Australian Securities & Investment Commission v Piggott Wood & Baker

REASONS FOR JUDGMENT 1 The respondent Piggott Wood & Baker (PWB) is a firm of solicitors carrying on practice in Hobart. 2 PWB carried on a managed investment scheme ("the Business"). Investors would make funds available for loans through PWB to borrowers. Those loans would be secured by mortgages over real property registered under the Lands Title Act 1980 (Tas) ("the Act"). The mortgages would be taken in the name of two partners of PWB. Within the records of the Business the funds provided by investors were allocated to a particular mortgage. From time to time some of the funds allocated to a mortgage were withdrawn and substituted by other funds contributed by other investors. I was told the Business was conducted pursuant to a trust deed, but no such deed or similar instrument was in evidence. 3 On 13 December 2001, on the application of the Australian Securities and Investments Commission ("ASIC"), Sundberg J ordered that the Business be wound up pursuant to s 601EE(1) of the Corporations Act 2001 (Cth) and that Barry Kenneth Hamilton and John Williams Woods be appointed joint and several liquidators to the loans described in the schedule of the order. By par 2(c)(ii) of the order the liquidators were granted liberty to apply to the Court for directions and further orders in relation to the exercise of their powers and discharge of their duties. 4 By a notice of motion dated 12 February 2003 Mr Hamilton ("the liquidator") seeks directions as to the distribution of net sale proceeds of a property known as "Rutherglen Holiday Village" at Bass Highway, Hadspen in Tasmania. Complications have arisen due to the fact that this property consists of the lands comprised in three separate certificates of title and the registration of mortgages securing monies advanced by the Business are not identical for each of the three certificates. There was also a mortgage to Australia and New Zealand Banking Group Ltd ("ANZ"). 5 The borrower/mortgagor was in each case a company called Everworth Tas Pty Ltd ("Everworth") and, except where indicated, the mortgagees were Grant Edward Kench and Michael Graeme Foster ("Kench and Foster"). The mortgages were as follows: (i) B770900 securing $600,000 registered 17 June 1994; (ii) B818719 securing $300,000 registered 13 December 1994; (iii) B831999 securing $100,000 registered 27 January 1995; (iv) B898759 in favour of ANZ registered 12 September 1995; and (v) B868139 securing $200,000 registered 29 November 1995 6 Mortgage (i) was a first mortgage but it was registered on only two of the three certificates, viz Volume 111014 Folio 2 and Volume 111015 Folio 42. The remaining mortgages were registered on those two titles in the order (ii), (iii), (v) and (iv). There had been an agreed variation of the priority of the ANZ mortgage. 7 On the remaining title, Volume 20627 Folio 2, the remaining mortgages were registered in the same order, viz (ii) (that mortgage being therefore a first mortgage), (iii), (v) and (iv). Again, the priority of the ANZ mortgage had been varied. 8 On 10 April 1997 Kench and Foster became mortgagees in possession. Pursuant to the order of Sundberg J the liquidator entered into possession and took control of their right title and interest in the mortgages. 9 The liquidator exercised a power of sale under mortgage B818719 (mortgage (ii)). The sale was completed on 20 December 2002. The property the subject of the three titles was sold as one lot. The net proceeds of this sale ("the proceeds") totalled $330,969.28. 10 By his notice of motion the liquidator seeks directions as to whether the distribution of the proceeds should; · be in accordance with the priority required by s 48(5) of the Act as to the mortgages registered first in time, as varied; or · be rateable, as between the first mortgages on each title and then in priority of the mortgages ranked second, third and fourth on each title and then to the mortgage ranked fifth on certificates Volume 111014 Folio 2 and Volume 111015 Folio 42; or · be rateable as between all mortgages; or · be in such other manner as the Court directs; and · take account of the substitution of investors for the original investors and, if so, what account should be taken. 11 Priorities are dealt with by s 48(5) of the Act which provides: "When registered, dealings affecting the same estate or interest shall, notwithstanding any express, implied, or constructive notice, be entitled in priority the one over the other according to the order in which they are registered and not according to the date of each dealing itself." 12 Section 78 confers a power of sale on mortgagees subject to certain requirements as to notice. Section 78(7) provides: "The purchase-money received by a mortgagee who has exercised the power of sale conferred by this section, after discharge of prior mortgages and encumbrances to which the sale is not made subject (if any), shall be applied- (a) firstly, in payment of all costs, charges, and expenses properly incurred, incidental to or for the purposes of the sale, or any attempted sale, or otherwise consequent on the default; (b) secondly, in payment of the money which is due and owing on the mortgage; (c) thirdly, in payment of subsequent mortgages and encumbrances (if any) in the order of their priority; (d) fourthly, in satisfaction of the claims of all persons who have lodged caveats subsisting when the power of sale was exercised, in accordance with their respective rights and priorities; and (e) fifthly, in payment of the residue (if any) to the mortgagor. 