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[2003] FCA 288
procedural. The Court directed that, after payment of costs, 69% of the net sale proceeds be paid to investors under mortgage B770900, with the balance applied in priority to investors under mortgages...
Heerey J ordered that sale proceeds of a holiday-village property be apportioned between the three Torrens titles and applied to mortgages only to the extent each mortgage actually affected those titles. Because mortgage B770900 was registered on only two of the three titles, 69% of the proceeds (the share attributable to those two titles) were to be paid to its investors; the remainder was to be applied in priority to other registered mortgages on the titles. Distribution within each mortgage is rateable among investors as at the sale date; substituted investors are those entitled. A solicitor-practice rule about what counts as a 'first mortgage' does not change registered priorities. Costs of the motion were paid from proceeds except ASIC's hearing costs.
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Piggott Wood & Baker (PWB), a Hobart firm of solicitors, operated a managed lending business under which investor funds were advanced as loans to borrowers and secured by mortgages registered under the Lands Title Act 1980 (Tas) [2]. Those loans related to a property known as Rutherglen Holiday Village, which comprised land in three separate certificates of title. Several mortgages taken in the names of PWB partners were registered in various sequences across the three titles; critically, mortgage B770900 (securing $600,000) was registered on only two of the three titles (Volumes 111014 Folio 2 and 111015 Folio 42) while other mortgages were registered on all three titles in a particular order [5]–[7].
ASIC obtained orders on 13 December 2001 winding up the managed investment business under s 601EE(1) of the Corporations Act and appointed liquidators with liberty to apply for directions [3]. The liquidator exercised a power of sale under mortgage B818719, sold the property as a single lot on 20 December 2002, and realised net proceeds of $330,969.28 [9]. Because of the inconsistent registration across the three titles and substitutions of investor funds over time, the liquidator sought directions (notice of motion 12 February 2003) as to how to distribute those sale proceeds among competing mortgage investors and whether substituted investors retained rights to share in distributions [10].
Heerey J directed that, after payment of costs, 69% of the proceeds (being the portion attributable to the two titles subject to B770900) be paid to the investors in B770900; the balance was to be applied in priority to the investors in B818719, then B831999, then B868139, then to the ANZ mortgagee in B898759, and finally to the mortgagor if any residue remained [1]–[9], [15]. Heerey J also held that distribution within each mortgage is to be rateable among investors as at the time of sale and that original investors substituted out are treated as having relinquished rights to share in the security [16]. The court refused an adjournment sought to file an affidavit about the interpretation of a solicitor-practice rule (r 62) and ordered costs against the parties to be paid from the proceeds, excluding ASIC's hearing costs [18]–[21].
Two statutory provisions shaped the decision: s 48(5) of the Lands Title Act 1980 (Tas) (which fixes priority of registered dealings that affect the same estate or interest according to order of registration) and s 78(7) of the Act (which prescribes the order in which purchase-money received by a mortgagee who has exercised a power of sale is to be applied) [11]–[12].
Central to the dispute was the meaning of s 78(7)'s phrase "after discharge of prior mortgages". Heerey J read s 78(7) together with s 48(5) and concluded that "priority" and "prior mortgages" must be understood as priorities among dealings that affect the same estate or interest [13]. Since mortgage B770900 was not registered on one of the three certificates (Volume 20627 Folio 2), it did not affect that particular estate. It therefore could not be regarded as a prior mortgage vis-à-vis that title and could not legitimately be discharged out of sale proceeds attributable to that title. To treat B770900 as taking all the proceeds of sale would effectively let its investors benefit from a part of the land over which they had no registered security [13].
Because precise apportionment evidence was lacking, the court accepted available settlement data showing relative values (55%, 14%, 31% for the three titles) and treated the sum for the two titles where B770900 was registered as generating 69% of the proceeds. The court therefore directed 69% of the proceeds to B770900 investors and application of the remainder according to registration priority as varied on the affected titles [14]–[15].
On substitutions of investors, Heerey J took a pragmatic rule-based approach: distributions are to be rateable among investors in the relevant mortgage as at the time of sale, and substituted-out original investors are treated as having surrendered rights to participate in the security benefits [16]. Finally, the court rejected reliance on Rule 62 of the Rules of Practice 1994 (Tas) as relevant to priority questions, observing that r 62 governs solicitor investment authorisations in a separate regulatory context and cannot alter the statutory priorities under the Lands Title Act; the subjective intentions of a solicitor are immaterial to legal priority of registered interests [17], [20].
Before this judgment, the governing principles for priority between registered interests were already statutory: the Torrens-registration-inspired rule that registration determines priority for dealings affecting the same estate or interest (here s 48(5)). The order of application of sale proceeds following exercise of a power of sale was also statutorily set out (s 78(7)). Heerey J did not change statutory law; rather, the judgment applies those statutory rules to a multi-title situation where a mortgage is not uniformly registered across all constituent titles of the subject property.
After the decision, the practical takeaway is clear: in a sale of land comprising multiple registered parcels, courts will allocate proceeds according to the estates or interests actually affected by each registered mortgage. A mortgage registered on only some titles cannot claim proceeds attributable to other titles where it has no registered interest. Where valuation evidence is not precise, the court may use reasonable documentary indicia (for example settlement statements) to apportion proceeds between titles for the purpose of applying priorities [14]–[15].
The case reaffirms that regulatory definitions under a different statutory regime (here rules about authorised investments for solicitors) cannot be used to vary the priority outcomes which are determined by the lands-registration statute [17], [20].
Quotation (s 48(5) cited): "When registered, dealings affecting the same estate or interest shall... be entitled in priority... according to the order in which they are registered" [11].
The court's analysis: "The 'priority' referred to in s 78(7)(c) must be the priority conferred by s 48(5) ... mortgage B770900 does not affect the estate or interest in the land in Volume 20627 Folio 2." [13].
Apportionment approach: "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." [15].
Substitutions: "The distribution should be rateably amongst investors in the relevant mortgage as at the time of sale... substituted... must be taken to have surrendered any rights..." [16].
On r 62: "Rule 62 cannot affect the priorities of registered mortgages under the Act... It operates for quite different purposes" [20].
This judgment is directly relevant in fact patterns where:
If the mortgage under which sale occurs is registered on all relevant titles, or if the mortgages are uniform in registration across titles, the specific allocation problem addressed here will not arise.
(Strictly limited to the text of this judgment: Heerey J did not cite subsequent authority and the reasons do not report later treatments. The judgment itself applies established statutory rules [11]–[12] and explains their operation in a multi-title setting. Practitioners should search post-2003 authorities for treatments of multi-title mortgage priorities for subsequent appellate or persuasive authority that cites this decision.)
Practitioners confronted with similar disputes should gather precise valuation evidence for each title, document the chain of investor substitutions, and check whether any trust instrument or registered encumbrance cross-references multiple titles in a manner that might alter the "affecting the same estate or interest" analysis that governed Heerey J's reasoning [13]–[16].
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.
Solicitor for the Respondent: Piggott Wood & Baker
Australian Securities & Investment Commission
Piggott Wood & Baker
The Court directed that, after payment of costs, 69% of the net sale proceeds be paid to investors under mortgage B770900, with the balance applied in priority to investors under mortgages B818719, B831999, B868139, then to ANZ under B898759, and finally to the mortgagor; distributions to mortgage investors to be rateable among investors as at the time of sale; costs of the liquidator and parties (excluding ASIC's representation costs at the hearing) to be paid from the proceeds; liberty to apply reserved [1]–[9], [15]–[16], [21].