Cambridge Credit Corporation Ltd v Lombard Australia Ltd

What is in dispute is whether the mortgage also secures, as Lombard asserts and as Cambridge denies, the payment of liabilities, initially contingent in character, on the part of Cambridge to Lombard arising under guarantees given by Cambridge to Lombard before the execution of the mortgage in connexion with loans made by Lombard to two other companies on the security of lands other than the Kingston Park Estate. The two companies were joint venture companies in which Cambridge had a substantial interest. They had been formed in each case by Cambridge and the other joint venturer to engage in land development. Cambridge had given the guarantees to Lombard to induce Lombard to provide finance and thereby enable the joint venture land development to proceed.

On 7th April 1975 Lombard demanded payment under these guarantees of $1,216,525.68, claiming that this sum was secured by the mortgage. Cambridge countered on 11th April 1975 by tendering $37,735.77, this being the amount which it claimed to be owing in respect of principal and interest under the mortgage, and sought a release of the security. Both the tender and the request for a release were rejected.

In the event that this question of interpretation is answered adversely to Cambridge, as it was by the primary judge, a second question then arises, that is, whether the mortgage upon its registration was effective to secure the repayment of the contingent liabilities on the lands in the Kingston Park Estate. In this respect Cambridge contends that in order to achieve this end the registration of a bill of encumbrance would have been necessary. Finally, there is a question of priority, Permanent asserting that the floating charge enuring in its favour as trustee for debenture stock issued under a trust deed which became a fixed charge on 30th September 1974 when Permanent appointed a receiver under the trust deed, ranks in priority to the security created by the mortgage by reason of a provision contained in the trust deed to the effect that no specific mortgage or charge would be created in priority to or without the consent of the trustee pari passu with the floating charge created by the trust deed. This argument depends for its success on the success of Cambridge's appeal. It is not suggested that Permanent is entitled to priority if the question of interpretation is answered adversely to Cambridge and if the bill of mortgage is effective to secure the liability under the guarantees. In this event the fixed mortgage, though given in breach of the trust deed, must prevail.

In the action Cambridge sought relief by way of redemption of the mortgage on the footing that the interpretation which it sought to give to the mortgage was correct, and in the alternative it sought relief by way of rectification of the mortgage on the ground that it did not express the true intention of the parties. This alternative claim is no longer pursued. Permanent sought a declaration that its charge under the trust deed ranked in priority to the mortgage except in so far as the mortgage secures any balance owing by Cambridge to Lombard in respect of moneys advanced on the security of the Kingston Park Estate. By its counterclaim Lombard sought a judgment for the amount due and owing by Cambridge in respect of the moneys which it claimed to be secured by the mortgage. The amount of the judgment is the amount found to be owing at the date when judgment was given, namely 9th June 1976.

Cambridge attacks the dismissal of its claim for redemption and the judgment on the counterclaim on the ground that the mortgage on its true construction does not secure the liabilities arising under the guarantees and, further, on the ground that the registration of the mortgage was ineffective to create a security over the land in respect of those liabilities. Permanent seeks the declaration as to priority which the primary judge refused to make.

Repayment under the mortgage was to be made forty-two months after the making of the first advance. Interest at the rate of seventeen per cent was payable, reducing to fifteen per cent for prompt payment. The mortgage provides: " And for the better securing to the mortgagee the repayment in manner aforesaid of the principal sum and interest the mortgagor hereby mortgages to the mortgagee all his estate and interest in the said lands above described", the lands so described being the lands in the Kingston Park Estate. The expression "the principal sum and interest" refers to the amount of $1,198,865 or whatever sum should be advanced and interest thereon.

