Dean-Willcocks v Nothintoohard Pty Ltd [2005] NSWSC 357 | Case summary

That case involved a provisional liquidator. The principle with respect to a court appointed receiver was traced back to the decision of Lord Eldon LC in Scott v Nesbitt (1808) 14 Ves 438. The equitable nature of the lien and its source in principles discussed in Hewett v Court above were recognised. 10 Characteristics of the particular kind of equitable lien were mentioned by Austin J in Weston v Carling Construction Pty Ltd (2000) 175 ALR 202, a case concerning voluntary administration. His Honour said (at p.206): "An equitable lien which arises in this way does not depend upon possession: Hewett v Court (1982) 149 CLR 639, see J O'Donovan, 'The Administrator's Priority and Statutory Lien in a Winding-up', (1994) 12 Co & Sec LJ 382, 383. The lien does not place its holder in the same position as a mortgagee with a power of sale, but enables the lienee to make an application for the judicial sale of the assets to which the lien pertains." 11 Mr M.W. Young of counsel, who appeared for the second defendant, submitted that, because any lien held by the plaintiffs according to the principles just mentioned is an equitable lien only, it cannot be asserted by the plaintiffs in such a way as to cause the claim for remuneration, costs and expenses protected by the lien to enjoy priority over the second defendant's claim for the moneys secured by its first legal mortgage. This is because the registered mortgagee's interest is a legal interest and the interest arising under the plaintiff's lien is merely equitable. 12 That a registered mortgagee of land held under the Real Property Act 1900 has, by virtue of the registered mortgage, a legal estate or interest in the land is clear beyond question. The effect of such a mortgage was stated by Dixon J in Partridge v McIntosh & Sons Ltd (1933) 49 CLR 453 at p.466 as follows: "The statutory mortgage does not upon registration effect a transfer to the mortgagee of an estate in the land, or confer upon him an immediate right to possession or to perception of the profits of the land. He has, of course, an interest in the land at law, but it is in the nature of a charge." 13 That being so, the contest between the second defendant's interest as registered mortgagee and the plaintiffs' interest under the equitable lien they assert is a contest between a prior legal interest and a subsequent equitable interest. According to ordinary and established principle, the legal interest will take priority over the equitable interest unless some special factor causes it to be postponed. This was the position in Choudhri v Palta [1994] 1 BCLC 184. Scott LJ (with whom Parker LJ and Sir Michael Kerr agreed) reviewed cases about a receiver's equitable lien and said (at p.188): "But none of these cases involved a prior charge. None is authority for the proposition that the receiver's costs and expenses can be given priority over a fixed charge in existence when the receiver was appointed. In Kerr on Receivers (17th edn, 1989) it is made clear that the appointment by the court of a receiver cannot affect the rights of prior encumbrancers (see pp.28, 137 and 141-143), save to the limited extent that if the receiver has taken possession of the charged assets a prior encumbrancer cannot displace the receiver's possession without making an application to the court. But it is well established that the prior encumbrancer's rights to the rents of the property of which the receiver has taken possession accrues on the date on which the prior encumbrancer makes the application to the court: see ibid p.142." 14 In Shawyer v Amberday Pty Ltd (2001) 10 BPR 18,869 (a case of a court-appointed receiver), Bryson J referred to Choudhri v Palta as providing "a clear illustration of the limits of a receiver's protection where property subject to the receivership was already the subject of a registered legal charge when the receivership commenced". The legal estate of the registered Torrens system mortgagee was effectively outside the ambit of the subsequent receivership. The matter was further explained by Austin J in Westpac Banking Corporation v ITS Taxation Services Pty Ltd (2004) 183 FLR 273, a court-appointed receiver case, at p.279 as follows: "The registered charges in Choudhri's case were, as Bryson J pointed out in Shawyer at [13], statutory charges analogous for present purposes to registered mortgages under the Torrens system. They were, for the purposes of the law of priorities, statutory legal interests carved out of the chargor's estate. When the receiver took possession and control of the chargor's real property, he took possession and control of an interest in the land akin to an equity of redemption, rather than the unencumbered freehold." 15 The circumstances in which a legal interest may come to be postponed to a subsequently arising equitable interest are discussed at paragraph 8-220 of the fourth edition (2002) of Meagher, Gummow and Lehane's "Equity: Doctrines & Remedies" (by Meagher, Heydon and Leeming). Four factors capable of effecting such a postponement are identified: (a) where the owner of the legal estate has himself created the subsequent equity by some assurance, declaration of trust or agreement; (b) where the legal owner fraudulently connives at the creation of the subsequent equity; (c) where the legal owner failed to get in his title deeds from his conveyor, thereby enabling his vendor to hold himself out to a third party as the legal owner of the land or (at least) as authorised to deal with it; and (d) where the legal owner has given to another authority to deal with a third party and such authority has been exceeded. 