Beachquest Pty Ltd v Interstate Mortgage And Investments Pty Ltd & Ors [2001] QSC 512

MORTGAGES - MORTGAGES AND CHARGES GENERALLY - THE MORTGAGE - FURTHER ADVANCES - priority of fresh mortgages and future advances - rule in Hopkinson v Rolt - whether determination of priorities should be based on previously released mortgages - whether the mortgage expressly imposed an obligation to make further advances

EQUITY - GENERAL PRINCIPLES - PRIORITY AND NOTICE - the rule in Clayton's Case - agreement excluding the operation of the rule between creditor and debtor - the affect of running accounts

MORTGAGES - MORTGAGES AND CHARGES GENERALLY - REMEDIES OF THE MORTGAGEE - MARSHALLING - the doctrine of marshalling - the right to marshall where just and equitable

MORTGAGES - MORTGAGES AND CHARGES GENERALLY - THE MORTGAGE - COVENANTS - FOR PAYMENT OF INTEREST - whether mortgage provided for payment of compound interest - whether compound interest can be retrospectively included in a priority sum or whether it constitutes a further advance, ranking behind subsequent securities

CORPORATIONS - PRACTICE AND PROCEDURE - IN RELATIONTO WINDING-UP - whether leave to proceed can be granted pursuant to s 471B

Land Title Act 1994 ss 178, 184

Air Services Australia v Ferrier (1996) 185 CLR 483, cons

Carter v Tanner's Leather Co 81 NE 902 (1907), cons

Central Mortgage Registry of Australia Ltd v Donemore Pty Ltd [1984] 2 NSWLR 128, cons

Devaynes v Noble; Clayton's Case [1815] EngR 77; (1816) 1 MER 572; 35 ER 789, cons

Ex Parte Kendall [1811] EngR 268; (1811) 17 Ves 514; 34 ER 19, cons

Hopkinson v Rolt [1861] EngR 641; (1861) 9 HL Cas 514; 11 ER 829, cons

Mercantile Credits Ltd v Australian and New Zealand Banking Group Ltd (1988) 48 SASR 407, foll

Queensland Trustee Ltd v Registrar of Titles [1893] 5 QLJ 46, cons

Re Arcade Hotel Pty Ltd [1962] VicRp 41; [1962] VR 274, cons

Re O'Leary; Ex Parte Bayne [1985] FCA 333; (1985) 61 ALR 674, cons

R &I Bank of Western Australia Ltd v Cash Resources Australia Pty Ltd (1993) 11 WAR 536, cons

Sands and McDougall Wholesale Pty Ltd v The Commissioner of Taxation [1998] VSCA 76; [1999] 1 VR 489, cons

Sarge Pty Ltd v Cazihaven Homes Pty Ltd (1994) 32 NSWLR 658, cons

Sibbles v Highfern Pty Ltd [1987] HCA 66; (1987) 164 CLR 214, cons

The Chioggia [1898] P 1

West v Williams [1899] 1 Ch 132, dist

[1] The principle dispute to be resolved on this application between the applicant ("Beachquest") and the first respondent ("IM&I") who each gave financial assistance to the third respondent ("The Wright Brothers") is to determine their priorities as mortgagees in respect of mortgages given by The Wright Brothers over certain of its real property. The second respondent ("Talgai") was a guarantor of The Wright Brothers' indebtedness to IM&I and to that end mortgaged property to IM&I to secure its guarantee. Beachquest seeks a declaration that the net proceeds of sale of that property and other receipts be applied to IM&I's priority debt for the purpose of calculation of its priority.

[2] Beachquest seeks a declaration that Talgai, which also advanced sums to The Wright Brothers, has priority against Beachquest limited to $240,000.

[3] Beachquest seeks sundry orders for account for rents and profits, if any, received by IM&I and Talgai and that it be at liberty to redeem their mortgages and/or to sell The Wright Brothers' mortgaged property.

[4] Talgai and the liquidator of The Wright Brothers were served but did not appear. If necessary an order granting leave to proceed nunc pro tunc is sought in respect of The Wright Brothers either as a company in respect of which a resolution has been passed for voluntary winding up, s 500 Corporations Law, or as a company in liquidation, s 471B. According to Mr A Tosswill, manager of Beachquest, the liquidators of The Wright Brothers have not accepted its submissions about the quantum of IM&I's priority over Beachquest.