The critical provision in the mortgage is cl. 2 (c). So far as it is material, it provides:

That the Mortgagor will on demand made in writing pay to the Mortgagee all such further and other sums of money interest costs charges and expenses as are now or hereafter shall become due owing or payable by the Mortgagor to the Mortgagee upon any account whatsoever and whether such sums of money shall be advanced or paid by the Mortgagee to or for the Mortgagor or on the Mortgagor's account or otherwise howsoever including all and every sum and sums of money to pay which a liability or agreement has been or shall or may be entered into or incurred by the Mortgagee upon or by reason or by means of affording to the Mortgagor an [sic] pecuniary assistance or money accommodation or by any or either of such means All the moneys in this Clause mentioned or referred to and all interest payable thereon hereunder are intended to be secured by this instrument and the above lands shall stand charged therewith accordingly it being expressly agreed between the Mortgagor and the Mortgagee that this security and all securities collateral therewith shall be a running and continuing security for the full amount of all principal monies and other monies expressed to be secured by this security

In our opinion the opening words of the clause cannot be read as creating only an obligation to pay the amount advanced and interest on that amount, together with such other amounts as may be added to the principal sum pursuant to other provisions in the mortgage. The obligation is to pay upon demand "all such further and other sums of money as are now or hereafter shall become due owing or payable upon any account whatsoever " (emphasis supplied). These words are appropriate to pick up not only liabilities which arise subsequently to the giving of the mortgage and whilst it subsists, but also liabilities which are contingent at the date of execution of the mortgage and cease to be contingent during the subsistence of the mortgage. The amount owing in respect of a liability, initially contingent, which nevertheless ceases to be contingent during the currency of the mortgage is a sum of money which has "become due owing or payable" within the meaning of the clause. If it be owing upon another account, because it is owing by the mortgagor in its capacity as a guarantor, it is none the less owing upon an account which falls within the words "upon any account whatsoever". The subsequent formulation "and whether such sums of money shall be advanced or paid by the Mortgagee to or for the Mortgagor or on the Mortgagor's account or otherwise howsoever" is an elaboration of what precedes it. If resort is had to the subsequent formulation for the purpose of elucidating the meaning of the preceding provision, there is no reason to think that it does not extend to a liability of the mortgagor arising under a guarantee given in connexion with a loan made by Lombard to an associated company of the mortgagor, probably at the request of the mortgagor, to enable that company to engage in a specific land development project similar to the Kingston Park Estate undertaken by Cambridge itself and financed by Lombard. Moneys so advanced or paid by the mortgagee are, if not paid "for the Mortgagor or on the Mortgagor's account", advanced or paid "otherwise howsoever".

The interpretation which we have placed on the first part of cl. 2 (c) is not at variance with the decision in, or the observations made by this Court inNational Bank of Australasia Ltd. v. Mason [1] . There the liability was at all times in prospect or contingent only; at no time during the subsistence of the mortgage was there any sum due or owing. In any event, the mortgage was expressed in language which differs from that found in cl. 2 (c). In particular there was in the mortgage in that case no reflection of the expression "howsoever arising" which appears in cl. 2 (c) (see [2] ). Consequently, the observation of Barwick C.J. [3] that "the payments by the bank which come within the operation of this clause are payments made by the bank on behalf of the mortgagors or of the company", is not apposite in the present case.

1. (1975) 133 C.L.R. 191. 2. (1975) 133 C.L.R., at pp. 196-198. 3. (1975) 133 C.L.R., at p. 198.

Clause 2 (c) provides that interest at the rate of seventeen per cent per annum should be paid on all sums of money to which it applies. The appellant pointed out that this rate differed from the rate of interest payable on one or more of the advances which were the subject of the guarantees given by Cambridge to Lombard and urged this as a reason for giving cl. 2 (c) a restricted application. It is not an acceptable reason. The mortgage between Cambridge and Lombard must be read according to its terms; it is not permissible to vary or modify its provisions by reference to an instrument between Lombard and another party or parties. It may be that any difference in the rates of interest disappears once the liability is brought under the terms of the mortgage and on that event occurring cl. 2 (c) takes effect.

