIR 20 an equitable chargee who had a proprietary interest over certain property was entitled to trace his interest into several bank accounts where the proceeds of the sale of the property were held. 10 As AVS is entitled to trace its security interest into the proceeds, it is also entitled to the interest derived from its share of the proceeds. According to Roman law the owner of a thing (res) was entitled to each thing (res) which was produced by the first thing: res accessoria cedit principali (accessio). Some of the rules of accessio have found their way into the common law. For example, in Swain v Law Society [1982] 1 WLR 17, 36 Oliver LJ said: "[T]hat which is the fruit of trust property or of the trusteeship is itself trust property". Interest is the fruit of capital. Generally speaking, therefore, the owner of the capital is entitled to the interest which it produces: Dick v Harpour at [55]. 11 In light of the forgoing there will be an order that AVS be paid the interest which has in fact accrued on the principal debt together with any interest that has accrued on interest, if that is what happened. The costs of the parties should be paid out of the balance held in the receivers' account. I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.