Capital Finance Australia Limited v O'Bryan Group Pty Ltd [2003] VSC 355

2. In this proceeding, the plaintiff, Capital Finance Australia Ltd ("Capital") by amended originating motion between parties filed 5 September 2003, seeks an order removing the warrant of seizure and sale ("the warrant") obtained by the first defendants, The O'Bryan Group Pty Ltd ("O'Bryan") in proceeding No. 6528 of 2001 by judgment made 9 May 2003 (and subsequent attachments made 4 August 2003 and 25 August 2003) against the second defendant, 635 St Kilda Road Pty Ltd ("the developer").

5. The warrant authorised the fourth defendant, the Sheriff, to levy execution for a judgment debt of $22,777.35 plus interest of $13,000 (totalling $35,777.35), costs to be taxed and sheriff's fees in respect of certain nominated apartments and car spaces ("the apartments") situated on land ("the land") now described in various certificates of title, of which the developer is the registered proprietor in fee simple.

8. Capital also seeks a permanent injunction restraining O'Bryan from requiring the developer's interest in the land to be the subject of the warrant or lodging the warrant on the land in future, and from selling the developer's interest in any of the land.

11. Further, Capital seeks liberty to apply to extend the above orders to the interest of the developer in other properties or apartments situated on the land which are, or may become, subject to the warrant. Capital also seeks costs on an indemnity basis.

15. The developer is the registered proprietor of an estate in fee simple of the land. It is the builder and developer of an apartment complex situated on the land at 635 St Kilda Road, Melbourne. The complex comprises eight apartments and associated car spaces.

18. Capital is the holder of a registered first mortgage ("the first mortgage") over the land, securing advances made to the developer under a Facility Agreement, secured by both the first mortgage and a fixed and floating charge over the assets of the developer. The amount of indebtedness to Capital currently secured by the first mortgage is $3,433,582.23.

21. The Walter Construction Group ("Walter Construction Group") collectively comprises the holders of second registered mortgages over the land (collectively referred to as "the second mortgage") securing advances to the developer made by various members of the Walter Construction Group. The current amount of indebtedness to the Walter Group secured by the second mortgage is $5,826,890.43.

24. The total amount of indebtedness by the developer secured by the first and second mortgagees together is $9,260,472.66.

27. GIO General Limited ("GIO") is the holder of a third registered mortgage over the land ("the third mortgage") securing liability pursuant to a bond issued by the Walter Construction Group.

33. Capital's application in this proceeding is also supported by the second and third mortgagees. The priority between the mortgagees inter se is governed by a multi party priority deed between the mortgagees and the developer.

36. The Sheriff did not appear at the hearing of the application, but by letter dated 3 September 2003 stated that he neither opposes nor consents to the orders sought by Capital. The fourth defendant, the Registrar of Titles ("the Registrar") did not appear at the hearing of the application. By letter dated 3 September 2003 the Registrar stated that she neither opposes nor consents to the orders sought by Capital.

39. Capital's application is supported by the affidavits of John Thomas Byrne sworn 29 April 2003 and 9 September 2003 and the affidavit of Roger Phillip Timms sworn 15 September 2003.

42. The developer is and has been in default under the facility agreement since 27 March 2003. Demands and default notices were sent on 27 March 2003 and 8 April 2003 respectively, and have not been complied with. Capital is consequently empowered to enter into possession and to exercise its powers under the first mortgage, including the power of sale.

45. O'Bryan is the project manager of the complex. It obtained a judgment dated 9 May 2003 against the developer and another party. O'Bryan caused the warrant of sale and seizure to be issued in respect of the judgment debt of $22,777.35 plus costs, interests and expenses. The total amount now due to O'Bryan is $35,777.35. The developer has sold six of the eight apartments pursuant to contracts of sale which have not as yet settled. Two apartments have not yet been sold.

48. The warrant was attached to apartment 4A, extended on 4 August 2003 to apartments 17A and 18 and on 25 August 2003 to apartments 18A and 14B.

51. Each of the apartments is either subject to a contract of sale or scheduled for sale. Capital contends that the amount owed to it and to the Walter Group collectively, secured by the first and second mortgages, exceeds the net value of the land, after allowing for the costs of sale and related expenses.

54. In consequence, Capital submits that the developer's equity of redemption in the land is of no value. A Sheriff's sale of the developer's interest in the land pursuant to the warrant will therefore be a futility.

