3943 of 2005 CIRCUIT FINANCE PTY LTD -V- KENNETH JOHN WILLS AND ANOR
JUDGMENT
1 HIS HONOUR: These proceedings concern moneys presently standing in Court, which represent the balance of the proceeds of sale, together with interest earned thereon, of certain land situate at and known as 27 Murray's Flat, Goulburn ("the Goulburn property").
2 The Goulburn property was sold on 15 April 2005 by the National Australia Bank as the first registered mortgagee in possession. After deducting all the moneys owing to it under its mortgage that Bank paid into Court the sum of $127,575.59.
3 It is appropriate that I should set forth the circumstances in which the present parties respectively claim entitlement to the moneys standing in Court.
4 In 2002 Kenneth John Wills and Margaret Maria Wills ("Mr and Mrs Wills") entered into a contract to sell their residence situate at and known as 8 Clanalpine Street, Mosman ("the Mosman property") to Damah Securities Pty Limited ("Damah") for $2,300,000. That price was financed, in part, by a loan of $1,872,000 secured by first mortgage to the National Australia Bank and by vendor finance provided by Mr and Mrs Wills in the sum of $275,000. Settlement of that sale took place on 23 December 2002. The arrangements between Damah and Mr and Mrs Wills included a loan agreement dated 23 December 2002 ("the Wills loan agreement"), by which Damah as borrower and Michael Moses and Joseph Levy as guarantors requested Mr and Mrs Wills to lend $275,000 to Damah for twelve months. That loan agreement further provided that the guarantors should execute a deed of guarantee and indemnity.
5 By such a deed, also dated 23 December 2002, Mr Moses and Mr Levy guaranteed the obligations of Damah under the Wills loan agreement. By clause 11 of that deed the guarantors charged in favour of Mr and Mrs Wills all their real property (and agreed to grant a charge over any future real property) to secure their obligations under the deed.
6 Also on 23 December 2002 Circuit Finance Pty Limited ("Circuit Finance") advanced $432,000 to Damah, pursuant to a loan agreement between Circuit Finance and Damah and Mr Moses and Mr Levy as guarantors ("the Circuit Finance loan agreement"). By clause 12 thereof those guarantors charged in favour of Circuit Finance "all real estate held or hereafter to be held by them and consent to a caveat or other registration instrument being lodged to register such charge".
7 At the time of his entering into the foregoing loan agreements as guarantor Mr Levy was the registered proprietor of the Goulburn property, which at that time was subject to a first mortgage in favour of the National Australia Bank.
8 On about 30 December 2002 Mr and Mrs Wills lodged (a) a caveat over the Goulburn property, claiming an "equitable interest as mortgagee"; and (b) a caveat over the Mosman property, claiming an "equitable interest as mortgagee".
9 On about 4 March 2003 Mr Levy granted to Circuit Finance a second mortgage over the Goulburn property. That mortgage was not, however, registered at that time. But on about 17 March 2003 Circuit Finance lodged a caveat over the Goulburn property, claiming an "interest as mortgagee".
10 In May 2003 proceedings 2853 of 2003 were instituted by Mr and Mrs Wills, consequent upon the lodgement by Circuit Finance of a notice of lapsing in respect to their caveat. In those proceedings an order was made, upon terms, extending the operation of the caveat of Mr and Mrs Wills.
11 On 4 June 2003 the solicitor for Circuit Finance wrote to the solicitor for Mr and Mrs Wills, seeking the latter's agreement to the following proposal,
1. Your clients [that is, Mr and Mrs Wills] to have the Court Order dissolved so that the mortgage to Circuit Finance Pty Limited may proceed to registration.
2. Circuit Finance Pty Limited to assist your clients to register their mortgage.
3. Your clients and our client [that is, Circuit Finance] acknowledge that the priority as between their respective mortgages will not be altered by mere registration of the mortgages or the order of registration.
4. Costs to be reserved.
12 A further letter from the solicitor for Circuit Finance of 16 September 2003 included the following,
Circuit Finance Pty Limited agrees that full net proceeds from the attempts to realise on these securities will go into a common pot to be divided up in accordance with Court Orders or agreement between our respective clients.