[5] Mr F.L Harrison QC, for Beachquest and Mr C Wilson, for IM&I, relied on the affidavits filed on behalf of their respective clients. No deponent was required for cross-examination. There are differences concerning notice of conditions in respect of a conceded priority, but Mr Harrison made appropriate concessions as to how far the material could be taken. There are differences as to amounts received by IM&I in satisfaction of The Wright Brothers' indebtedness. The relevance of that quantum is dependent on the findings made on the application and, if necessary, accounts can be taken.

[6] The application raises issues relating to priorities, future advances and the rule in Hopkinson v Rolt [1861] EngR 641; (1861) 9 HL Cas 514; 11 ER 829; marshalling; the rule in Clayton's Case [1815] EngR 77; (1816) 1 MER 572; 35 ER 789; and whether compound interest constitutes a future advance.

[7] The Wright Brothers is a limited private company which went into liquidation in December 1999. It was acquired and used for the purchase of land under development located at Mudjimba Beach Road, Maroochydore in Queensland. It was proposed to develop the land into a staged resort development containing town houses, an administration building, a restaurant and recreational facilities known as "Twin Waters Garden Villas". To assist in the purchase of the land the Commonwealth Bank advanced $1.6 million and registered a first mortgage over the property but did not wish to provide construction finance for the project.

[8] The original arrangements for funding, to which it is unnecessary to refer, did not eventuate. Clyde and Charles Veivers, agreed initially to fund the project through their family company, Talgai. Talgai is the sole unit holider in the Twin Waters Garden Villas Unit Trust. Clyde Veivers, with others, was a director of The Wright Brothers.

[9] Medhurst Master Builders (Qld) Pty Ltd ("Medhurst") was the builder for the development.

[10] On 13 January 1998 IM&I approved a loan to The Wright Brothers to pay out its existing loan to the Commonwealth Bank in the amount of $1.925 million to be secured by a first registered mortgage over the development land. The amount of $1.850 million was advanced. It was expected that construction funding would be sought and during construction of the development The Wright Brothers and IM&I entered into a number of loan agreements for the advance of funds by IM&I. Subsequent advances were secured by the mortgage over the development land which was lodged for registration on 13 March 1998.

[11] On 19 May 1998 IM&I agreed to lend to The Wright Brothers a further $2.450 million bringing the total principal to $4.3 million. The mortgage was stamped to this amount on 29 May 1998.

[12] On 8 May 1998 Beachquest through Mr Anthony Tosswill, its manager, agreed to provide The Wright Brothers with $990,800 trade dollars to provide the trade dollar component of the construction fee to Medhurst. Trade dollars are explained by Mr Tosswill to be "credits valued in dollars established as part of a system of trading goods and services without the provision of actual currency" (para 2(jj) of the affidavit of Anthony Tosswill filed 14 December 2000). That facility was secured by a mortgage executed on 8 May 1998 and registered on 10 June 1998. The actual advances made by IM&I to or on behalf of The Wright Brothers pursuant to the loan agreements as at 10 June 1998 was $2,449,811.

[13] On 8 August 1998 IM&I agreed to a further advance to The Wright Brothers of $430,000 taking the total principal $4.73 million. This was stamped on the mortgage on 21 August 1998.

[14] According to Mr Tosswill, IM&I's solicitors, Halliday & Stainlay, consented to The Wright Brothers drawing down a loan of $500,000 from Macau Investments Pty Ltd ("Macau") to pay Medhurst in respect of the construction of stage two and Beachquest consented to the loan which was secured by a registered mortgage having priority to Beachquest.

[15] Talgai lent The Wright Brothers $240,000 secured by a mortgage executed on 12 September 1998 and lodged on 5 October 1998. Although Talgai apparently alleges the mortgage secured $1.2 million there is no material evidencing that sum.

[16] Beachquest had made further advances to The Wright Brothers in the amount of $1,159,200 by August 1998. It was not until 9 September 1998 that IM&I became aware of Beachquest's mortgage and did not become aware of the quantum of its advances until after the commencement of these proceedings.

[17] By letter dated 9 September 1998, Rea & Sockhill, solicitors for The Wright Brothers, wrote to Halliday and Stainlay seeking co-operation in releasing the existing IM&I mortgage over the development land so that the subdivision plan and other dealings could be registered. Thereafter IM&I (and the other mortgagees) would lodge fresh collateral mortgages over the land. The letter concluded

"The order of priority of mortgages will be as follows:-

("MN4" to the affidavit of Mark Newnham filed 13 February 2001)

It is unchallenged that this was the first notification that IM&I or its solicitors had received the existence of Beachquest as a mortgagee.

