Commonwealth Bank of Australia v Pascoe and Scott as trustees of the estate of Usha Wati Charan

Judgment (5 paragraphs)

[1]

Judgment

These proceedings arise out of the sale of two properties by the plaintiff ("the Bank") pursuant to its power of sale as mortgagee. The two properties, one at Casula and one at Holsworthy, were owned by three members of a family by the name of Charan. Prabhakar Charan and Usha Charan, to whom I will refer as Mr and Mrs Charan, are husband and wife. Prashant Charan, to whom I will refer to as Prashant, is their son. Mr and Mrs Charan were the owners of the Holsworthy property. It appears to have been their matrimonial home. Mrs Charan and Prashant owned the Casula property.
Mrs Charan was made bankrupt in June 2012. Andrew John Scott and Scott Darren Pascoe were appointed as her trustees in bankruptcy. They are now the first defendants in the proceedings. Mr Charan was made bankrupt in February 2018. Initially the Official Receiver in Bankruptcy was appointed as trustee but subsequently William Cotter was appointed in the Official Receiver's place. He is the second defendant in the proceedings. Despite his bankruptcy, Mr Charan claims a personal interest in the monies in Court. He has now been named as the third defendant in the proceedings. Prashant was also bankrupted, in November 2006. His trustee was Bruce Gleeson. Mr Gleeson has not participated in the proceedings.
There were two loan facilities which were secured on the properties. Each was described as an "Investment Home Loan". The first facility was granted in December 2005, for $700,150, and will be referred to as "Loan No 1". There were three borrowers: Mr Charan, Mrs Charan and Prashant. The other loan facility was granted in August 2007, for $70,400, and will be referred to as "Loan No 2". The borrowers were Mr Charan and Prashant (who by this stage was bankrupt). Mrs Charan was a guarantor.
In September 2012, the Bank began the process of exercising its power of sale over the properties under the Real Property Act 1900 (NSW), s 57. By then Mrs Charan was bankrupt, and in November 2012 her trustees were registered as the proprietors of her shares of the Casula and the Holsworthy properties. Prashant's trustee had also been registered as the proprietor of his share of the Casula property. Mr Charan remained registered as the proprietor of a half share of the Holsworthy property.

