Circuit Finance Australia Limited (Receivers and Managers appointed) (in liquidation) v Panella & Anor

Limiting the Plaintiff's Interest 10The first claim depends on the unjust enrichment which it is said will result if the plaintiff's interest is not limited to $2,044. The difficulty is that the reasoning is circular. There will only be unjust enrichment if there has been conduct which makes it unjust for the plaintiff to have the benefit of its charge as against the second defendant. But there has been no disentitling conduct by the plaintiff in the orthodox sense; no reason arising from the plaintiff's conduct in connection with the underlying events why its priority should be lost, postponed or limited. All that there is to go on, is the supposed unfairness to the second defendant, and the supposed windfall which will flow to the plaintiff, if the latter is successful. It was submitted that, in those circumstances, even the plaintiff's conduct in pressing its claim was itself unconscionable. 11I do not think that this is a sufficient, or even a legitimate, basis on which to deprive the plaintiff of the right to which its equitable charge entitles it. The plaintiff did no wrong. It did not mislead the second defendant. Nor did it engage in any act, neglect or default "during the carrying out of which it is reasonably foreseeable that a later equitable interest will be created and that the holder of that later interest will assume the non-existence of the earlier interest": Heid v Reliance Finance Corporation Pty Ltd (1983) 154 CLR 326 at 342 (Mason and Deane JJ). To similar effect is Butler v Fairclough (1917) 23 CLR 78 at 91-2 (Griffith CJ) and Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265 at 276 (Kitto J). 12It may be understandable, but it is inappropriate, to describe the result as a windfall to the plaintiff. And it is not sufficient to invoke in the abstract broad and non-specific exhortations to fairness and justice having regard to the whole of the circumstances. Even if this is a genuine priority dispute between competing equitable interests in land, which I doubt, what will be determinative in resolving the question of priority is identifiable causative conduct by the holder of the first interest. That conduct will usually be constituted by some negligence or representation. It may or may not give rise to an estoppel. But it will inevitably cause the holder of the later interest to suffer a disadvantage, unless remedied. 13When courts speak of "general considerations of fairness" in the context of a priority dispute, the search is for conduct which is both blameworthy and causative: Heid v Reliance Finance (supra) at 341. Mere unfairness in the outcome is irrelevant unless there is also some tangible conduct by the holder of the first interest which caused the holder of the later interest to act on a false premise. This is why, in such a case, the conduct of the holder of the first interest is often described as "postponing" or "disentitling" conduct. It is not sufficient to point to the eventual outcome and contend that it is unfair. It may well be so by some moral standard. But the unfairness of the outcome is not a reason for departing from well-established legal principle. The only relevant question is wether the supposedly unfair result is the consequence of some causative act, neglect or default by the plaintiff. If not, the plaintiff is entitled to the benefit of its equitable charge over the land. Nothing in Capital Finance Australia Ltd v Struthers [2008] NSWSC 440 suggests otherwise. 14For those reasons, I cannot see any reason why the plaintiff's equitable charge should be limited so that it secures only $2,044. To do so involves, I think, an appeal more to sentiment than reason. It may well be that an order for the removal of the plaintiff's caveat could have been obtained at completion for the price of $2,044. But it was not. That is because, through no fault of its own, the plaintiff was not made aware of the transaction. And the first and second defendants ignored the plaintiff's caveat. Five years have now passed, interest and charges have multiplied, and a great deal of legal expense has been incurred. In those circumstances, there is nothing objectionable in the plaintiff exercising the rights which its charge gives to it. For those reasons, I reject this ground of defence.