[18] Mr Tosswill deposes that there was agreement between Beachquest and The Wright Brothers about the order of the mortgages granted to IM&I, Macau, Talgai and Beachquest and the quantum of each mortgagees' priority. In the case of IM&I this was said to be for $4.3 million. No date is given for the meeting when this agreement was reached, nor is it suggested that this limit on the amount of its priority was communicated to IM&I, even less, that it had agreed to it. IM&I's new mortgage was stamped to $4.73 million on 23 September 1998, Macau's mortgage was stamped to $500,000 on 10 September 1998, Talgai's mortgage was stamped to $240,000 on 16 September 1998 and Beachquest's new mortgage stamped to $990,800 on 30 September 1998. The IM&I and Beachquest previous mortgages were released by releases dated 21 and 30 September 1998 respectively and lodged on 5 October 1998. All of the fresh mortgages were lodged on 5 October 1998.

[19] A further loan of $800,000 was agreed to be made by IM&I to The Wright Brothers in September 1998. In a letter dated 1 October 1998 to Medhurst, IM&I's solicitors wrote that these funds were to be used to discharge the loan of $500,000 to Macau with the balance to be available for payment to Medhurst. The solicitors wrote

"These funds will be drawn as soon as possible and released upon the following:

2. Lodgement of plan for Stage 1 with titles 0ffice.

3. Execution of Hotel Lease Agreement with Golden Hotel satisfactory to allow settlements of Stage 1 to proceed upon registration of the BUP.

We further confirm that we will provide 75% of Stage 2 progress works certified by Ryder Hunt following the draw down of the $300,000 at whatever intervals sought by MMB. [Medhurst]

We have spoken to Mr Bruce Sockhill [solicitor for The Wright Brothers] who is pursuing the withdrawal of Caveat from Macau and we envisage that this matter would be completed by Wednesday, 7 October 1998 providing the above requirements have been satisfactorily resolved."

("MN6" to the affidavit of Mark Newnham filed 21 February 2001)

[20] Mr Tosswill deposes that Beahquest agreed with The Wright Brothers and Medhurst to the further advance having priority over Beachquest on certain conditions including that Macau was to be paid out from the proceeds of sale of units in the development and not from the draw down of the $800,000. He complains that the monies were not distributed as he understood they would be so as to enable Medhurst to continue building. In that way, he deposes, Beachquest's security has been adversely affected. Mr Tosswill seeks to draw support for the conditional nature of the agreement about IM&I's priority from phrases in a number of contemporaneous documents. In light of the clear expression of intent in the letter of 1 October 1998 from IM&I's solicitors to Medhurst and a letter of 2 October 1998 from Beachquest's then solicitors consenting to the advance of $800,000 as a further advance under the first mortgage "which ranks in priority to any monies secured by the mortgage to" Beachquest, without any conditions as to its distribution, whatever Mr Tosswill's understandings were with the individuals behind The Wright Brothers and others, they were not communicated to nor shared by IM&I and cannot affect the agreed priority.

[21] The further $800,000 was advanced on 8 October 1998.

[22] By facsimile transmission dated 16 October 1998 Beachquest's then solicitors consented to a further advance of $315,000 by IM&I to The Wright Brothers under the first registered mortgage "which ranks in priority to any monies secured by the mortgage to" Beachquest.

[23] The total amount advanced under the IM&I mortgage as at 16 October 1998 was $5,658,509 for which IM&I maintains it has priority over Beachquest by virtue of its first registered mortgage of 5 October 1998 together with the subsequent agreed priority advances of $800,000 and $315,000. IM&I did not seek priority from Beachquest in respect of any further advances made by it after 16 October 1998.

[24] Payments were made by The Wright Brothers to IM&I in reduction of the principal from sales of units in the development in the amount of $2.28 million. As at 25 March 1999, $6,529,550 was owed under its loan agreements to IM&I.

[25] On 19 October 1999 IM&I received $750,000 on the realisation of the sale of property owned by Talgai at Southport in its capacity as guarantor of the loans to The Wright Brothers.

[26] On 16 December 1998 Messrs. Clout and McIntosh were appointed administrators to Medhurst. An agreement was reached whereby Mr Medhurst personally would complete the construction of the units. IM&I paid progress claims submitted by the administrators.

[27] On 7 October 1999 Mr Grant Sparks of Sims Lockwood was appointed administrator of The Wright Brothers and liquidator on 15 December 1999.