Payment of monies out of Court

I was told that the trustees for Mrs Charan and for Mr Charan had reached an agreement that the monies in Court should be divided equally between the two bankrupt estates and I was asked to make orders for payment out accordingly. The Bank did not oppose this course: the Bank's position was that, while it did not admit it had no claim on the funds in Court (for unpaid costs or otherwise), it did not press any claim to the funds in Court "at this time" and reserved its right to proceed by way of proof of debt.
As I have noted, when these proceedings were commenced the Bank identified Prashant's trustee as another party potentially interested in the monies. Although Prashant's trustee did not participate in the proceedings, on the evidence he appears to have been aware of them.
In any event, the evidence makes it clear that the funds in Court are the proceeds of the Holsworthy property. Under the Real Property Act, s 58, in the absence of any other registered mortgagor, the registered proprietors, namely Mr and Mrs Charan, are entitled to the surplus proceeds unless some other equitable interest has intervened: Bofinger v Kingsway Group Ltd (2009) 239 CLR 269; [2009] HCA 44 at [34]-[35]; Residential Housing Corporation v Esber (2011) 80 NSWLR 69; [2011] NSWCA 25 at [139]-[144]. There is no evidence to suggest that any other person has an equitable interest in the property apart from Mr and Mrs Charan, so between them their bankrupt estates are entitled to the money.
On the face of it, the monies would be divided equally between the bankrupt estates in accordance with the prior common ownership of the property by Mrs Charan and Mr Charan. But there is a complication. The proceeds of the Holsworthy property have been applied to discharge the outstanding balance on Loan No 2. As I noted at [3] above, under the documentation for Loan No 2 Mr Charan was one of the borrowers but Mrs Charan was only a guarantor. This raises the potential for the equity of exoneration to apply in favour of Mrs Charan's estate. In Parsons v McBain (2001) 109 FCR 120; [2001] FCA 376 the Full Court of the Federal Court said (at [20]-[21]): The equity of exoneration is an incident of the relationship between surety and principal debtor. It usually arises where a person has mortgaged his property to secure the debt of another, whether or not that other has covenanted to pay the debt. However, it will also arise in a case where, although not an actual suretyship, the relationship is treated as one of suretyship. This is Lord Selbourne's third class of suretyship mentioned in Duncan, Fox & Co v North and South Wales Bank (1880) 6 App Cas 1 at 10. For the doctrine to apply in this class, the following facts will usually exist. First, a person must charge his property. Where the person is the beneficial owner of the property it will be sufficient if the charge is by his trustee. Secondly, the charge must be for the purpose of raising money to pay the debts of another person or to otherwise benefit that other person. Thirdly, the money so borrowed must be applied for that purpose. See generally Re Berry (a Bankrupt) [1978] 2 NZLR 373. An equity of exoneration operates in the nature of "a charge upon the estate of the principal debtor by way of indemnity for the purpose of enforcing against that estate the right which [the beneficiary] has, as between [the beneficiary] and the principal debtor, to have that estate resorted to first for the payment of the debt": Gee v Liddell at 72. Thus, where co-owners mortgage their property so that money can be borrowed for the benefit of one mortgagor, the other has an interest in the property of the co-mortgagor whose property is to be regarded as primarily liable to pay the debt.
In Farrugia v Official Receiver in Bankruptcy (1982) 58 FLR 474 at 477-478 Deane J held that a wife's charge upon her husband's interest in a property that secured her right of exoneration was not obliterated by the husband's bankruptcy. The Official Receiver was bound to recognise the charge when it became vested with the husband's interest in the property.
Thus, if the equity of exoneration applied in favour of Mrs Charan in the present case, that right would have passed to Mrs Charan's trustees in bankruptcy. Mr Charan's bankruptcy in February 2018 would not have "obliterated" Mrs Charan's charge on the funds in Court for the amount to which Mrs Charan would be entitled.
In the course of the hearing I raised the possible application of the equity of exoneration. Counsel for Mr Charan's trustee responded by submitting that the equity did not arise. Counsel pointed to the possibility that Mrs Charan might have benefited from the loan. In effect, counsel was submitting that the onus lay on the trustees for Mrs Charan to demonstrate affirmatively that she had not benefited from the loan.
Somewhat surprisingly, counsel for Mrs Charan's trustees responded by expressing the same view, even though that was against the interests of the party for whom counsel was appearing. I got the impression that the question of exoneration had not been considered by Mrs Charan's trustees or their advisers prior to it being raised at the hearing, but that counsel was nevertheless instructed to proceed in accordance with the understanding which had previously been reached for equal division of the funds in Court. It was only when I asked who would be paying, out of his or own pocket, if Mrs Charan's trustees abandoned a perfectly good claim to the other $30,000 in Court, that counsel was instructed to ask for an adjournment to allow the issue to be considered further.
