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

Supreme Court of NSW|2011-03-30|Before: Pembroke J, Barrett J

Introduction 1This case concerns competing claims to a parcel of vacant land at Coonabarabran. The plaintiff is a finance company. It has an equitable interest in the land by reason of a charge given to it by the registered proprietor. The charge was given pursuant to a valid charging clause in an equipment lease dated 10 October 2005. The second defendant claims to have an equitable interest in the land as purchaser pursuant to a contract for sale entered into on 23 February 2006 and completed on 27 March 2006. The first defendant is the chargor under the equipment lease and the vendor pursuant to the contract of sale. He is still the registered proprietor. He has not appeared in the proceedings.

The Facts 2The dispute arises because the first defendant defaulted under the equipment lease almost from its commencement and then sold the land to the second defendant and her late husband who paid the purchase price. At completion, almost all of the purchase price was paid, at the first defendant's direction, in discharge of his indebtedness to the National Australia Bank as registered mortgagee. The only amount that would have been available from the proceeds of sale to satisfy the plaintiff's equitable charge was $2,044. 3However the plaintiff was not paid the amount of $2,044 at completion. It was not even aware of the sale. Neither the first defendant as vendor, nor the second defendant and her late husband as purchaser, appear to have recognised the plaintiff's rights as the holder of an equitable charge over the land. They proceeded to complete the transaction blithely ignorant, it would seem, of the charge. This was notwithstanding that the plaintiff had lodged a caveat on the title to the land on 19 December 2005. The caveat was valid in form: Circuit Finance Australia Limited v Bessouinan [2006] NSWSC 1190 (Barrett J). And the solicitor for the second defendant and her late husband was on notice of the caveat, but only just. 4The second defendant has now succeeded to her late husband's interest. She holds the original certificate of title and the original transfer but registration of the transfer is prevented by the existence of the plaintiff's caveat on the title. The caveat remains because the first defendant has not paid the moneys due to the plaintiff. The amount due to the plaintiff is now greater than the value of the land. If the plaintiff's equitable interest in the land prevails, the second defendant will have lost the whole of her purchase price and received nothing in return. 5If this outcome is allowed to stand, it is an unfortunate, but entirely coincidental, arithmetical consequence of two unshakeable commercial facts. The value of the land is and remains modest. But the amount due under the equipment lease has increased substantially because of the compounding effect of the first defendant's default. As to the land, its purchase price in 2006 was a mere $36,500 and its current market value could not be much more. As to the lease, the monthly instalments over 48 months were $803.45 per month and the residual value of the goods was $4,840. By 2008, the accrual of interest and charges under the lease led to the plaintiff obtaining judgment against the first defendant for $60,223.70. The amount now due to the plaintiff is approximately $120,000. This is well in excess of the current realisable value of the land. 6The paradox is that, if it is entitled to priority, the plaintiff is now in a much improved position to that which prevailed when completion of the sale took place on 27 March 2006. At that date, as I have mentioned, it would only have received $2,044 if it had been paid out. Its charge would not have enabled it to recover any more of the moneys that were outstanding under the lease. It could not therefore have maintained its caveat so as to extract further moneys or to prevent completion of the sale. If payment of the amount due to a registered mortgagee will exhaust the proceeds of sale, the caveat cannot be maintained: Lew v Bluescope Distribution Pty Ltd [2010] NSWSC 794 at [4] - [8]. Similarly, if the whole of the available balance of the proceeds of sale remaining after the discharge of prior interests is tendered to the caveator, the caveat cannot be maintained. 7The facts of this case may seem hard. But I should observe that settlement proceeded even though the second defendant's solicitor was put on notice of the plaintiff's caveat on the morning of settlement. The particular facts are salutary. On 6 February 2006, the vendor's solicitor submitted a draft contract for the sale of land to the solicitor for the second defendant. The contract included a title search dated 19 December 2005. It showed no encumbrances on the land other than the registered mortgage in favour of the National Australia Bank. The title search was printed by Lawpoint at 11.37am on 19 December. On the same day, but, it would seem, later, the plaintiff lodged its caveat. Settlement was originally planned for 21 March 2006 but was postponed to 27 March. On the morning of 27 March, at 9.08am, the second defendant's solicitor obtained a final search. It disclosed the plaintiff's caveat. Nonetheless, settlement took place at 12 noon. 8At settlement, the proceeds of sale were disbursed as follows: NAB $29,596.72; Warrumbungle Shire Council $2,516.99 and Ray Capner $858.00. After allowing for the deposit of $3,650, the purchaser's allowance of $198.96 for council rates and the vendor's allowance for registration fee on discharge of mortgage, this accounted for the whole of the purchase price of $36,500. 9Against that background, the second defendant advances two submissions in answer to the plaintiff's claim: (a) she says that the plaintiff's equitable interest should be limited to the extent of $2,044 because otherwise it would be unjustly enriched; (b) alternatively, she says that she is subrogated to the position of the National Australia Bank, entitled to keep its mortgage alive and therefore has an equitable interest in the sum of $29,596.72 which ranks in priority to the plaintiff's interest.

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.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 15 April 2011

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