Bahr v Nicolay [2001] NSWSC 479 | Case summary

10.4 Stonehaven would not create, permit or allow to exist any further charge over property which it held in trust without the consent of the plaintiff. 7 The plaintiff's case is that there were breaches of each of the covenants I have particularly mentioned; the plaintiff did not consent to the grant of the later mortgages, or know of them at all, until long after they were registered. 8 The second, third and fourth defendants agreed with Stonehaven to advance Stonehaven $255,000 on the security of registered first mortgages over properties called the Pennington Duplexes; they agreed to do so about 20 July 1999 and in pursuance of the agreement Stonehaven executed mortgages in their favour on 1 October 1999. On that day they paid the advance and took first mortgages, which were registered on 26 November 1999. The first defendant entered into an agreement with Stonehaven on 6 January 2000 to advance sums of $228,000 and $200,000 on terms which provided among other things that the advance of $228,000 was to be secured by registered first mortgage over leasehold property at Gawler and the $200,000 advance was to be secured by registered second mortgage over the same property. The advance of $228,000 was to be further secured by a registered mortgage over freehold land at Hackney. Mortgages were granted accordingly on 7 January 2000 and the advances were then made; and these mortgages were registered on 10 February 2000. 9 Stonehaven defaulted on its liability to the plaintiff to repay principal on 23 June 2000, and the plaintiff appointed a Receiver and Manager of Stonehaven on 7 August 2000 but has not recovered the principal. Stonehaven also defaulted under its mortgages to the defendants who have taken action in default. The second, third and fourth defendants have sold the Pennington Duplexes and have collected or are proceeding to collect the proceeds of sale. The first defendant has intervened to collect rent for the leasehold property. 10 In the Statement of Claim it is charged against the defendants and for interlocutory purposes the plaintiff has prima facie established that Robertson Finance Pty Limited, which acted as the defendants' agent in negotiating the loans, knew of the Fixed and Floating Charge to the plaintiff and knew of its terms. It is also alleged that the defendants were fixed with the knowledge of Mr Phillips, solicitor, who acted for them, and knew of the existence and terms of the Fixed and Floating Charge. 11 It is alleged to the effect that the defendants induced Stonehaven to breach the terms of the Fixed and Floating Charge by requiring Stonehaven to grant mortgages. In my view there is no substance in this allegation, and it was not part of the basis of the application for interlocutory injunction. It is then alleged that the defendants' conduct entitled the plaintiff to assert its interest under the Fixed and Floating Charge in priority to their mortgages, notwithstanding ss 69(I) and 72 of the Real Property Act 1886 (SA). 12 In illustration of his submissions the plaintiff's counsel pointed to passages at pages 7 to 12 of the reasons of Master Macready of 12 April 2001. In those reasons Master Macready referred to texts and authorities dealing with the notice of the existence of a Fixed and Floating Charge and all the clauses in it. For present purposes I will assume that knowledge of the existence of the Fixed and Floating Charge is knowledge of all clauses in it. (I make that assumption for limited purposes, although it is open to contention.) It was the Master's view that there was a reasonably arguable case of fraud within the meaning of subs 69(I) of the Real Property Act 1886, or of a personal equity of a kind which may be enforced against a registered proprietor notwithstanding the infeasibility conferred by statutory provisions such as s 69, on which the Torrens System of title by registration turns. 13 Plaintiff's counsel referred to and relied on passages in the learned Master's judgment at pages 10 to 12 as illustrating the personal equity to which the defendants are said to be arguably subject. None of the many illustrations in that passage is in any way a close or useful illustration of the workings of the further principles on which personal equities are excepted from indefeasibility in any context like the present. Counsel also referred to the passage in "Company Charges", WJ Gough, 2nd Ed pages 392 and 393 under "Restrictive Clause as personal equity". Although, on principles which I regard as unclear, English courts have treated knowledge of negative pledges as for some reason postponing later mortgages in circumstances where the Charge of which they form part otherwise would not, these decisions have not been given in a context of statutory indefeasibility: English and Scottish Mercantile Investment Co Ltd v. Brunton [1892] 2QB 700 at 707 and Rother Iron Works Ltd v. Canterbury Precision Engineers Ltd [1974] QB 1 at 6. The situation of a person who knows of a negative pledge is not at all like the position of a person who, as in Bahr v. Nicolay, has given a commitment to observe a competing equitable interest. The learned author makes cross-references to pages 226 to 230, which do not treat of Torrens System priorities either. 