I do not find the argument presented by counsel for Mr Charan's trustee that the onus lay on Mrs Charan's trustees to prove that she received no benefit from the loan persuasive. The doctrine of exoneration applies wherever the transaction is one of surety. On the face of it, that is what Mrs Charan was. I would have thought that the onus would lie on the party resisting exoneration to demonstrate that the substance of the transaction was otherwise. But in the end, counsel for Mr Charan's trustee did not press me to decide the question on the evidence currently before the Court. Instead counsel invited me to order that the monies be paid out in equal shares, but on the express basis that the issue could be considered further by the respective trustees and the order paying out the money would not prejudice such further consideration and any claims which might result. This made an adjournment unnecessary, and I understood counsel for Mrs Charan's trustees to consent to the approach. The question is whether I should accede to it.
Although in form the Bank's application was made under the Trustee Act, as a matter of substance these proceedings can be seen as an interpleader by the Bank between the trustees of Mrs Charan's estate and Mr Charan (initially, and subsequently Mr Charan's trustee in bankruptcy). It must be emphasised that such proceedings are substantive in nature, not merely procedural. In De La Rue v Hernu, Peron & Stockwell Ltd [1936] 2 KB 164 Greene LJ said (at 170-173): What, in substance, all along, both under the old equitable procedure and under the modern procedure, is being decided, is claims by two claimants against the person interpleading. What really happens is, that whereas there are two claimants who are harassing a person desirous of interpleading that person is by the interpleader proceedings calling upon the claimants to come out into the open and formulate their claims against him. In substance, when an interpleader issue is tried, two actions against the person interpleading are being dealt with. Interpleader proceedings are the method of compelling the parties - either one, or both, or neither of whom may have actually issued a writ - to prosecute their claims. As it is the essence of interpleader proceedings that the person who has interpleaded has no title himself he naturally drops out of the suit. But in effect the entire matter is tried out in the presence of all the parties concerned, and the real claimants are compelled to put forward their claims and have them adjudicated upon. The reason for that is not their own benefit, it is for the relief of the person interpleading.
In proceedings of this type, the Court resolves the competing claims of the defendants against the interpleading party in a way which is final and binding on the interpleading party as well as on the defendants among themselves. Although the ultimate order is that the monies be paid out, this is only consequential upon the Court's determination of liability. It is that determination which is the real substance of the Court's decision (even if it may not be formally recorded in a judgment or declaration). At the same time, the Court can resolve further claims between the parties which, while not directly concerning the property which is the subject of the interpleader, are appropriately joined to the interpleader proceedings.
In the present case, the competing claims are claims against the Bank by persons entitled to the surplus proceeds under the Real Property Act, s 58. The case is unusual for a case under s 58, in that it is not a contest about priority between subsequent mortgagees, or between a subsequent mortgagee and a registered proprietor. Rather it is a contest between joint proprietors themselves. But the comments I have just made are equally applicable. The proceedings were constituted so that the rights to the monies paid into Court could be finally determined as between Mrs Charan's trustees and Mr Charan (and, after his bankruptcy, his trustee).
The cross-claims by the respective trustees did not reflect this. It was legitimate for Mr Charan's trustee's cross-claim to join Mr Charan as cross-defendant, because of the standing issue which needed to be resolved as between Mr Charan and the trustee. But the trustees for Mrs Charan's estate should also have been joined as cross-defendants, since they were the party with the opposing interest. Similarly, Mr Charan's trustee should have been joined as cross-defendant to the cross-claim by Mrs Charan's trustees, and there was no justification for Mr Charan to be joined as a cross-defendant to that cross-claim. Of course, these pleading deficiencies would not have been an obstacle to the resolution of the exoneration issue, or any other issue which arose between the estates of Mrs Charan and Mr Charan, had the respective trustees wished to pursue such claims. But in substance, what the trustees have agreed to do is to discontinue the claims between them to the monies in Court without any substantive resolution of those claims.
As I have noted, the monies paid into Court did not represent the whole of the surplus from the sale of the Holsworthy property: monies were retained by the Bank on account of the loan debts (including fees and interest); the costs of sale of the properties; the provision for the costs incurred by the Bank in Mr Charan's proceedings and in preparing the application to the Court in these proceedings. I was informed by Mr Lewin from the Bar Table that the Bank had expended the whole of the provision, but it appears that no formal statement of account for the monies received from the sale of the properties has ever been issued by the Bank and that little, if anything, has been done by the trustees to clarify the entitlements of the respective estates in this regard.