13 The first question which arises is whether the words "after discharge of prior mortgages" in s 78(7) produce the result that, since mortgage B770900 was a "prior mortgage" to B818719 under which the power of sale was exercised, all the proceeds should be applied in the first instance towards the discharge of the former (in the circumstances, that would of course exhaust all the funds). However, that would mean that those investors secured by mortgage B770900 would be benefiting in part from the proceeds of sale of the land in Volume 20627 Folio 2, over which they held no security. In respect of that land there is no "prior mortgage" within the meaning of s 78(7). Moreover, the "priority" referred to in s 78(7)(c) must be the priority conferred by s 48(5), that is to say one which is concerned with dealings "affecting the same estate or interest". This is not the case since mortgage B770900 does not affect the estate or interest in the land in Volume 20627 Folio 2. 14 There is some evidence of the value of the land comprised in the different titles in the form of the settlement statement which sets out the current rates. On this basis the percentage of the total value of the property was: Certificate of Title Volume 11014 Folio 2 55% Certificate of Title Volume 11015 Folio 42 14% Certificate of Title Volume 20627 Folio 2 31% 15 In the absence of any further evidence, it is therefore reasonable to treat that part of the property subject to mortgage B770900 as generating sixty-nine per cent of the proceeds. Accordingly sixty-nine per cent of the proceeds (subject to the costs of the motion, as discussed below) should be distributed to investors under mortgage B770900 and the balance in priority to, first, the investors under B818719 and then in the event of any surplus to the investors in subsequent mortgages in order of priority of registration, as varied. 16 As to the substitutions, the distribution should be rateably amongst investors in the relevant mortgage as at the time of sale. To the extent that original investors have been substituted, they must be taken to have surrendered any rights to participate in any benefits obtainable under the security of the mortgage. 17 An issue arose as to r 62 of the Rules of Practice 1994 (Tas) made under s 17 of the Legal Profession Practice Act 1993 (Tas). Rule 62(1) defines the term "first mortgage" as a mortgage where (i) the amount advanced does not exceed two thirds of the security valuation if the mortgage is not insured, or (ii) 90 per cent if the mortgage is insured in respect of the excess over two thirds or (iii) 50 per cent of government valuation if there is no security valuation. Rule 62(2) provides that if the amount secured under a first mortgage does not exceed the limits specified in sub-rule (1), a mortgage includes a further mortgage between the same parties in relation to the same estate. The significance of this definition is that it is part of the regime under which ASIC's predecessor the Australian Securities Commission had exempted legal firms from the prospectus provisions of the Corporations Law and under which solicitors could make certain investments: see r 71(1)(a)(ii). Broadly speaking, investment in a "first mortgage" was an authorised investment. 18 Counsel for PWB sought an adjournment to file a proposed affidavit by Mr John Turner, a partner in the firm who was responsible for the Business, or at any rate the loans in question. She said that he would depose that he thought at the time that r 62 enabled first and subsequent mortgages to be grouped together so that all investors would be on an equal footing, and that that had been his intention. 19 Counsel for the liquidator opposed any adjournment. He pointed out that directions I gave on 20 February 2003 required any affidavits on behalf of PWB to be filed by 7 March 2003. On 3 March 2003 PWB wrote to the liquidator's solicitors advising that Mr Turner was out of the State until late on 13 March, that he was "the only person with any knowledge of the relevant events" (one wonders why this was not mentioned at the directions hearing on 20 February), and that the firm hoped to be in a position to file any affidavit by close of business on the 14th. On 17 March however PWB telephoned the liquidator's solicitors and advised that they did not intend to file any affidavit. Counsel for the liquidator was not advised of the change of mind until the morning of the hearing. 20 I declined to grant the adjournment. Quite apart from the failure to comply with directions, the proposed affidavit did not seem to me to raise any relevant matter. Rule 62 cannot affect the priorities of registered mortgages under the Act. It operates for quite different purposes, viz the regulation of the kinds of investments which solicitors in Tasmania could then make without registration of a prospectus. Still less could the subjective beliefs of the solicitor as to its operation be material. 21 As to costs, there will be an order that the parties' costs of the motion be paid out of the proceeds. Those costs however should not include the costs of ASIC for its representation at the hearing. There was not any interest differing from that of the liquidator and counsel for ASIC did not make any separate submissions. I make the following orders and directions on the notice of motion dated 12 February 2003. 1. The net proceeds of the sale of the property "Rutherglen Holiday Village" referred to in the affidavit of Barry Keith Hamilton sworn 12 February 2003 should be distributed as follows. 2. First, in payment of the costs hereby ordered. 3. Secondly, as to 69 per cent of the balance to the investors in mortgage B770900 (in this and the subsequent paragraphs investors means investors as at the time of the said sale). 4. Thirdly, to the investors in mortgage B 818719. 5. Fourthly, to the investors in mortgage B831999. 6. Fifthly, to the investors in mortgage B868139 7. Sixthly, to the mortgagee in mortgage B898759. 8. Seventhly, to the mortgagor. 9. The costs of the liquidator and the parties, other than the costs of representation of the applicant at the hearing on 19 March 2003, be paid out of the said net proceeds. 10. Liberty to apply is reserved. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey.