Buchanan & Anor v Crown & Gleeson Business Finance Pty Ltd

LEGISLATION CITED : (NSW) Real Property Act 1900, s 74 MA, s 74 O

Australian Property & Management Pty Ltd v Devefi Pty Ltd (1997) 7 BPR 15,255, Custom Credit Corp Ltd v Ravi Nominees Pty Ltd (1992) 8 WAR 42 Eng Me Yong v Letchumanan [1980] AC 331 Esther Investments Pty Ltd v Wilson International Pty Ltd [1982] ANZ ConvR 647 CASES CITED : Kerabee Park Pty Ltd v Daley [1978] 2 NSWLR 222 Martyn v Glennan [1979] 2 NSWLR 234 Re Jorss' Caveat [1982] Qd R 458 Re Ridge Incentive Programs Pty Ltd (in liquidation) (1985) Q ConvR 54-172 Wildschut v Borg Warner Acceptance Corp (Aust) Ltd [1987] ANZ ConvR 283

Ruth Dorothy Buchanan (first plaintiff) PARTIES : Emily Jane Stimson (second plaintiff) Crown & Gleeson Business Finance Pty Ltd (defendant)

COUNSEL : B C Kasep (plaintiffs) M J Bransgrove (sol) (defendant)

SOLICITORS : Truman Hoyle Lawyers (plaintiffs) Bransgroves Lawyers (defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION DUTY JUDGE LIST

5519/06 Ruth Buchanan & Anor v Crown & Gleeson Business Finance Pty Ltd JUDGMENT (ex tempore) 1 HIS HONOUR: The plaintiffs Ruth Buchanan and her daughter Emily Jane Stimson are the registered proprietors of 51 Ernest Street Crows Nest, which at least Ruth Buchanan occupies as her home. The Ernest Street property is subject to a first mortgage to St George Bank Ltd which is in default, St George having obtained a judgment on 8 February 2006 for about $1,548,000. On 24 February 2006, St George obtained the issue of a writ for possession of the Ernest Street property. The judgment sum will have increased with interest since February 2006.

2 St George also held security over another property of the plaintiffs' in Alexander Street, which it has since sold in exercise of its mortgagee's power of sale for about $490,000. Although the evidence on the topic is less than direct, it is possible to infer from the material - including some correspondence in July 2006 from the solicitors for St George to the solicitors acting for the Buchanans - that the proceeds of the mortgagee sale reduced the debt to about $1.1 million; a reduction to $1.1 million is consistent with the sale figure of $490,000 which counsel informs me was the price at which the Alexander Street property was sold. Once again, that will have since increased to some extent with interest. 3 On 22 December 2005 the plaintiffs, together with William Frank Walster, Carole Walster and Plastech Australia Pty Ltd, borrowed from the defendant Crown & Gleeson Business Finance Pty Ltd a sum of $884,000, for business purposes. By this loan agreement, the borrowers agreed to grant Crown & Gleeson certain securities, including (a) a fixed and floating charge by Plastech (presumably over the assets of Plastech); (b) a registered mortgage by the Buchanans over 51 Ernest Street; (c) a registered mortgage by the Buchanans over unit 26, 9 Holtermann Street, Crows Nest; (d) a registered mortgage by Ruth Buchanan over lots 33 and 14, 6-8 Clarke Street, Crows Nest, and (e) a registered mortgage by Mr and Mrs Walster over property at 7 High Street, Willoughby. In addition, the borrowers agreed to charge all land that they held with their obligations under the loan agreement: As further security for the performance of the terms hereof by the borrower, the borrower (and every person constituting the borrower if more than one) hereby charges in favour of the lender all of the interest of the borrower in any freehold land in Australia and agrees that the lender shall have in respect of such land those powers given to a mortgagee by the legislation in the relevant jurisdiction where the mortgage is by deed. 4 The following day, 23 December 2005, Crown & Gleeson lodged caveat AC7815 in respect of the Crows Nest property, claiming an interest as "Unregistered mortgage between Ruth Dorothy Buchanan and Emily Jane Stimson mortgagors and Crown & Gleeson Business Finance Pty Ltd ACN 114715856, mortgagee", pursuant to an unregistered mortgage dated 22 December 2005. It does not appear that any separate form of mortgage was executed, but it is plain that the agreement, contained in the loan agreement, to grant a registered mortgage over the 51 Ernest Street property or alternatively the additional charging as security "all of the interest of the borrower in any freehold land, would create a caveatable interest in the Ernest Street property. 5 Ruth Buchanan has negotiated with St George for the acceptance by St George of a discounted sum in return for a discharge of mortgage, and with Provident Capital Limited for a loan to enable her to refinance the St George debt by paying out the discounted sum. She wishes to have Crown & Gleeson's caveat withdrawn, to permit her to discharge the mortgage to St George and register a replacement mortgage to Provident Capital. Crown & Gleeson have refused to withdraw their caveat. In those circumstances, Ruth and Emily Buchanan have brought this application for an order under Real Property Act 1900 (NSW), s 74MA, that the caveat be withdrawn, together with a further order, pursuant to s 74O, granting leave to Crown & Gleeson to lodge a further caveat claiming the same interest once the St George mortgage has been discharged, and registration completed of a transfer of Emily Buchanan's interest to Ruth Buchanan and a mortgage to Provident. 6 Part of the difficulty with this case has been that it does not appear to have been appreciated by Crown & Gleeson, at least at the outset, that, on an application for the withdrawal of a caveat, the caveator bears the onus of persuading the Court that the caveat should be maintained, which is measured by reference to the same considerations which informs the Court's discretion to grant an interlocutory injunction. Although it is sometimes said that this approach descends from the decision of the Privy Council in Eng Me Yong v Letchumanan [1980] AC 331, in fact it was established in New South Wales before then, and was most clearly articulated by Waddell J (as he then was) in Martyn v Glennan [1979] 2 NSWLR 234, where his Honour explained that the principle to be applied by the Court on such an application is to inquire whether the defendant would in all the circumstances be entitled to an interim injunction, and if not to order that the caveat be withdrawn. If the defendant makes out the necessary prima facie case that it has a caveatable interest, then the further question of the balance of convenience arises. On the balance of convenience, the onus is on the caveator to show that the balance of convenience favours maintenance of the caveat [Eng Me Yong, 337; Re Jorss' Caveat [1982] Qd R 458; Re Ridge Incentive Programs Pty Ltd (in liquidation) (1985) Q ConvR 54-172]. And it would not be proper to continue the caveat unless the caveator gives the usual undertaking as to damages [Martyn v Glennan]. 7 In this case, the Buchanans do not dispute that Crown & Gleeson has a caveatable interest, but they submit that in the circumstances the balance of convenience does not favour maintaining the caveat so as to prevents them from refinancing - though, as I have said, they consent to a grant of leave to lodge a further caveat upon completion of the refinance. 8 Where there is a seriously arguable or undisputable caveatable interest, the Court retains a discretion, based on the balance of convenience, as to whether it will maintain the caveat or require its withdrawal. There is a valuable discussion of the cases and principles by Sheryl Jackson in Removal of a Valid Caveat - How Convenient (1996) 4 APLJ 1. The circumstance that a caveator has a caveatable interest is not conclusive that the caveat will not be removed. The Court will order the withdrawal even of an indisputably valid caveat where the balance of convenience favours that course. An instance of this is to be found in Australian Property & Management Pty Ltd v Devefi Pty Ltd (1997) 7 BPR 15,255, and reference was made to it in Esther Investments Pty Ltd v Wilson International Pty Ltd [1982] ANZ ConvR 647. 9 One circumstance in which such a course will be taken is where the party applying for removal of the caveat has an interest in the land superior to that of the caveator, and especially where that party is being prevented by the caveat from a legitimate exercise of its rights. Thus a caveat by an unregistered second mortgagee will be removed if it is preventing the registered first mortgagee from exercising its power of sale with a clear title [see, for example, Kerabee Park Pty Ltd v Daley [1978] 2 NSWLR 222]. This is not without significance, at least by analogy, in the present case: St George, as a judgment creditor with a writ for possession, could exercise its power of sale as mortgagee to satisfy its debt, and in order to facilitate its doing so could obtain removal of the Crown & Gleeson caveat. At present a mortgage sale by St George is not contemplated; but it is instead proposed that the St George debt be refinanced. A refinance in these circumstances is analogous to a mortgagee sale, and unless it will be more prejudicial to the caveator than a mortgagee sale, there is a strong case for removal of the caveat to permit it to be pressed.

10 A valid caveat may also be removed by the Court if it prevents the registered proprietor from the legitimate exercise of a right in respect of the land, including a proper sale or refinance (as was suggested in Esther Investments v Wilson International). Again, this usually occurs where the registered proprietor can point to other interests in the land superior to that of the caveator - such as a first mortgagee where the caveator is a subsequent encumbrancee [see, for example, Wildschut v Borg Warner Acceptance Corp (Aust) Ltd [1987] ANZ ConvR 283].

11 A highly relevant consideration is whether the removal of the caveat will derogate from the caveator's claim. There is great force in the submission made by Mr Bransgrove that if the removal of the caveat would have the practical effect of deferring the priority of the caveator's equitable mortgage, its removal ought not be countenanced. That view is supported by authority which indicates that it is a rare case where a valid caveat will be removed for reasons of the balance of convenience. Thus in Custom Credit Corp Ltd v Ravi Nominees Pty Ltd (1992) 8 WAR 42, Owen J said (at 50): However it seems to me interlocutory removal of a caveat where an arguable case as to the existence of a caveatable interest has been demonstrated would be unusual. It is important to bear in mind the nature and purpose of a caveat under the Torrens system. By its very nature the caveatable interest must be a proprietary interest in the land. The purpose of the caveat is to restrain the registered proprietor from dealing with the land in a way which will defeat or derogate from the incidents attaching to that proprietary interest until the respective rights of the parties have been honoured (if there is agreement) or to determine if there is disagreement. In many cases, removal of the caveat will have the effect of destroying for all practical purposes, the benefit of the proprietary interest. For example, a creditor, having a specific security interest in land will rank as an unsecured creditor once the property, the subject of the specific security, no longer exists. This will often be the result of removal of a caveat which permits the registered proprietor to sell the property free from any practical obligation to recount to the secured creditor for the proceeds of sale. 12 In my view, similar considerations are relevant, if the priority of the caveator's interest will be adversely affected by the removal of the caveat, even if the caveator will retain some interest in the land. A critical question on the present application, then, is whether removal of the caveat will derogate from the caveator's claim and priority.

13 The only direct evidence of the value of the security property is a valuation of Ernest Street, as at 16 May 2006, at $790,000. At such valuation, the property is inadequate to satisfy the first mortgage to St George, let alone any subsequent security. However, there is reason for thinking that the property might be worth more than that: Provident proposes to lend $935,000, which appears to be based on a 75 percent loan to valuation ratio, implying that the property might be worth $1.25 million. At that value, the property would satisfy the St George loan, and leave a small surplus - perhaps $100,000 - which could go towards satifying Crown & Gleeson's interest.