13 By letter of 25 September 2003 the solicitor for Mr and Mrs Wills, in providing drafts of caveators' consents to the registration of, inter alia, the mortgage held by Circuit Finance over the Goulburn property, requested the solicitor for that company to "confirm in writing that your client agrees to the following,
1. That registration of your client's [that is, Circuit Finance's] mortgages shall not in any way alter the rights (including priority) of our respective clients;
2. That our respective clients will consent to orders on the next occasion in Supreme Court proceedings number 2853/03 to the effect that the matter be stood over generally with liberty to restore on say 7 day's [ sic ] notice.
14 Later on that same day, 25 September 2003, the solicitor for Circuit Finance, as requested, endorsed a copy of the foregoing letter with the words, "Agreed. Piggot Stinson, 25/9/03", whereupon the solicitor for Mr and Mrs Wills provided the consents to the registration of, inter alia, the foregoing mortgage held by Circuit Finance over the Goulburn property.
15 On 6 July 2004 proceedings 2853 of 2003 were disposed of by consent. The Court ordered that the proceedings be dismissed and that there be no order as to costs. Paragraph 3 of that consent order was a notation in the following terms,
The Court notes:
the agreement between the parties in relation to the properties 27 Murray's Flat Road, Goulburn NSW and 1/2-4 Broadway, Punchbowl, NSW where with the consent of the First and Second Plaintiff the First Defendant has registered second mortgages collateral to its mortgage over 8 Clanalpine Street, Mosman, NSW ("the collateral second mortgages"). Any moneys received by the First Defendant under the collateral second mortgages shall be applied firstly to pay the costs of the First Defendant in obtaining registration of the collateral second mortgages and enforcing its rights thereunder and any balance shall thereafter be divided between the First and Second Plaintiff on the one hand and the First Defendant on the other so that the First Defendant receives 61.1% and the First and Second Plaintiffs together receive $38.9%.
16 The present proceedings were instituted by summons filed by Circuit Finance on 13 July 2005. By that summons the Plaintiff claims substantively,
1. A declaration that it has priority as the second registered mortgagee number 9980517 dated 4 March 2003 over land comprised in the Certificate of Title Folio Identifier 222/750050, known as 27 Murray's Flat, Goulburn NSW 2580 (the "Mortgaged Property").
2. An order pursuant to section 98 of the Trustee Act , 1925 and Part 70 of the Supreme Court Rules , 1970 that it be paid the sum of $127,575.29 being the residue money following the sale of the mortgaged property by the first mortgagee, the National Australia Bank on 15 April 2005.
17 Subsequently, by notice of motion filed on 12 October 2005 Mr and Mrs Wills sought leave to be joined as Defendants to the proceedings and sought leave to file a cross-summons. Consequent upon the making of such orders on 25 November 2005 Mr and Mrs Wills as Defendants filed a cross-summons on 29 November 2005, by which they sought the following relief,
1. A declaration that the cross-claimants are entitled to receive out of the moneys paid into Court by National Australia Bank in respect of the surplus of the sale of the land comprised in Certificate of Title Folio Identifier 222/750050 the entire proceeds thereof.
2. An order that the sum of $127,575.59 together with interest accrued thereon be paid out of Court to the said cross-claimants.
3. In the alternative to paragraphs 1 and 2 above, an order that any sum paid out of Court to the cross-defendant under the mortgage over the land comprised in Certificate of Title Folio Identifier 222/750050 be applied as follows:
a. Firstly, to pay the costs of the cross-defendant in obtaining registration of the said mortgage and enforcing its rights thereunder;
and
b. Secondly, to be divided between the cross-claimants and cross-defendant so that the cross-claimants receives 38.9% and the cross-defendant receives 61.1% of the balance.
18 As at 19 September 2005 the amount owing to Mr and Mrs Wills under the Wills loan agreement was $388,352.00, comprising the principal sum of $275,000 and accrued interest of $113,352.00.
19 I have had the benefit of receiving a written outline of submission from Counsel for the respective parties. Those documents will be retained in the Court file.
20 The disposition of the proceeds of sale of the Goulburn property is governed by the following provisions of section 58 (3) of the Real Property Act 1900,
The purchase money to arise from the sale of any such land, estate, or interest, shall be applied, first, in payment of the expenses occasioned by such sale; secondly, in payment of the moneys which may then be due or owing to the mortgagee, chargee or covenant chargee; thirdly, in payment of subsequent mortgages, charges or covenant charges (if any) in the order of their priority; and the surplus (if any) shall be paid to the mortgagor, charger or covenant charger, as the case may be.