The appellant endeavoured to limit the operation of cl. 2 (c) by reference to the purpose of the mortgage as derived from its terms and from the course of the negotiations which preceded its execution. Evidence of the prior negotiations was tendered to the primary judge on the issue of rectification. That evidence cannot now be used for the purpose of construing the instrument itself. It sufficiently appears from the mortgage that the money advanced by Lombard to Cambridge was to be used for the purpose of carrying out and completing the subdivision into residential allotments of the Kingston Park Estate. But this fact supplies no reason for denying effect to cl. 2 (c) or for limiting its operation. It is entirely consistent with the purpose of the advance as we have stated it to be that the parties intended to secure in addition to the repayment of the principal sum the payment of other liabilities that might become thereafter due, payable or owing by Cambridge to Lombard, including liabilities arising under guarantees given by Cambridge of the performance by associated companies of their obligations in similar transactions relating to land development projects.

The next point is as to the sufficiency of the mortgage or, rather, the sufficiency of the registration to confer security in respect of the liability arising under the guarantees. Under the general law "a mortgage is a conveyance of land or an assignment of chattels as a security for the payment of a debt or the discharge of some other obligation for which it is given" (Santley v. Wilde, per Lindley M.R. [4] ). Consequently, under the general law a mortgage of land is appropriate to secure the performance of any kind of obligation. However, it is most frequently used to secure a money debt, in particular a money loan. Australian Torrens title legislation draws a distinction between a mortgage and an encumbrance and in so doing uses the word "mortgage" to describe a form of security which is significantly different from the conception of a mortgage at common law and in equity. The statutory mortgage under the Real Property Acts is not a conveyance or transfer of the mortgagor's estate or interest in the land; it is a charge on that estate or interest, as indeed is an incumbrance.

What is more important for present purposes is that the statutory definitions of "mortgage" in the Real Property statutes in Australia restrict it, in accordance with its more common exemplifications, to cases in which security is taken for a debt or a loan. Thus, in s. 3 of the Real Property Act, 1900 N.S.W., as amended, "mortgage" is defined so as to mean "Any charge on land created merely for securing a debt" and "encumbrance" is defined to mean "Any charge on land created for the purpose of securing the payment of an annuity or sum of money other than a debt". The genesis of the problem in this case is that s. 3 of the Real Property Act, 1861 Q., as amended ("the Act") adopts an even narrower conception of "mortgage", describing it as "any charge on land created merely for securing a loan". It is to be contrasted with "encumbrance" - "any charge on land created for the purpose of securing the payment of an annuity or sum of money other than a loan".

"Mortgagor" is defined so as to mean a borrower and "mortgagee" a lender on the security of an estate or interest in land. "Encumbrancer" means any person not being a mortgagor who shall have charged any estate or interest in land with any annuity or sum of money other than a loan. "Encumbrancee" has a corresponding meaning, that is, a person "not being a mortgagee".

There is not an exact correspondence between the definitions. If attention is confined to the distinction between a mortgage and an encumbrance it might be thought that an encumbrance included any security except one which merely secured a loan and that it therefore included a security given for both a loan and some other liability. However, when "encumbrancer" and "encumbrancee" are contrasted with "mortgagor" and "mortgagee", they indicate that an encumbrance is a security given for a debt other than a loan and that it therefore excludes any security given for both a loan and a debt.

Section 56 of the Act, which is headed "Lands under this Act how mortgaged or encumbered", provides (inter alia):

Schedule F. Whenever any land or any estate or interest in land under the provisions of this Act is intended to be charged [with] or made security in favor of any mortgagee the mortgagor shall execute a bill of mortgage in form F of the Schedule hereto

Schedule G. and whenever any such land estate or interest is intended to be charged with or made security in favor of any encumbrancee for the payment of an annuity rent charge or sum of money the encumbrancer shall execute a bill of encumbrance in form G of the Schedule hereto

This section needs to be read with the statutory definitions of Bill of mortgage and Bill of encumbrance in s. 3 and with forms F and G in the Schedule. The definitions are as follows:

"Bill of mortgage" shall mean any instrument in form F of the Schedule hereto or in such form as under the provisions of this Act may for the like purpose be authorised executed by the intending mortgagor with a view to creating any such mortgage as aforesaid.