14 The covenants referred to, which I will call a negative pledge, cannot in my opinion be considered or treated as equitable interests or an equitable interest in the mortgaged land conferred on the plaintiff. As between the plaintiff and Stonehaven the covenants may be susceptible of enforcement including enforcement by equitable remedies, as they are negative in character, but that does not establish that the covenants constitute equitable interests by knowledge of which another person dealing with Stonehaven might be affected. Entitlements under the covenants are, in my view, aspects of the equitable interest created by the Fixed and Floating Charge, but not of a higher or different character than aspects of the equitable interest created by it. In my view a person who is protected in some way against the equitable interest created by the Charge is also protected against notice of these covenants. The leading characteristic of the rights created by these covenants is that they are, as they are commonly spoken of, negative pledges, that is, that they are covenants against the creation of further interests in land, but in their own terms they avoid being themselves interests in land. 15 The plaintiff's counsel contended that if the plaintiff establishes (as in my view the plaintiff has prima facie established) that persons with whose knowledge the defendants are fixed knew or believed that they were taking their mortgages in circumstances where Stonehaven was breaching its negative pledge, that is sufficient to demonstrate that there is a personal equity against the defendants. Counsel observed that no undertaking to protect or respect the plaintiff's rights with any analogies to the personal equity revealed in Bahr v Nicolay [No. 2] (1988) 164 CLR 604 could be shown. He observed that the negative pledge did not lead to the result that the mortgagor could not pass on an effective security interest, that the defendants' interests would be a real and effective security interest but would be subordinated in equity to the plaintiff's interest. Counsel referred me to many allusions to the existence of the plaintiff's security in documents which for present purposes the defendants should be treated as knowing of, which alluded, with more or less clarity, to the existence of the plaintiff's charge or some such charge predating the charge taken by the defendant. Indeed, counsel was able to point out that the first defendant, Ralchester, itself took a Fixed and Floating Charge containing the same negative pledge, as well as its Torrens System mortgage. 16 The application to the Torrens System in South Australia and its legislation of the general principle of indefeasibility, and further principles under which equities arising from the conduct of a registered proprietor before or after registration may be enforced against the registered proprietor notwithstanding indefeasibility, is established by the judgment of the High Court in Bank of South Australia Limited v Ferguson (1998) 192 CLR 248 and particularly by the passages at paragraphs 9, 10 and 11, pages 255-256. Their Honours there referred to passages in judgments in Bahr v Nicolay [No. 2] (1988) 164 CLR 604 in which the general principle and the further principle were recognised; Mason CJ and Dawson J at 612-614, Wilson and Toohey, JJ at 637-8 and Brennan J at 653-654. In particular, in Bank of South Australia at 255-256 the High Court said: As we have indicated, within the meaning of the Act, the Bank was the registered proprietor of the mortgage. In its terms, s 691 required identification of the rights and remedies which, as a person "defrauded", Mr Ferguson would have had if the land were not under the provisions of the Act. The legislation thus recognises the principle, propounded in an established line of cases dealing with Torrens system legislation, that an equity arising from the conduct of a registered proprietor before or after registration may be enforced against that registered proprietor notwithstanding the indefeasibility of registered titles (Bahr v Nicolay [No. 2] (1988) 164 CLR 604 at 612-614, 637-638, 653-654). Section 691 operates to qualify the general principle of indefeasibility only if the case answers the statutory description of "fraud". Not all species of fraud which attract equitable remedies will amount to fraud in the statutory sense. The distinction may be illustrated as follows. In some circumstances, equity subjects the interest of a purchaser of unregistered land to an antecedent interest of which the purchaser has notice. However, in respect of land to which the Act applies, registration of a transfer is not fraudulent in the statutory sense required to qualify the operation of the doctrine of indefeasibility, merely because the transferee knows that registration will defeat an antecedent unregistered interest of which the transferee has notice (Bahr v Nicolay [No. 2] (1988) 164 CLR 604 at 652-653). The points of significance for the present litigation are that (i) statutory fraud embraces less, not more, than the species of fraud which, at general law, founds the rescission of a conveyance; and (ii) statutory fraud is not itself directly generative of legal rights and obligations, its role being to qualify the operation of the doctrine of indefeasibility upon what would have been the rights and remedies of the complainant if the land in question were held under unregistered title. 