21 Since the amount presently in Court cannot satisfy even one, let alone both of the respective claims of the Plaintiff and of the Defendants, it becomes necessary for the Court to determine, in respect to the securities held by those parties, "the order of their priority".
22 In the event that any moneys are received by the Plaintiff, then it will become necessary for the Court to determine the effect of the agreement between the parties noted by the Court in the consent order of 6 July 2004. Since that agreement by its terms takes effect only if any moneys are received by the Plaintiff, it is unnecessary to proceed to a consideration of that agreement if the Court determines that the Defendants are entitled to the entirety of the moneys standing in Court, since, in that event, no part of such moneys are received by the Plaintiff.
23 It will be appreciated that the mortgage in favour of the Plaintiff is registered upon the title of the Goulburn property (pursuant to the consent of the Defendants in that regard of 25 September 2003), whilst the charge in favour of the Defendants is not registered. In normal circumstances, that fact would give to the Plaintiff's mortgage priority over the charge of the Defendants. However, in the instant case, the parties expressly agreed that "that registration of your client's mortgages shall not in any way alter the rights (including priority) of our respective clients". As the only persons interested in the distribution of the balance of the proceeds of sale (after the first mortgagee has been paid out), the Plaintiff and the Defendants are able to vary the manner in which that balance of the proceeds of the mortgagee sale are to be applied, or at the very least are able to vary the manner in which the available proceeds of the mortgagee sale are to be applied amongst themselves (see Duggan v Thomas [2002] FCA 830 at [39]; Commonwealth Bank of Australia v Duggan [2003] FCAFC 64 at [30]).
24 Accordingly, in determining the priority between the respective securities of the Plaintiff on the one hand and of the Defendants on the other, the fact of that registration of the Plaintiff's mortgage should be disregarded.
25 The Court must therefore determine the priority between the two securities, each executed on the same day, 23 December 2002, without heeding the fact that the mortgage giving effect to one of those securities was subsequently registered. It follows, therefore, that in determining priority between them the Court must treat the respective interests of the parties as adverse equitable interests. There is no evidence before the Court as to which of the two loan agreements was executed earlier in time on 23 December 2002.
26 In any event, priority of time is the last resort in a contest between persons having only equitable interests. In the classic statement of general principle regarding priority between adverse equitable interests Kindersley V-C said in Rice v Rice (1853) 2 Drew 73 at 78; 61 ER 646 at 648,
[I]n a contest between persons having only equitable interests, priority of time is the ground of preference last resorted to; i.e ., that a Court of Equity will not prefer the one to the other, on the mere ground of priority of time, until it finds upon an examination of their relative merits that there is no other sufficient ground of preference between them, or in other words, that their equities are in all other respects equal; and that, if one has on other grounds a better equity than the other, priority of time is immaterial.
In examining into the relative merits (or equities) of two parties having adverse equitable interests, the points to which the Court must direct its attention are obviously these: the nature and condition of their respective equitable interests, the circumstances and manner of their acquisition, and the whole conduct of each party with respect thereto. And in examining into these points it must apply the test, not of any technical rule or any rule of partial application, but the same broad principles of right and justice which a Court of Equity applies universally in deciding upon contested rights.
27 Since, as I have already concluded, the fact of the registration of the Plaintiff's mortgage should, as expressly agreed between the parties for such purpose, be disregarded, the respective interests of the parties should, for the purposes of ascertaining priority, be treated as being equitable interests. Consonant with the application of the foregoing principle in Rice v Rice, the Court must direct its attention to the nature and condition of the respective interests of the parties under the two loan agreements, the circumstances and manner of the acquisition of those interests, and the whole conduct of each party with respect thereto. Those matters may be compendiously described as the relative merits of the parties. In the instant case the question of priority must be resolved by a consideration of those relative merits.
28 The Defendants submit that the following factors weigh in their favour:
· Both Mr and Mrs Wills have sworn affidavits to the effect that, at the time the charge was granted in their favour, they were unaware that Mr Moses and Mr Levy had agreed to charge all their property for the benefit of Circuit Finance.