14 The interest of Crown & Gleeson ranks behind that of St George. Crown & Gleeson have other securities, to which I have referred. There is, with the exception of the property of the Walsters over which Crown & Gleeson has a registered first mortgage, and which there is some evidence is worth $1 million, no evidence as to the value or status of the other securities that Crown & Gleeson holds. Although in some cases the availability of alternative security may be a significant consideration, in this case the mortgage given by the Walsters is the subject of an application by them to have it declared void under Contracts Review Act 1980 (NSW). Ultimately, a creditor is entitled to take as many securities, and resort to them in such order, as it pleases, and I do not think that there are any circumstances in the availability of other securities in this case which weigh the balance of convenience in favour of withdrawal of the caveat in the circumstances of this case. In other words, I do not regard the fact that Crown & Gleeson may hold other securities for the debt, to be a factor favouring the withdrawal of the caveat. 15 The proposed refinance involves St George accepting a sum of $890,000 for a discharge of its first mortgage, Ruth Buchanan borrowing $935,000 from Provident Capital and paying $890,000 of that to St George, and Emily Buchanan transferring her interest in the property to Ruth Buchanan. Provident's first mortgage, once registered, will secure only $935,000, as opposed to the present first mortgage to St George which secures something in excess of $1.1 million. Prima facie, this substantially improves the position of Crown & Gleeson, particularly if the property is worth $1.25 million or less, since there is otherwise only a small remaining equity available to satisfy Crown & Gleeson's security. 16 But despite this apparent enhancement of the position of Crown & Gleeson, Mr Bransgrove has argued that in fact the balance of convenience does not favour the removal of the caveat. His first argument was that the position of Crown & Gleeson was not in fact enhanced by the proposed transaction, because the balance of the St George debt, after payment of the discounted sum of $890,000, would retain priority in equity over the Crown & Gleeson debt, and an extra $45,000 due to Provident would precede Crown & Gleeson in priority.

17 The proposed agreement between the Buchanans and St George provides that upon exchange the Buchanans will pay St George $890,064 in reduction of their indebtedness to St George and in return for a discharge of St George's first mortgage; and that St George will forebear in enforcing the balance of the debt against Ruth Buchanan until 13 June 2007, and covenants not to sue Emily Buchanan. The balance of the debt to St George is likely to be in the order of about $200,000. Mr Bransgrove's argument was based essentially on clause 9.1(E) of the proposed deed of release, which provides as follows: 9.1. If the Payment or any other payment is avoided for any reason, including: (A) as a result of any law relating to bankruptcy or insolvency or the protection of creditors; or

(B) any legal limitation, disability or incapacity of or affecting any person, then, notwithstanding anything which was or ought to have been in St George's knowledge ... (E) Ms Buchanan and Ms Stimson must immediately do all things to satisfactorily restore to St George all mortgages and other entitlements held by it immediately before the Avoided Payment took place and the releases in this deed have been given by St George.... 18 The "Payment" is defined as the payment of $890,000 at the time of exchange, and the "Avoided Payment" mean "Avoidance of the payment of the amount of $1 million agreed on the terms of this deed by reason of bankruptcy or insolvency or legal limitations". Mr Bransgrove argued that the effect of clause 9.1(E) was that, having discharged its first mortgage, St George immediately obtained an equitable mortgage for the balance of the debt which, so it was said, was prior in time Crown & Gleeson's security and therefore prevailed over it in equity. I disagree. 19 First, I do not see how an equitable mortgage created by a deed yet to be exchanged could be regarded as prior in time to and having priority over a mortgage created by the loan agreement in December 2005. It is not the date of the loan, but the date of creation of the interest that is relevant in this respect. Secondly, on the proper construction of clause 9.1(E), its function is to serve as a restitutionary measure, so that if - by reason of bankruptcy or for want of capacity - the payment of $890,000 to St George is set aside or declared void, all steps that can be are taken to undo the deed of release and its consequences and to restore the parties to the position in which they were before that release. In that event, the parties would be restored to the position in which they now are; in other words, if the payment of $890,000 is avoided, I do not see that Crown & Gleeson would be worse off than their current position; if it stands, and the refinance proceeds, then they will be significantly better off, perhaps to the extent of about $200,000. There is nothing in this to suggest that the balance of convenience favours maintaining the caveat to prevent the proposed refinancing. 20 Next, it was argued that by reason of provisions of the deed of loan between Provident and Ruth Buchanan, Mrs Buchanan will be immediately in default under that deed by reason of her doing anything which she must not do, or failing to do something which she is required to, do under a third party security. Crown & Gleeson say that from the commencement of the loan from Provident Mrs Buchanan will be in contravention or be in default under that provision. 21 I assume, without finding, that Mrs Buchanan is and will remain in breach of some obligation under a "third party security", and thus that she will be in default in that respect of the Provident loan from the outset. It does not follow that Provident will necessarily treat her as being in default under that provision. The circumstance that she may be in default, while relevant, does not mean that there is no advantage or utility in advancing the priority of Crown & Gleeson by $200,000 and affording Mrs Buchanan the opportunity of refinancing the loan and retaining her home. 22 Thirdly, it was submitted that the interest rate charged by Provident is higher than that charged by St George. I am sure, and I will proceed on the basis, that that is so. The disadvantage which that involves has to be weighed against the advantage in terms of capital and, as the Provident loan has a term of 12 months, the interest rate would have to be extraordinarily discrepant to erode a capital benefit of $200,000. The Provident interest rate is 16.95 percent per annum, reducing to 10.95 percent per annum for each payment received by the due date. I do not think that is likely to be so much higher that the St George mortgage as to erode the apparent benefit of a saving of $200,000 in capital. 23 The fourth matter advanced was that Emily Buchanan would cease to be a registered proprietor. As to this, although Emily Buchanan will cease to be a registered proprietor of the land, that does not affect the circumstance that the whole of the land remains subject to Crown & Gleeson's equitable mortgage; moreover, although Emily Buchanan will cease to be a registered proprietor, that will not release her from her personal obligations to Crown & Gleeson under the loan agreement. Accordingly, Crown & Gleeson retains all its personal rights against Emily Buchanan, and all its security rights against the subject land. I do not see, therefore how the circumstance that the land is to be transferred from Emily Buchanan to Ruth Buchanan, subject to Crown & Gleeson's security, has any detrimental effect on the position of Crown & Gleeson. An argument was advanced - by analogy, so it was said, with the position of a guarantor - that somehow Emily Buchanan might be relieved from her obligation by virtue of the security no longer being given by her, but the loan contract is not a contract of guarantee, and she is so being relieved of the obligation under that agreement. I do not see how any of the other borrowers are disadvantaged in any way by this transaction, since the same security remains to support the loan. In those circumstances, I do not understand how the proposed transfer of Emily Buchanan's interest to Ruth Buchanan would affect the liability of either of them to Crown & Gleeson, or Crown & Gleeson's rights against them. 24 It follows that I am satisfied that the proposed transaction will not derogate from Crown & Gleeson's interest or, to state the matter correctly in terms of how the onus in this type of proceeding is borne, I am not satisfied that the balance of convenience favours maintaining the caveat to prevent this transaction from proceeding.