These proceedings would have been a suitable vehicle for determining what those entitlements were. As mortgagors, Mr and Mrs Charan were entitled to bring proceedings for an account from the Bank as a mortgagee which had exercised its power of sale: J D Heydon and M J Leeming, Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (LexisNexis Butterworths, 5th ed, 2015) 924 [26-140]. Such proceedings for an account would have been appropriately joined to the Bank's interpleader claim with respect to the monies paid into Court. For the purposes of the account the Bank would have been required to put forward a formal statement specifying the amount calculated to be due, and the components of that calculation. On behalf of the borrowers, any alleged overcharges by the Bank ("falsifications") or further credits which should allegedly have been given ("surcharges") would have been identified and the Bank could have been required to produce appropriate evidence ("vouching") in support of any challenged item. Contrary to the suggestion by counsel for Mr Charan's trustee, this process would not necessarily have been cumbersome or protracted; the Court has ample powers under Uniform Civil Procedure Rules 2005 (NSW) Pt 46 to ensure that the process is carried out efficiently. The end result would have been a net figure determined by the Court which would have been final and binding on all parties.
The proceedings would also have been an appropriate vehicle for resolving any claims against the Bank on behalf of Mr and Mrs Charan as borrowers about the manner in which the Bank exercised its powers of sale. As noted at [8] above, in his judgment in Mr Charan's first proceedings White J referred to such a claim as being for "equitable damages" rather than by way of an account. As appears from the judgment at [28], his Honour derived the reference to equitable damages from the judgment of Young CJ in Eq in Ultimate Property Group Pty Ltd v Lord (2004) 60 NSWLR 646; [2004] NSWSC 114 at [36]. There Young CJ in Eq referred to the decision of the Court of Appeal in Commonwealth Bank of Australia v Hadfield (2001) 53 NSWLR 614; [2001] NSWCA 440 and said that that decision: …made it clear that after the exercise of the power of sale the action is not one for account but is one for equitable damages.
My reading of the Court of Appeal's decision is that the decision was actually to the opposite effect. The Court of Appeal referred to earlier authority, including the High Court case of Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676; [1912] HCA 9, and reaffirmed that claims for compensation against a mortgagee for breach of the mortgagee's duty of good faith in exercising the power of sale are properly made as part of a claim for an account. In some cases, of which Pendlebury is an example (but this case is not), all other components of the account may have been determined and the balance paid, so that the only issue litigated is the claim for compensation. But I think Hadfield shows that even in such a case, a subsequent claim for compensation for sale at an undervalue remains conceptually an element of the mortgagor's entitlement to an account of what is due.
With this in mind, I pointed out to the legal representatives for the parties that these proceedings would be a suitable vehicle for finalising the amount, if any, due to the borrowers from the Bank. But counsel for Mr Charan's trustee indicated that the trustee proposed to deal with the question informally. Counsel for Mrs Charan's trustees took the same position.
Had these proceedings been completed, they would also have resulted in orders determining the incidence of costs. There would have been a winner and a loser and the loser would have been required to pay the costs of both the winner and of the Bank. If I am right in my analysis in St George Bank v Meredith [2017] NSWSC 961 at [62]-[69], the winning party could also have obtained an order for interest from the losing party for the difference between the interest earned on the monies in Court and an award of interest at Court rates, so as to compensate for the period of time when the monies were held in Court under the very low interest rates which prevail. But again the parties chose not to take advantage of this. I was not asked to make any order for costs or for payment of interest at Court rates.
Although the interested parties are all agreed on the outcome, it cannot be considered a satisfactory one. The monies have languished in Court for more than three and a half years. In the meantime Mr Charan has been bankrupted. Apart from clarifying Mr Charan's lack of standing, all that will have been achieved by the proceedings is the transfer of the funds to the accounts of the trustees on a "without prejudice" basis. The entitlements of the respective estates as among themselves (and as against the Bank) will remain undetermined. None of the parties to the dispute will have been made responsible for the costs, which will lie where they fall. It will be a very poor return for the time and money expended on the proceedings.
Nevertheless, as all interested parties wish to resolve the proceedings in this way, I think I must give effect to their agreement. I will order the monies in Court to be paid out. To make it clear that no substantive rights are being determined as between the Bank and the trustees for the two estates, I will make a notation to that effect. There will be no order for costs.
No doubt Mrs Charan's trustees had to deal with the distractions created by Mr Charan's litigation. But the trustees had an obligation, independently of what Mr Charan was doing, to determine the state of the account between Mrs Charan's estate and the Bank. They would have been entitled to a statement of account from the Bank and, if necessary, they would have been able to commence proceedings in the nature of an account for the purpose of determining the entitlement of Mrs Charan's estate. If Mrs Charan's trustees accepted the Bank's calculations but Mr Charan did not, proceedings brought by Mrs Charan's trustees would have forced the issue and resulted in a determination binding on all the parties. Similar comments apply to Mr Charan's trustee for the period after he was appointed, although that happened much more recently.