16 Reliance by Mr M.J. Stevens of counsel, on behalf of the plaintiffs, upon the decision of Finn J in Pattison v Lockwood (unreported, FCA, 30 April 1998) suggests that the plaintiffs assert priority for their equitable interest over the second defendant's prior legal interest on the basis of the first of these four factors - that is, because of an agreement or consent by the first defendant. That case involved a situation where there were two equitable charges by way of debenture over the whole of a company's assets and the chargee under the subsequently created charge appointed a receiver (Mr Pattison) but the chargee under the prior charge did not (at least until a later stage). A key finding of Finn J was: "… that from 13 March 1997 until it made its own appointment of Mr Lockwood, Standby Force [the first chargee] consented to Mr Pattison's conduct of Quicknet's business and conduct for the purposes of achieving repayment first of Standby Force's debt and then, at least partially, of Sumikin's [the second chargee]." 17 After referring to the Universal Distributing case, Finn J said: "While in the present case there was no fund produced from which payment was to be made - the consent given was to have the business continue to trade for the purpose of paying its debts - I do not regard this as an operative difference. I would add in passing that I reject the respondents' submission that the existence of a fund is a prerequisite for the principle of In re Universal Distributing Co coming into play. What is necessary is that there is property that properly can be subjected to the charge for remuneration, costs and expenses. The actions taken by Mr Pattison were in the first instance for Standby Force's benefit and only then for Sumikin's. Whether or not those actions proved fruitful is another matter altogether. What is important is that when they were taken Mr Pattison was, in light of the consent given, acting as a stand-in for the receiver and manager Standby Force chose not to appoint. In these circumstances his costs, expenses and remuneration for so acting should be paid out of Quicknit's assets in priority to the right to be paid out of those same assets enjoyed by Standby Force." 18 The case before me is, of course, distinguishable. This is not only because there was no legal mortgage in Pattison v Lockwood but also because, in the present case, there was no business to be maintained and the mutual interest of the two secured creditors was merely in the preservation of the land and, ultimately, its sale. As will be seen, the second defendant was at first generally amenable to the possibility of sale by the plaintiffs. Eventually, however, the second defendant decided to exercise its own power of sale. The extent, if any, to which the second defendant may be taken to have agreed or consented, by implication, to cede priority to the plaintiffs for their remuneration and outgoings (thus bringing the matter within the first class in paragraph 8-220 of Meagher, Gummow and Lehane) is a matter to be addressed by reference to the evidence. 19 First, however, I consider the "salvage" basis for the plaintiffs' claim. The relevant principle is explained in the joint judgment of Sheppard, Burchett and Gummow JJ in Shirlaw v Taylor (above). After referring in detail to the equitable lien of a receiver or provisional liquidator according to principles already discussed, their Honours said: "In addition to the anxiety of the court to protect the position of its officer, in particular, lest there be in the future an absence of persons willing to take such appointments, the claims of the officer under a court appointed administration may be seen as in the nature of "salvage". The principle is that those taking the benefit of the administration should not escape bearing the burden of the proper cost of it; see In the Matter of Tharp (1852) 2 Sm & Giff 578; 65 ER 533 and Re Berkeley Applegate (Investment Consultants) Ltd (in liq); Harris v Conway [1989] Ch 32 at 51." 20 They then quoted from the judgment of Nugee QC, sitting as a High Court Judge, in the last-mentioned case, Re Berkeley Applegate (Investment Consultants) Ltd; Harris v Conway [1989] Ch 32 at pp.50-51: "The authorities establish, in my judgment, a general principle that where a person seeks to enforce a claim to an equitable interest in property, the court has a discretion to require as a condition of giving effect to that equitable interest that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property. It is a discretion which will be sparingly exercised; but factors which will operate in favour of its being exercised include the fact that, if the work had not been done by the person to whom the allowance is sought to be made, it would have had to be done either by the person entitled to the equitable interest (as in Re Marine Mansions Co LR 4 Eq 601 and similar cases) or by a receiver appointed by the court whose fees would have been borne by the trust property (as in Scott v Nesbitt, 14 Ves Jun 438); and the fact that the work has been of substantial benefit to the trust property and to the persons interested in it in equity (as in Phipps v Boardman [1964] 1 WLR 993)." 21 Key words, in this statement of principle, are: "…where a person seeks to enforce a claim to an equitable interest in property". The person with whom the principle is concerned is thus one who asserts an equitable interest - in other words, "he who seeks equity". The principle decrees, in effect, that that person "must do equity". Here, of course, the second defendant does not assert any equitable claim. It does not seek to enforce an equitable interest in property. It relies upon its legal interest. The equitable principle requiring that the enjoyment of benefit be accompanied by an appropriate shouldering of burden - that he who seeks equity must do equity - therefore does not apply. 