57. The writ of execution was served on the Registrar in respect of one apartment on 25 June 2003 and in respect of the remaining seven apartments on 25 August 2003. Its effect is to prevent the completion of the sales, as the Registrar of Titles will reject any dealings lodged after the service of the warrant and before the lodgment or deemed lodgment of the transfer under the warrant. There is, in effect, a three months "freezing" of the Register until 25 September 2003 in relation to one apartment and until 25 November 2003 in relation to the remainder of the apartments.

60. Although Capital is empowered to enter into possession and to exercise its power of sale due to the default of the developer, it is reluctant to undertake that course, as an orderly sale conducted by the developer is likely to result in a better return than a "fire sale" or a sale in distressed circumstances. The mortgagees already face a shortfall in the repayment of the amounts secured by their mortgages.

63. The solicitors for the developer requested the removal of the warrant in order to permit the settlement of apartment 4A, scheduled for 5 April 2003, on the basis that the developer had no equity in the land, as the indebtedness secured by registered mortgages exceeded the value of the land.

66. O'Bryan did not comply with that request. Correspondence between the solicitors for Capital and the solicitors for O'Bryan followed. The solicitors for O'Bryan expressed concern as to how their client would be paid. O'Bryan instructed the Sheriff to sell the developer's interest in apartments 4A, 5A, 7A, 17A and 18 if the amount for which the warrant was issued was not paid by 25 August 2003.

69. The solicitors for O'Bryan requested details of the amounts outstanding on the mortgages and copies of the contracts of sale "in order to satisfy our client that there is no equity in the three properties referred to ... ".

72. Capital provided the requested details by 29 August 2003, but O'Bryan did not withdraw the warrant.

75. Currently, there has been no advertisement of sale by the Sheriff, but such an advertisement appears to be imminent.

78. Capital submits that the maintenance of the warrant upon the title constitutes a futility. It will not result in any return to O'Bryan, but will merely obstruct the sale of the apartments, further reducing the return to the mortgagees and any other unsecured creditors of the developer. Capital alleges that O'Bryan is, in essence, holding the mortgagees to ransom, in order to extract from them payment of a relatively small debt, which O'Bryan would otherwise fail to recover. It is said that such conduct amounts to an abuse of the processes of the Court. Capital therefore seeks its costs on an indemnity basis.

81. Capital contends that O'Bryan's refusal to remove the warrant has prevented the settlement of the sales of the six apartments subject to contracts of sale, increased Capital's claim against the developer and potentially jeopardised the sale of the remaining apartments.

85. Section 52 of the Transfer of Land Act 1958 (Vic) ("the Act") permits execution of a warrant issued under orders 68 and 69 of the Supreme Court Rules after its registration by the Registrar of Titles, by sale of the judgment debtor's land.

88. Section 52 of the Act provides:

"Sale under writ of fieri facias or decree of Supreme Court etc. 52. Sale under writ of fieri facias or decree of Supreme Court etc.

(1) Save as in this Division provided no execution or lis pendens shall bind or affect any land under the operation of this Actvi.

(2) The Registrar, on being served with a copy of any judgment, decree, order or process of execution of the Supreme Court or of the County Court accompanied by a statement signed by any interested party or his legal practitioner or agent specifying the land sought to be affected thereby and a statutory declaration identifying to the satisfaction of the Registrar the judgment debtor with the registered proprietor of such land or (where the registered proprietor is deceased) with his legal personal representative shall mark upon such copy the date of such service and make in the Register a recording of the service of that copy.

(3) After any land so specified has been sold under any such judgment decree order or process the Registrar shall, on lodgment of a transfer thereof in an appropriate approved form, register such transfer if lodged within the period of three months from the day on which the copy of such judgment decree order or process was served on the Registrar, in which case no other instrument dealing with the land lodged with the Registrar after the time of service of the copy and before the lodging of the transfer shall be registered or be deemed to have been lodged for registration.

(4) On registration of such transfer the purchaser shall become the transferee and be the proprietor of the land in all respects as if the transfer were a transfer for valuable consideration to the purchaser by the registered proprietor, but until a recording of the service of the copy has been made in the Register as aforesaid no sale under the judgment, decree, order or process shall be made by the sheriff or other officer.

(5) Unless a transfer on sale under such judgment decree order or process is lodged with the Registrar within the period of three months from the day on which the copy of such judgment decree order or process was served on the Registrar such judgment decree order or process shall cease to bind or affect the land.

(6) Upon production to the Registrar of sufficient evidence of the satisfaction of any judgment decree order or process a copy whereof has been served as aforesaid he shall make a recording in the Register to that effect, whereupon such judgment decree order or process shall cease to bind or affect the land.

(7) This section shall with such adaptations as are necessary extend and apply to- (a) writs of fieri facias issued out of the High Court of Australia and decrees and orders of that Court and officers thereof."

95. The judgment debtor's land, in this context, is limited to its interest in land subject to any encumbrances, charges or interests held by a purchaser for valuable consideration.[1]

98. The position of the judgment creditor is analogous to that of a trustee in bankruptcy. The creditor stands in the shoes of the judgment debtor and is subject to all the interests, including unregistered and uncaveated interests, which bind the debtor's interest in the land. The warrant authorises recovery only against the debtor's equity in the land after satisfaction of the interests to which it is subject.[2]

101. In the present case, O'Bryan is limited to recovery against the developer's interest in the land after satisfaction of the interests of the registered mortgagees and the equitable fees simple of purchasers under the contracts of sale.

104. The issue and registration of a warrant does not confer upon the judgment creditor an interest in the land affected by the warrant. The judgment debtor does not obtain a charge or security, or other proprietary interest in the land, but remains an unsecured creditor.[3]

107. In the context of a subsequent insolvency of the debtor, in contrast to a secured creditor, the execution by the judgment creditor would ordinarily be stayed. If the judgment creditor had already recovered payment from the judgment debtor, the proceeds would be subject to the "claw-back" provisions of insolvency legislation.

110. If the warrant were executed pursuant to s.52 of the Act, the Registrar would register the transfer to the purchaser at the Sheriff's sale. However, that purchaser would take its subsequent interest subject to the registered mortgages and the contracts of sale.

114. In my opinion, the futility of maintaining and executing the warrant depends on the establishment of two matters:

(1) First, that there is no reasonable likelihood of O'Bryan recovering any payment from the sale, because the value of the land is such that the deduction of the proceeds necessary to satisfy priority interests will leave a nil amount.

(2) Secondly, that the maintenance of the warrant will not be effective to result in payment of O'Bryan's claim by the developer from other resources, or by persons who have an interest in maintaining the corporate developer's solvency, commercial reputation, or possibly in retaining the property until the equity of redemption is of value.

120. By order of Kellam J made 10 September 2003 the plaintiff released the exhibits containing a valuation of the land, subject to a confidentiality regime imposed by reason of the valuation's commercial sensitivity.

123. The total current liability secured by the first and second mortgages is $9,260,472. After the paying out of the mortgages and the estimated costs of sale and further interest, legal costs, default interest and other adjustments, there would be an estimated deficiency of $622,386. There would be no equity remaining for satisfaction of O'Bryan's claim. If the developer became insolvent, any amount obtained by virtue of execution within the statutory "claw back" period would be subject to reclamation.

126. It is undisputed that the developer has not satisfied the judgment debt of O'Bryan. Further, by his affidavit sworn 29 August 2003, Mr Byrne deposed that the developer is in default under the mortgages and that it is unable to fund this application. However, those circumstances do not constitute unequivocal evidence that the developer has no resources, other than its interest in the land, from which to satisfy the judgment debt.

129. By affidavit sworn 11 September 2003 Colman Moloney, the solicitor for O'Bryan, deposed that O'Bryan's only knowledge of the financial affairs of the developer was obtained through affidavits sworn in this proceeding.

132. Mr Colman also deposed that in the course of a Magistrates' Court complaint against the developer, transferred to this Court in 2001, the developer, up to March 2003, made representations that it was solvent and had equity in the apartments. Further, in May 2002 the developer successfully opposed an application for security for costs on the ground that it was solvent.

135. Mr Colman objected that Capital's material does not demonstrate the insolvency of the developer or its inability to satisfy O'Bryan's liability pursuant to third party's obligations.

138. Further, he deposed that the principal director of the developer is a director of other companies and has real estate assets in his own name.

141. It is well-established that the court has power to grant relief in restraining abusive or futile applications of its processes. In Jago v District Court of New South Wales,[4] Mason CJ stated:

"It is clear that Australian courts possess inherent jurisdiction to stay proceedings which are an abuse of process ... Subject to statutory provision to the contrary, a court also possesses the power to control and supervise proceedings brought in its jurisdiction, and that power includes power to take appropriate action to prevent injustice".[5]

145. His Honour observed that "injustice" in that context might have a limited meaning, although the power is not to be confined to closed categories.[6]

148. In Commercial Credit Cooperative Ltd v Mancesvski[7] mortgagees sought to restrain the renewal of a writ of Fi Fa. A proposed sale by the mortgagees could not be completed, due to the existence of the Fi Fa memorandum on the register book.

151. Nathan J observed that the memorandum of Fi Fa was not an encumbrance or an interest in land. He noted that the judgment creditor could not prevent a mortgagee from proceeding with the sale.

154. Nathan J observed that, in the case before him, the valuation evidence on the property indicated a market value well in excess of the mortgagee's claim. He noted that the judgment creditors had only one legal remedy against the debtor by way of the writ of Fi Fa. He was not satisfied, on the evidence before him, that their hopes of recovery were so forlorn that their interests should be overborne in favour of the mortgagee.[8]

157. A judgment creditor seeking to execute a warrant is an unsecured creditor. Its claim is validated by a judgment and it is employing a legitimate statutory mechanism. The vulnerability of unsecured creditors, and the pre-eminent position of secured creditors, on insolvency is widely recognised.

160. The warrant provides an enforcement resource which, prior to insolvency, may result in satisfaction of the judgment creditor's liability. Once insolvency intervenes, the execution of the warrant is generally stayed; or, if it is executed within the "clawback" period prior to sequestration or winding up, any proceeds can be reclaimed by the liquidator or the trustee in bankruptcy.[9] In my opinion, the Court should approach with caution an application by a secured creditor which will deprive an unsecured creditor of its entitlement to pursue a statutory mechanism which provides some prospect of payment.

163. Sometimes a debtor does not pay its liabilities for reasons other than a want of resources. The debtor may be recalcitrant. In such circumstances, the warrant and the prospect of enforced sale may influence the debtor, or persons associated with it, to pay, in order to avoid detrimental consequences. The pressure exerted on the debtor by the mere maintenance of the warrant is not, in my view, illegitimate, or an abuse of the statutory enforcement procedure.

166. In the light of such considerations, the maintenance and execution of a warrant could not be considered futile or an abuse of the court's processes unless there were no realistic prospect that it would either result in payment to the judgment creditor from the proceeds of the property or influence the debtor or associated parties to satisfy the debt. So long as the debtor appears potentially able to pay from other resources, the prospect of such payment cannot be discounted. The debtor may have an interest in maintaining its commercial reputation or in retaining its equity (even if currently of no value) until a later date, when it may have recovered some value.

169. Therefore, irrespective of whether the debtor has any equity in the property, I would not be disposed to make an order depriving a judgment creditor of the only enforcement mechanism available to it, in the absence of clear evidence that the judgment debtor is unable to satisfy the claim from other resources.

172. At the hearing of the matter on 15 September 2003 I gave the plaintiff leave to file and serve a further affidavit dealing with the financial status of the developer.

175. By affidavit sworn 15 September 2003, Roger Phillip Timms deposed that he is the accountant for the developer and familiar with its accounts, books and records. Mr Timms deposed that the developer has no cash or other liquid assets apart from the proceeds of sale of the apartments as they are sold. He deposed to the interests of the mortgagees and to unsecured creditors whose claims total $3,670,408.17. He deposed that the developer has no assets other than the land.

178. Mr Lapirow, counsel for O'Bryan, submitted that if financial incapacity were demonstrated, the court ought not to make an order which might be said to assist in disguising the developer's poor financial status from potential purchasers. He also submitted that the maintenance of the warrant might induce payment by a director Further, he contended that the plaintiff should not be entitled to the relief it seeks in the absence of demonstrating that other avenues for recovering the debt secured by its mortgage (such as guarantees by third parties) are exhausted.

181. Six of the properties have already been sold. I do not consider that the withdrawal of the warrant would, in itself, cause prospective purchasers to make positive assumptions about the developer's financial status. Demonstrating exhaustion of all other avenues of recovery is not a reasonable pre-condition of the relief sought. Further, the mere possibility that the maintenance of the warrant might induce payment by a director should not outweigh the serious and widespread detriment entailed.

185. In all the circumstances, I am satisfied that the maintenance and execution of the warrant is likely to result in significant and widespread detriment to the mortgagees, the purchasers, the developer and its unsecured creditors and possibly other parties, without conferring any concomitant benefit or advantage upon O'Bryan.

188. There is no realistic prospect that the maintenance and execution of the warrants will fulfil any useful legitimate purpose, whilst significant detriment will be inflicted on a considerable number of parties.

191. In those circumstances, I consider it appropriate that the plaintiff be granted relief broadly in the terms of the orders sought.

[1] Simpson v Forrester [1973] HCA 4; (1973) 132 CLR 499.

[2] National Bank of Australasia v Morrow (1886) 13 VLR 2.

[3] Sykes, E.I. and Walker, S. The Law of Securities, 5th edn, at 23-24.

[4] [1989] HCA 46; (1989) 168 CLR 23.

[9] Corporations Act s.569-70; Bankruptcy Act, s.118-119.