With the benefit of hindsight, it is most unfortunate that action along these lines was not taken when the sale of the Holsworthy property was completed. It would have resulted in the finalisation of accounts between Mr and Mrs Charan and the Bank years ago; it would have avoided the necessity for these proceedings; and it would probably also have avoided all of Mr Charan's separate proceedings, since any maintainable claims that Mr Charan might have made could have been included in proceedings for an account.
This of course is all hindsight. But it is difficult to see why such steps were not taken by the trustees at an earlier point, rather than passively waiting for Mr Charan's other proceedings, and then these proceedings, to play out. It is also difficult to see why the trustees did not consider the application of the equity of exoneration, which in this context is a basic principle, well before it was raised by the Court at what was supposed to be the final hearing. Questions may arise as to how much remuneration should be allowed to the trustees for what they have done so far and whether the expenses incurred by the trustees in conducting this litigation should be chargeable to the bankrupt estates, but these are matters for the Federal Court or the Federal Circuit Court which have jurisdiction over bankruptcy administration.
The result (or, rather, non-result) in this case illustrates some of the deficiencies in the Trustee Act procedure, when compared with the interpleader procedure, in cases where a mortgagee is holding surplus funds derived from a mortgagee sale. As I have described, the interpleader procedure involves joining the claimant parties to the proceeding at the outset, whereupon they will be required by the Court to propound formally their claims to the funds in question. Before taking the step of joining a party as a defendant, the mortgagee must be sure that party is actually making a claim to the surplus monies, because if there is no actual dispute, the basis for interpleader fails and the mortgagee will have to pay the costs. By the same token, the fact that the losing claimant will be responsible for the successful claimant's costs and for the Bank's costs, and perhaps for interest as well, is an incentive not to make an unreasonable claim to the monies. It is also an incentive, if competing claims are made, to resolve the dispute speedily. The difficulty with the Trustee Act procedure is that these pressures are largely absent. It is all too easy for the mortgagee simply to pay the monies into court as soon as there is a hint of dispute or uncertainty, and it is all too common for the monies then to languish for months or even years until the claimant parties identify themselves and the claims are crystallised, at which point the dispute can be resolved by agreement or determined by the Court.
As far as I can see, the unsatisfactory outcome in this case cannot be blamed on the Bank. Court of Appeal authority entitled the Bank to proceed by way of payment of monies into Court under the Trustee Act: Esber, at [28] above, at [110]-[119]. It was always open for Mr Charan or Mrs Charan's trustees to agitate the question of payment out and it is not the Bank's fault that they failed to do so.
A mortgagee is entitled to be recouped out of the surplus funds for the costs of resolving any dispute about entitlement to those funds, but should be looking to ensure if at all possible that those costs fall on the unsuccessful claimant. And the mortgagee's own interests lie in minimising the cost and delay associated with the procedure. At a time when banks are seeking to improve their reputation for protecting their customers' and shareholders' money, they might perhaps consider the advantages on the interpleader procedure compared with the Trustee Act procedure when considering what to do with surplus funds derived from a mortgagee sale.
In this case it may even be that, faced with the borrowers' failure to agree a joint direction and release of the Bank on the one hand, and to bring proceedings to determine finally the amount owing by the Bank on the other, the Bank could itself have initiated proceedings in the nature of an account so as to force the issue. Usually, of course, a claim for an account is made by a mortgagor against the mortgagee in such circumstances. But a foreclosure suit, which involves taking an account of the same type, is brought by the mortgagee. In a partnership context, the Court will make an order for an account to be taken on dissolution of the partnership without concerning itself with whether the partner who is to provide the account is the plaintiff or the defendant. I have been unable to find any authority in which a mortgagee has initiated account proceedings in a case of a mortgagee sale where there is dispute, or potential dispute, about the amount ultimately due to the mortgagor. But in principle, there seems no reason why such relief should not be available to a mortgagee in a proper case.
As a final matter, I think it was inappropriate for the Bank to withhold monies on account of its costs of these proceedings from the payment into Court. While a mortgagee is usually entitled to an order for costs on an indemnity basis, the proper course is to pay the whole of the monies into Court and then apply for an order for costs so that the parties having an interest in the funds have an opportunity to be heard. It is wrong for the mortgagee to anticipate an order in its favour by withholding funds. But no harm has been done by this. I raised the point in the course of the hearing and it will be open to the trustees to pursue the question further should they wish to do so, as no final order has been made and the state of account as between the Bank and the trustees remains undetermined.

At a glance

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Judgment (5 paragraphs)

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Legislation Cited (4)

Cases Cited (22)

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