* A determination as to the priorities of Beachquest, IM&I and Talgai as mortgagees under mortgages given by The Wright Brothers in respect of the development land and in particular declarations that

* IM&I's mortgage has priority over Beachquest's only to the extent of $2.7 million ($4.3 million in the application reduced by deducting advances after 10 June 1998) and interest less sums received by it in reduction of The Wright Brothers' indebtedness; and

* the sum of $750,000 received by IM&I from the sale of Talgai's property at Southport is to be taken in part satisfaction of the sum of $2.7 million and interest; and

* Talgai's mortgage has priority over the mortgage of Beachquest to the extent of $240,000 and interest less sums received, if any.

(a) of what, if anything, is due under and by virtue of IM&I's and Talgai's mortgages;

(b) the rents and profits in respect of the mortgaged premises received by them or which, but for the neglect or default of each them, might have been received;

(c) what sums were secured by Beachquest's mortgage.

* That upon payment by Beachquest to IM&I and Talgai of any sum found due in priority to Beachquest on the taking of accounts that Beachquest may be at liberty to redeem those mortgages.

* That Beachquest may be at liberty to sell the mortgaged property out of court for the purpose of discharging the mortgage debt thereby secured or that the mortgage property may be sold with the approval of the court or alternatively that Beachquest may be let in to redeem.

* An inquiry whether any and what parts of the mortgaged property have been sold by whom and the disposition of the proceedings.

[29] Registered mortgages take priority in Queensland according to the order of lodgement and not according to when each of them was executed, ss 178, 184 Land Title Act 1994. The law about tacking and further advances has largely been preserved by s 82 of the Property Law Act 1974 with minor alterations.

[30] The question is whether the starting point for determining the priority of the mortgages and the amount secured thereunder is 5 October 1998 when the fresh mortgages were lodged for registration with the priority as agreed between the mortgagor and the mortgagees, or whether the released mortgages continued to govern the priorities. Mr Wilson submitted that on 5 October 1998 the interested parties carried into effect their agreement, which was to their mutual advantage, namely_,_ that the existing mortgages be released so that the plan of subdivision, a boundary re-alignment plan, transfer of land to the local council and the purchase of land from an adjoining land owner in respect of the development land could be registered. Fresh mortgages were to be lodged and the order of priority was agreed upon. There was no qualification as to the quantum of IM&I's priority inconsistent with the usual position of priority for the advances then secured by the mortgage. As at 5 October 1998 the balance owing to IM&I was $4,534,419. King CJ in Mercantile Credits Ltd v Australian and New Zealand Banking Group Ltd (1988) 48 SASR 407 observed at 409-410

"But the rule in Hopkinson v Rolt does not affect the title of the mortgagee. His title to the charge upon the land which a mortgage of registered land creates would be unaffected by the application of the rule. The mortgagee's interest in the land is a charge giving him security for the mortgagor's indebtedness. It can only extend at any give time, to the amount owing at that time. The rule in Hopkinson v Rolt does not operate to defeat that security or any part of it. It merely fixes the amount for which the security has priority over subsequent securities at the date upon which the mortgagee has notice of those subsequent securities."

[31] In my view Mr Wilson's submission is correct and the amount of IM&R's advances for which it enjoyed priority against Beachquest (and the other subsequent mortgages) was $4,534,419.

[32] If this is not the correct approach to the fresh mortgages then, as Mr Harrison contends, the rule in Hopkinson v Rolt as modified by s 82 of the Property Law Act 1974 needs to be considered. Hopkinson v Rolt established that if a mortgage expressly provided that it was to operate as a security for further advances, a prior mortgagee could claim priority for a further advance made by it under such a mortgage over an advance made by a subsequent mortgagee before the further advance of the prior mortgagee, provided the prior mortgagee had no notice of the subsequent mortgage at the time of the further advance.

[33] Section 82 of the Property Law Act provides

"82.(1) After the commencement of this Act, a prior mortgagee shall have a right to make further advances to rank in priority to subsequent mortgages (whether legal or equitable)-

(a) if an arrangement has been made to that effect with the subsequent mortgagees; or

(b) if the mortgagee had no notice of such subsequent mortgages at the time when the further advance as made by the mortgagee; or

(c) if the mortgagee's mortgage imposes on the mortgagee an obligation to make such further advances.

(2) Northing in subsection (1) affects the right of a prior mortgagee to rank in priority to subsequent mortgagees in respect of expenses properly incurred in preserving the mortgaged property.

(3) In relation to the making of further advances after the commencement of this Act a mortgagee shall not be deemed to have notice of a mortgage merely by reason that it was registered under an Act providing for registration of mortgages or deeds, if it was not so registered at the time when the original mortgage was created or when the last search (if any) by or on behalf of the mortgagee was made, whichever last happened.

(3A) Subsection (3) applies only where the prior mortgage was made expressly for securing a current account or other further advances.

(4) Save in regard to the making of further advances as mentioned in subsection (3), the right to tack is abolished. ..."

[34] Beachquest's mortgage was registered on 10 June 1998. IM&I had then advanced $2,699,811 to The Wright Brothers. Beachquest's loan agreement with The Wright Brothers noted the amount of $4.3 million as secured by IM&I's registered mortgage. Duncan & Vann suggest that the better construction of s 82(1)(c) is to accept that it reverses the result of West v Williams [1899] 1 Ch 132 and the reasoning on which it was based so that a subsequent mortgage by a mortgagor does not release the prior mortgagee from an obligation in the mortgage to make further advances and does not prevent a prior mortgagee, even with notice, tacking a further advance, para 7.1040.

[35] Mr Harrison submitted that IM&I's mortgage did not expressly impose an obligation to make further advances in that it merely secured moneys becoming owing. The obligation to advance arose outside the mortgage and the loan agreement was not incorporated into the mortgage.

[36] Item 5 of the IM&I mortgage provides for "description of debt or liability incurred" and refers to the schedule where the "secured monies" are fully described and in particular

"(a) Money lent or advanced or to be lent or advanced at the request of the mortgagor on the terms and conditions of a loan agreement made between the Mortgagee and the Borrower and any document, letter of approval or agreement entered into for the purposes of its variation ("the loan agreement"), and

(b) The Mortgagee agreeing from time to time hereafter at the request of the Mortgagor to lend or advance money to the Mortgagor or the Borrower or to extend or furnish to the Mortgagor or the Borrower credit advances or accommodation."

[37] It has been suggested, Duncan and Vann para7.990, that it is not necessary in order to satisfy the word "expressly" in s 82(3A) for the mortgage literally to say "this mortgage is made to secure further advances". It is sufficient that there is a provision in the mortgage which shows that it is to cover further advances in a wider sense. The authors suggest "that it is probably sufficient" if the mortgage refers to another instrument which shows that the mortgage covers further advances. A fortiori where, in s 82(1)(c), the requirement is for the mortgage to "impose" on the mortgagee an obligation to make further advances.

[38] At the time of the mortgage the loan agreement bearing the same date was for an advance of $1.85 million. The loan agreement of 2 March 1998 provides that the principle sum is $1.85 million and that "debt" means the principle sum, and, inter alia "all advances, further advances or financial accommodation made, created or given previously, now or later by the Mortgagee to the Borrower". In the loan agreement of 19 May 1998 the principle sum is described as

"$2,200,000 - initial advance (an increase of $350,000 over $1,850,000)

The special terms of the loan required the certification of, e.g., construction of work in order for claims to be made out of the funds in IM&I's solicitors' trust account. Provided the conditions were met, IM&I was obliged to advance funds. Although a subsequent mortgagee would not have access to a collateral document evidencing the amount of the loan, in this case the mortgage was stamped to duty of $1.85 million on 9 March 1998 and $4.3 million on 29 May 1998 and there was reference to the loan agreement in the schedule referred to in Item 5 of the mortgage Form 2.

[39] I would incline to the view that the obligation to make further advances is sufficiently expressed in the mortgage for IM&I to have the advantage of s 82(1)(c).

[40] If, contrary to that view, the mortgage imposed no obligation to make further advances, was IM&I affected by notice of Beachquest's registered mortgage? It is not contested that the first actual notice that IM&I or its solicitors had of Beachquest's mortgage was on 9 September 1998. Mr Harrison submitted that constructive notice, that is, notice by registration or reasonable search, is sufficient notice by virtue of the registration of the mortgage otherwise there is little purpose to ss (3A). He relied to an observation by the majority in Sibbles v Highfern Pty Ltd [1987] HCA 66; (1987) 164 CLR 214 at 221 where their Honours, referring to the rule in Hopkinson v Rolt, said

"... the prior mortgagee could not tack if at the time of the further advances he had notice, actual or constructive of the subsequent mortgage."

Anderson J in R & I Bank of Western Australia Ltd v Cash Resources Australia Pty Ltd (1993) 11 WAR 536 noted that this statement was not strictly necessary for the decision in the case and no authority was cited

"... that constructive notice would be sufficient to effect the equities in this kind of case." at 547

[41] The authorities are not uniform. Central Mortgage Registry of Australia v Donemore Pty Ltd [1984] 2 NSWLR 128 at 133-5 held that lodging a caveat was not notice; while Re Arcade Hotel Pty Ltd [1962] VicRp 41; [1962] VR 274 at 279 held that registration is notice for purposes of enforcing a restrictive covenant. See also Queensland Trustee Ltd v Registrar of Titles [1893] 5 QLJ 46 at 51. If constructive notice is insufficient to constitute notice for s 82(1)(b) then there seems little purpose to ss (3A) because the special rule for current accounts would be the general rule. This, then, might suggest that the draftsman intended a distinction to be made between the two and that s 82(1)(b) is premised on registration being sufficient notice.

[42] However, the underlying basis of the rule in Hopkinson v Rolt, as Kearney J noted in Central Mortgage Registry of Australia Ltd v Donemore Pty Ltd at 132, is that it would be inequitable, that is, would constitute equitable fraud on the part of a prior mortgagee to claim priority in respect of further advances made with notice of an intervening equity. In such circumstances actual notice is essential. That seems to me to be a preferable result, that is, to give effect to the equitable principle by requiring actual notice notwithstanding the unsatisfactory situation with ss (3A).

[43] Even if the starting point for considering the quantum of IM&I's priority is not 5 October 1998, nonetheless IM&I takes the benefit of s 82(1).

[44] According to the affidavit of Mr Newnham, IM&I received repayments from The Wright Brothers from sales of units in the development between 10 November 1998 and 25 March 1999 of $2,043,000 and $750,000 from a guarantor (Talgai) on 19 October 1999. Mr Tosswill deposes to a considerably greater sum by way of repayments, namely, $3,890,000. If necessary, the quantum of the repayments can be established by agreement or by taking accounts. It is the approach to these repayments which is the issue to be decided.

[45] Mr Harrison submitted that the rule in Clayton's Case (Devaynes v Noble; Clayton's Case [1815] EngR 77; (1816) 1 MER 572; 35 ER 789) applies, while Mr Wilson contended that it is excluded by virtue of cl 20.10 of the memorandum of mortgage between IM&I and The Wright Brothers of 5 October 1998. That clause provides

"If any moneys are paid into a running account with the Mortgagee, the application of the rule in Clayton's Case shall be excluded, if the effect of the operation of the rule would be that the amount of the Secured Moneys for which the Mortgagee would be able to claim priority as against any other mortagee, chargee or emcumbrancee of the Mortgaged Property would be reduced or the amount of the Secured Moneys for which any Surety could be made liable would be reduced, and in such cases the moneys paid into the running account shall be deemed to have been applied progressively in reduction of the later debits, commencing with the latest debit."

[46] The majority in Sibbles v Highfern [1987] HCA 66; (1987) 164 CLR 214 described the rule in Clayton's Case as presuming

"... that payments made in reduction of a debt are intended to be applied consecutively in discharge of the items making up the debt. Where notice of a second mortgage is given, subsequent payments into the account are applied to reduce the overdraft existing at the time of the notice and, in effect, for the benefit of the subsequent mortgagee." at 222

[47] Mr Harrison submitted that Beachquest ought not be bound by cl 20.10, an agreement to which it is not a party. Such an arrangement excluding the operation of the rule in Clayton's Case is between the creditor and debtor and it is coincidently that the presumption which derives from that authority may benefit a subsequent creditor. That that is so is clear from the discussion on this aspect of Clayton's Case by the Master of the Rolls, Sir William Grant, at pp 604-611;

[48] The inclusion of such a term is common to bankers', and other lenders', mortgages. A search of the register by Beachquest would have revealed its existence. It could have declined to lend to The Wright Brothers or sought to negotiate some different arrangement as to priority with IM&I for although IM&I only dealt with Beachquest through solicitors, nonetheless they were both engaged in financing the same project and Beachquest was aware from the outset of IM&I's involvement, and its role as primary lender.

[49] Mr Harrison submitted that even if cl 20.10 is operative as against Beachquest's interests the expressions "paid into" a "running account" are not apt to describe the repayment of IM&I's loan secured under the mortgage out of the proceeds of sale of units and any further proposed sales. Both counsel relied on the description of "running account" in Sands and McDougall Wholesale Pty Ltd v The Comissioner of Taxation [1998] VSCA 76; [1999] 1 VR 489 at 506-7 where a number of earlier authorities are discussed. That case and Air Services Australia v Ferrier (1996) 185 CLR 483, to which considerable reference was made, were preference cases and the observations on the meaning of the term "running account" must be seen in that light. Dawson, Gaudron and McHugh JJ said at 504-5

"However, the significance of a running account lies in the inferences that can be drawn from the facts that answer the description of a "running account" rather than the label itself. A running account between traders is merely another name for an active account running from day to day, as opposed to an account where further debits are not contemplated. The essential feature of a running account is that it predicates a continuing relationship of debtor and creditor with an expectation that further debits and credits will be recorded."

"Thus, it is not the label "running account" but the conclusion that the payments in the account were connected with the future supply of goods or services that is relevant, because it is that connection which indicates a continuing relationship of debtor and creditor."

The term "running account" as was noted by their Honours appears to come from the world of banking where it is synonymous with a current account

""on which cheques are drawn and to which credits are paid, as opposed to a deposit account on which normally cheques are not drawn": Hansen, Dictionary of Banking and Finance (1985), p 183 and see the definition of "current account" in Woelfel, The Fitzroy Dearborn Encyclopaedia of Banking & Finance, 10th ed (1994), p 278 as an "open, continuing and running account.""

[50] Weaver and Craigie, The Law Relating To Banker And Customer In Australia, 2nd ed (1990) describe it thus

"Current is used here in the sense of flowing or running, like a stream. ... The real point is that, irrespective of the physical means of recording, the monies paid to the bank for credit of the customer's account form one incoming stream, while an outgoing stream of payments is made by the bank at the customer's direction." [7.40]

[51] The nature of the account which operated between IM&I as lender and The Wright Brothers as borrower is demonstrated by the account ledger exhibited to Mr Newnham's affidavit ("MN 9"). He sets out in the body of his affidavit at para 6 the stream of payments out made by IM&I on behalf of or to The Wright Brothers in respect of, inter alia, construction costs and progress payments and the payments in reduction of the outstanding debt at para 17. Mr Wilson summarised the effect of these payments in and out in a document entitled "Current Account As Between First Respondent And Third Respondent Borrower - 16/10/98 to 19/10/989" which is with the papers.

[52] Although not "the overdraft" account situation strictly or the trader relationship to which the cases generally refer, the movement of monies in and out of the same account with the expectation that this would continue until the need for the advances ceased and the repayment of the amount outstanding to the lender was completed suggests that this account might, without too great an insult to the expression, be termed a "running account" for the purposes of cl 20.10. The consequence is that the repayments in whatever amount are not affected by the rule in Clayton's Case and the payments received by IM&I after 16 October 1998 should be applied to the balance owing on the date of receipt.

[53] On 2 March 1998, the same day on which The Wright Brothers gave a mortgage over the development land to secure the loan by IM&I of $1.85 million, IM&I entered into a deed of unconditional guarantee and indemnity with Talgai pursuant to which Talgai agreed to guarantee the obligations of The Wright Brothers under its agreement with IM&I. As security for its guarantee Talgai granted to IM&I a mortgage over land which it owned at Southport. The Wright Brothers obligations under each of the subsequent loan agreements between IM&I and The Wright Brothers were guaranteed by Talgai.

[54] The Wright Brothers defaulted under the loan agreements in early June 1999 and IM&I made demand on Talgai for The Wright Brothers' default and served on it a notice of exercise of power of sale dated 10 June 1999. On or about 29 June 1999 IM&I served a notice accelerating liability to pay the principle debt. A further notice of sale was given on 12 July 1999 but in the result IM&I permitted Talgai to sell the secured property itself which occurred on 19 October 1999. Talgai paid IM&I $750,000 from the proceeds of sale.

[55] Mr Harrison submitted that that sum should be applied to reduce the priority of IM&I, that is, that IM&I should be required to marshall its securities. The doctrine of marshalling rests upon the principle that a creditor having two funds to satisfy its debt may not by his application of them to his demand defeat another creditor who may resort only to one of the funds, Re O'Leary; Ex Parte Bayne [1985] FCA 333; (1985) 61 ALR 674 at 680 and Sykes, The Law of Securities, 5th ed (1993) at 182.

[56] In order to oblige a creditor to marshall its securities the funds must be funds of the same debtor, Ex Parte Kendall [1811] EngR 268; (1811) 17 Ves 514 at 520; [1811] EngR 268; 34 ER 199 at 201-202 and The Chioggia [1898] P 1 at 6; and Meagher Gummow & Lehane_, Equity - Doctrines and Remedies_ 3rd ed (1992) para 1108. Mr Harrison contended that the beneficial ownership of the principle security, the development land, and the collateral security, the Southport property, vested in the same entity. This is because Talgai is the sole unit holder in the Twin Waters Garden Villas Unit Trust, the trust property of which is the development land. He submitted that this was sufficient to constitute the same debtor for the purposes of obliging IM&I to marshall its securities.