"Bill of encumbrance" shall mean any instrument in form G of the Schedule hereto or in such other form as under the provisions of this Act may for the like purpose be authorised executed by any person having estate or interest in land with the view of creating any such encumbrance as aforesaid.

The concluding words of s. 3 of the Act relate to the forms in the Schedule and provide: "any variation from such forms not being a variation in matter or substance shall not affect their validity or regularity but they may be used with such alterations as the character of the parties or the circumstances of the case may render necessary".

There is some difference in the operative parts of the form as set out in Schedules F and G. In the form contained in Schedule F the mortgagor "mortgages" all his estate or interest in the land; in form G the encumbrancee "encumbers" the land, the form going on to provide that the encumbrancer "shall be entitled to all powers and remedies given to an encumbrancee" by the Act.

Although the Act draws a distinction between mortgages and encumbrances in the respects already mentioned, for the most part its provisions apply equally and uniformly to both mortgages and encumbrances. See, e.g., s. 57 (conferring a power of sale on mortgagees and encumbrancees in case of default), s. 58 (imposing a duty on the Registrar-General to give effect to such sale), s. 59 (authorizing a variation of the forms so as to provide for the payment of money by weekly or periodical instalments), s. 60 (which provides that an instrument shall operate as a security and not as a transfer and which enables a mortgagee and encumbrancee to enter into possession and to bring ejectment), s. 61 (which enables the mortgagee or encumbrancee to distrain for arrears of rent), s. 62 (which creates a liability to the lessor on entry into possession of land or the rents and profits thereof), s. 63 (which makes provision for the discharging of securities), s. 65 (which provides that both forms of security may be transferred by an instrument in form H of the Schedule), s. 66 (which provides that every such transfer includes a transfer of the right to issue) and s. 68 (which imposes an obligation on the transferee of land subject to the security to indemnify the transferor).

In all this two important points emerge. There is no difference between the character of the security created by a mortgage and that created by an encumbrance; both constitute a security only; and the nature of the security is by way of charge in each case (s. 60). Moreover, the remedies conferred by the Act are the same in each case, even to the extent of giving the encumbrancee, as well as the mortgagee, an entitlement by proceedings in equity to foreclose the right of redemption. Thus in Schedules F and G the words "mortgage" and "encumber" perform similar functions in creating securities of the same kind which attract the same remedies.

The Act does not in terms prohibit the creation of a mortgage and an encumbrance by the one instrument. Section 56 does not contain such a prohibition; it merely provides that a bill of mortgage in form F will be executed when security is to be given to a mortgagor and that a bill of encumbrance in form G will be executed when security is to be given "in favour of any encumbrancee for the payment of an annuity rent charge or sum of money". The Act fails to make provision for the case where the security given is given in respect of a loan and some other liability as well. And, apart from the division of securities into the categories of mortgage and encumbrance, there is no reason for supposing that it was intended to prohibit the inclusion of a mortgage and an encumbrance in the one instrument. The similarity of the two securities and the rights which they confer do not suggest that there is any overriding or substantial purpose which would be served by an insistence on the execution and registration of separate instruments.

The conclusion to be drawn from all this is, we think, that as the Act makes no provision for the case where security is given for the repayment of a loan and for the discharge of another liability, it does not require in such a case the execution of separate instruments in forms F and G respectively. The Act is to be regarded as saying no more than that a bill of mortgage in form F will be executed when security is given for a loan of money only and that a bill of encumbrance in form G will be executed when security is given for an annuity, rent charge or sum of money only, and as allowing the parties to execute a bill of mortgage with appropriate modifications when security is given for a liability as well as a loan. This approach is in conformity with the concluding words of s. 3.

This conclusion is fatal to the case of both appellants as the case for priority presented by Permanent depends entirely on the success of the appeal by Cambridge.