The Subrogation Claim 15The alternative claim by the second defendant must also fail. Its premise is that the second defendant is subrogated to the rights of the National Australia Bank because she is a purchaser who has extinguished an encumbrance over the land. In some way, it is said that she is entitled to keep alive the bank's mortgage for her benefit. It is therefore said that she takes priority against any interest of the plaintiff to the extent of $29,596.72. This sum was the amount paid at completion in discharge of the mortgage given by the first defendant to the National Australia Bank. 16This contention is based on a factual misconception. The second defendant did not pay off the first defendant's mortgage. She is not a third party entitled to step into the shoes of the mortgagee. She and her husband merely paid the purchase price to the vendor in accordance with his directions. It would be quite inaccurate to characterise the usual settlement procedure, where part of the purchase price is paid, at the vendor's direction, in discharge of an existing mortgage, as giving to the purchaser a right of subrogation so that the mortgage is "kept alive for [the purchaser's] own benefit": Ghana Commercial Bank v Chandiram [1960] AC 732 at 745. The full statement by the Privy Council in that case was: It is not open to doubt that where a third party pays off a mortgage he is presumed unless the contrary appears, to intend that the mortgage shall be kept alive for his own benefit. 17But the facts of that case bore no resemblance to the facts here. The issue in Ghana Commercial Bank arose between two banks. The ratio of the decision was that by paying the amount due to Barclays Bank, the Ghana Bank became entitled to the benefit of Barclays Bank's equitable charge with the same priority for the amount thereby secured as had been enjoyed by Barclays Bank. The Ghana Bank had advanced the moneys on the clear understanding that the mortgagor would, on paying out the prior charge of Barclays Bank, grant specific security for that advance. Because the mortgagor refused to execute that security, it was unsurprising that the court treated the first security as still alive in the hands of the Ghana Bank. 18Subrogation is not a doctrine which operates at large. It does not operate in an idiosyncratic fashion to relieve any perceived unconscionability: Bofinger v Kingsway Group Ltd (2009) 239 CLR 209 at 301. It is a means of preventing the unjust enrichment of the principal debtor who otherwise might escape ultimate liability: Bofinger (supra) at 299. This is illustrated by Registrar General v Gill, Court of Appeal, unreported, 16 August 1994 where Gleeson CJ and Priestley JA identified the three parties between whom the doctrine will usually operate: The equitable principles relating to subrogation aim to adjust the interests of three parties, such as a creditor, a debtor and an insurer or surety ... 19The proposition that if a purchaser pays, at the vendor's direction, a portion of the purchase price to the outgoing mortgagee, he thereby becomes entitled to keep the outgoing mortgage alive for his own benefit, is heterodox. It could lead to results that are not merely uncertain, but strange and difficult to discern. In a case where a third party has discharged the liability of the principal debtor to a secured creditor, the doctrine of subrogation may in some circumstances operate to give the third party rights against the principal debtor. But the purpose of the doctrine is to prevent the principal debtor's unjust enrichment. In this case, the principal debtor is the first defendant. He has not been unjustly enriched. 20In truth, the second defendant was never subrogated to anything. It is well recognised that there will be no subrogation if, rather than A paying off B's mortgage, A lends money to B which B uses to pay off the mortgage. In such a case, the money received by the mortgagee is "in every relevant sense" that of B not A: Porter v Associated Securities Ltd (1976) 1BPR 9279; Meagher, Heydon & Leeming, Equity Doctrines & Remedies, 4 th edition pages 358-9; see also Cochrane v Cochrane (1985) 3 NSWLR 403 at 405 (Kearney J). This is such a case. The second defendant as purchaser has not discharged the mortgage of the National Australia Bank. The vendor did so. The purchaser simply paid the purchase price to the vendor or at his direction. The concept of subrogation is not, in my view, available to assist the second defendant in this case.

No Equitable Interest 21I should add by way of post-script that to describe the second defendant as having an equitable interest in the land suffers the difficulty explained in Black v Garnock (2007) 230 CLR 438 at 449-450 (Gummow and Hayne JJ). The "interest" of a purchaser of land, if any, can only be that which is commensurate with the availability of specific performance. Gaudron J identified the conundrum in Stern v McArthur (1988) 165 CLR 489 at 437-8. And in Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ expressly approved (at 332-3) that statement by Gaudron J. An argument that a purchaser has an equitable interest in land will be bedevilled by circularity unless it is appreciated that the "interest" is only that which is commensurate with the availability of specific performance. 22In this case, it is difficult to see that the second defendant has any enforceable or available right of specific performance and therefore any equitable interest. The transfer was handed over by the first defendant at settlement. Registration of the transfer is unavailable because of the plaintiff's unsatisfied equitable charge and the existence of the caveat recording its interest. The second defendant may have remedies against a number of persons, but her equitable interest in the land is problematic. In this respect, the drafter of the Amended Summons was justified in refraining from describing the second defendant's interest as an "equitable interest in the land" and instead referring to it only as an "equitable claim". In reality, I do not think that this proceeding constitutes a priority dispute between competing equitable interests in land. This is an additional reason why, as a matter of law, the second defendant must fail. I should acknowledge however that although the point was adverted to in argument, the plaintiff did not embrace it and the second defendant developed no submissions against it. Nonetheless, it is a pure question of law on agreed or uncontested facts and I cannot ignore it.

Conclusion 23For those reasons, I make orders in accordance with paragraphs 2, 3 and 4 of the Amended Summons. I dismiss the Cross Summons. The second defendant must pay the plaintiff's costs.

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