[57] Meagher Gummow & Lehane's comment that it is not sufficient to satisfy the same debtor test, for example, that security has been given by a company to all the shares in which the debtor is beneficially entitled citing Re O'Leary can as well apply to unit holding in a unit trust.

[58] There is an exception to the common debtor rule discussed by Young J in Sarge Pty Ltd v Cazihaven Homes Pty Ltd (1994) 34 NSWLR 658 at 660 and following. His Honour quoted the United States case of Carter v Tanner's Leather Co 81 NE 902 (1907) at 904

"... there is an exception to the general rule that assets will be marshalled only among creditors of a common debtor, and that marshalling may be resorted to to give effect to the equities in favour of the creditors of that debtor who is only secondarily liable for the debt, or ought to be called upon only after the exhaustion of the other's means."

It had been submitted in Sarge at 663 that where the creditors are creditors of funds belonging to different debtors, the right to marshall will exist where it is just to do so, that is, where an equity arises in the circumstances of the case. To that submission Young J responded,

"The right will only rise where there is an equity and there will only be an equity where there is a duty on the part of one debtor to pay the debts of the other. The right does not arise merely because the court as a matter of abstract justice thinks that it ought to apply."

Beachquest can point to no obligation on the part of one debtor to pay the debts of the other.

[59] The issue over interest was whether the mortgage provided for the payment of compound interest and, if it did, whether on the facts which have occurred it can, in effect, be retrospectively included in IM&I's priority sum or whether it constitutes a further advance. Mr Wilson, whilst not conceding the point, did not press it.

[60] There is some apparent conflict between the provisions relating to interest in the deed of loan which are for simple interest and the memorandum of mortgage which provides for compounding (capitalising) interest in cl 6.

[61] There is no evidence of any agreement to capitalise the interest and none that IM&I elected to do so. Without elaboration, the conclusion is that unpaid interest capitalised constitutes a further advance which would rank behind any subsequent security.

[62] Beachquest seeks a declaration that Talgai's mortgage has priority over its mortgage at most to the extent of $240,000 plus interest less any sums received. Item 5 of the Talgai mortgage reads

"5. Description of debt or liability secured

Interest Rate - 15.5% per annum calculated on a monthly basis."

There is no mention of any further sums being secured nor any cross-referencing under Item 5 to the schedule.

The Mortgagor covenants with the Mortgagee in terms:- * the attached schedule * attached Schedule's and charges the estate or interest in the land with the repayment/payment to the Mortgagee of all sums of money referred to in Item 5."

(2) any further moneys advance by the Mortgagee to the Mortgagor;

(3) all other moneys payable by the Mortgagor to the Mortgagee under this mortgage; and

(4) all moneys now or hereafter to become owing or payable to the Mortgagee by the Mortgagor either alone or in conjunction with any other person or any account whatsoever."

[65] By cl 2 the mortgagor covenanted to pay the "monies secured" which would include all monies becoming payable to the mortgagee by the mortgagor on "the date set out in the Bill of Mortgage". There is no instrument identifiable as a "Bill of Mortgage". There is a conflict between the schedule covenants and conditions and that which appears on Form 2. The usual rule of construction is that if there are two clauses or parts of a deed repugnant to each other the first will be received and the latter rejected unless there is some special reason to approach the matter differently.

[66] Form 2 requires the debt secured to be described in item 5. Although the covenants containing the further moneys clauses is referred to in item 6, the charging clause in item 6 refers only to the sum in item 5. There is nothing to suggest that the mortgage secures any further amounts. The mortgage is stamped to $240,000. There is no evidence that Talgai made any further advances.

[67] The application initially sought leave to proceed pursuant to s 471B of the Corporations Law against The Wright Brothers as a company in liquidation. However s 500 of the Corporations Law provides that after the passing of a resolution for voluntary winding-up no action or other civil proceedings shall be proceeded with or commenced against a company except by leave of the court and subject to such terms as the court imposes. The Wright Brothers is subject to a creditors' voluntary winding-up. It matters not whether the leave is sought pursuant to one or other of the provisions of the Corporations Law. No order is sought against The Wright Brothers and it seems reasonably clear on the material that the property available will be insufficient to satisfy all mortgagees so that the proceedings will not relate to the property of the company. Prudence would suggest that leave to proceed be granted nunc pro tunc, Ocean Life Limited v Insurance and Retirement Services Pty Ltd (1993) 11 ACLC 1157.

[68] The form of the orders and declarations should be settled by counsel in light of these reasons.