25 To that can be added that Crown & Gleeson offers no undertaking as to damages. I raised this with Mr Bransgrove yesterday, and have confirmed again this morning that no such undertaking is proffered. I am inclined to accept that the absence of such an undertaking may be less significant when it is conceded or clear that the caveator does have a caveatable interest, and it is for that reason that I have thought it appropriate to review the balance of convenience in more detail rather than simply to rely on the absence of undertaking as to damages. Nonetheless, the absence of an undertaking to damages is still relevant where the caveat prevents legitimate dealings by a party with a superior interest, and weighs in the balance of convenience. The absence of such an undertaking strengthens the basis for the conclusion which I would in any event have reached. 26 My orders are:- 1. Order, pursuant to Real Property Act , s 74MA, that the defendant withdraw caveat AC7815 by 4 pm today. 2. Order, pursuant to Real Property Act , s 74O, that the defendant have leave to lodge a further caveat in respect of the same estate interest or right and purporting to be based on the same facts as caveat AC7815, after the registration of a discharge of mortgage 9931348, a transfer by the registered proprietors to Ruth Dorothy Buchanan in the form comprised in exhibit RDB9 which forms part of PX05 herein, and a mortgage in favour of Provident Capital Limited ACN 082735573, securing a loan in the terms contained in exhibit RDB8 which forms part of PX04. 3. Order that the plaintiffs be restrained from lodging or causing to be lodged any dealing with the land comprised in folio identifier B 1968740, other than those referred to in the preceding order, until seven days has elapsed from their notifying the defendant's solicitors of the registration of the Provident mortgage. 4. Order that the plaintiffs notify the defendant's solicitors in writing forthwith upon lodgement of the Provident mortgage for registration. 5. Order that the defendant pay the plaintiffs' costs. 6. Direct that these orders be entered forthwith.

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