17 Their Honours there referred to a passage in the judgment of Justice Brennan in Bahr v Nicolay which included the following at 652-653: "Registration of the transfer is not fraudulent merely because the transferee knows that an antecedent interest of which he has notice would be defeated thereby. As Kitto J said in Mills v Stockman (1967) 116 CLR 61 at 78: merely to take a transfer with notice or even actual knowledge that its registration will defeat an existing unregistered interest is not fraud." "However, the title of a purchaser who not only has notice of an antecedent unregistered interest but who purchases on terms that he will be bound by the unregistered interest is subject to that interest. Equity will compel him to perform his obligation." 18 Indefeasibility and the protection afforded by registration apply no matter what may be the terms of the equitable interest of which the incoming registered proprietor had notice. It is my opinion the negative pledge, including its prohibition of the creation of other security interests, does not place the interests of the plaintiff under the Deed of Charge in any different category, or take the conduct of the defendants in disregarding it outside the protection conferred by the principle of indefeasibility. 19 In Bank of South Australia v Ferguson the judgment speaks in terms of the operation of s 69(1) at 254: The title of every registered proprietor of land shall, subject to such encumbrances, lines, estates, or interests as may be notified on the original certificate of such land, be absolute and indefeasible, subject only to the following qualifications: Fraud 1. In the case of fraud, in which case any person defrauded shall have all rights and remedies that he would have had if the land were not under the provisions of this Act: Provided that nothing included in this subsection shall affect the title of a registered proprietor who has taken bona fide for valuable consideration, or any person bona fide claiming through or under him. 20 Counsel also referred me to s 72: 72. Knowledge of the existence of any unregistered estate, interest, contract, or trust shall not of itself be evidence of want of bona fides so as to affect the title of any registered proprietor. 21 Counsel pointed out that s 72 expressly negatives knowledge as showing a want of bona fides. Counsel submitted that s 72 does not refer to knowledge of a specific contractual prohibition, and that its terms as a whole suggest the obverse proposition that lack of bona fides will affect the title of the registered proprietor. Counsel contended that the terms of s 72 provide a basis on which it is reasonably arguable that there is a want of bona fides and the title of a registered proprietor is affected if the knowledge of the registered proprietor is knowledge in greater detail than knowledge of the existence of an unregistered interest of itself. I do not regard s.72 or this contention as showing that it is reasonably arguable that the degree of detail in which the unregistered interest is known is of general significance for indefeasibility. Bona fides referred to in s.72 is relevant to the proviso in subs 69(I) which refers to a case of fraud; there is no basis on which it could be contended that there is fraud in the present case, no basis on which the proviso could be reached, and no occasion to examine the exposition of the concept of bona fides furnished by s 72. In my opinion the degree of detail in which the unregistered interest is known, and what it provides about the creation of competing interests do not have a bearing on the registered proprietor's protection under the general principle of indefeasibility. 22 Counsel referred in the context of fraud to Templeton v Leviathan Pty Limited (1921) 30 CLR 34. I do not find any useful analogy in that case; in any event the notice attributed to the defendants of the terms of the negative pledge could not be considered to be notice of a breach of trust. 23 In my opinion the plaintiff does not have a prima facie case, or an arguable position of any strength at all, and for that reason it would not be appropriate to make an interlocutory injunction. It is not necessary to address the balance of convenience. 24 During argument I raised the question whether the negative pledge provisions had any effect on Stonehaven's right in equity to create an effective subsequent or other charge, and whether equitable principles avoiding provisions which clog the equity of redemption have any relevant operation. I have not reached any conclusion on that matter. 25 Order:

Bahr v Nicolay

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