22 But there may be a wider basis for the plaintiffs' "salvage" claim, namely, that it is necessary to impose an equitable lien, as in Hewett v Court (above), to ensure that the second defendant, in relying upon its rights at law to sell the property as a means of obtaining satisfaction of moneys owing to it in priority to moneys owing to others, does not unconscientiously reap the reward of outlays by the plaintiff productive of "incontrovertible benefit" to the property and therefore to the second defendant as the holder of a legal interest in it. Such an approach - characterised as an aspect of the law of restitution - has been recognised in somewhat analogous circumstances: see, for example, Monks v Poynice Pty Ltd (1987) 11 ACLR 637; Young v ACN 081 162 512 Pty Ltd [2005] NSWSC 139. Such a "salvage" claim, if properly available as a matter of principle, would be an example of the intervention of equity to prevent unconscientious reliance on common law rights and would operate as a qualification upon such rights. 23 It is unnecessary, however, to come to any firm conclusion whether such a claim is properly available as a matter of principle. This is because I am satisfied that none of the outlays to which the plaintiffs point can be said to have protected or preserved the property or enhanced its value in a way that produced "incontrovertible benefit" that ultimately enured to the advantage of the second defendant and the sale it effected. The various items are detailed in Mr Shepard's affidavit of 30 March 2005. He speaks of attendances upon the third defendant and its solicitors, the obtaining of marketing proposals from estate agents, commissioning of valuations, retaining of selling agents, reporting to ASIC, correspondence about an unregistered strata plan, the obtaining of leasing proposals in relation to a billboard on the property, the obtaining of an environmental report, the obtaining of insurance, the obtaining of advice from a property consultant and a town planning expert, efforts to have chattels removed from the property (which chattels, incidentally, were ultimately removed as a result of proceedings initiated by the second defendant), the service of lapsing notices on a caveator and subsequent proceedings by that caveator seeking extension of the caveat, litigation concerning ownership of certain intellectual property and preparation of a draft contract for sale. All these expenditures were directed simply to putting the plaintiffs in a position where they might sell - which, of course, in the long run they did not do. 24 I return, therefore, to the possibility that the second defendant may, to some extent, have ceded its first priority by agreement according to the first of the possibilities referred to at paragraph 8-220 of Meagher, Gummow and Lehane. 25 The third defendant gave the second defendant advance written notice of its intention to appoint receivers. The notice was acknowledged and the second defendant asked to be informed when the appointment had been made. On 8 July 2004, the third defendant's solicitors informed the second defendant's solicitors of the appointment. The second defendant's solicitors then wrote to the plaintiffs asking about their "immediate intentions" and informing them that the second defendant had issued a notice under s.57(2)(b) of the Real Property Act (that being a statutory prerequisite to exercise of the power of sale under the second defendant's mortgage). On 12 July 2004, the third defendant's solicitors put the second defendant on notice of a plan to pay out the second defendant's first mortgage before sale of the property (the third defendant held a second ranking registered mortgage as well as the mortgage debenture). Another possibility mentioned by the third defendant's solicitors was assignment of the second defendant's mortgage to the third defendant. The second defendant's solicitors replied on 14 July 2004 that the second defendant was "not inclined to transfer its mortgage" and would need to be paid out, otherwise it would exercise its power of sale. 26 The plaintiffs prepared a report for the third defendant on or about 15 July 2004. A copy was sent to the second defendant's solicitors. They, in response, noted that marketing plans were to be prepared by consultants and requested a copy, together with information of "time frame". The marketing plans were furnished on 20 July 2004. The next day, the third defendant's solicitors wrote to the second defendant's solicitors saying that the third defendant could not meet the costs of preparing the property for sale and asking whether the second defendant would advance funds for this purpose. A negative response was given by letter dated 2 August 2004 which also said: "Our client's intention is to wait for your client and or [sic] the receiver to sell the property. If it transpires that you are unable to do that then our client will appoint a real estate agent and sell the property." 27 On 13 August 2004, the plaintiffs' solicitors informed the second defendant's solicitors that the plaintiffs were in a financial position to sell the property and that a marketing campaign was expected to start soon. The letter also said: "For the avoidance of doubt, the Receivers will in due course look to be paid their reasonable remuneration costs, fees and expenses relating to their appointment, out of the sale proceeds of the mortgaged property." 28 The second defendant's solicitors replied on 23 August 2004. They expressed dissatisfaction at the rate of progress towards sale and said: "In relation to the receiver's costs we note that our client is the first mortgagee and is entitled to receive all money owed under its mortgage (including the legal costs of enforcing the mortgage) out of the sale proceeds in priority to any other creditor, including the second mortgagee and its receiver." 29 On 2 September 2004, the solicitors for the plaintiffs sent to the second defendant's solicitors a letter that should be quoted in full: "Dear Sirs Preslands Finance Pty Limited We refer to previous correspondence. For your information, we enclose a copy of a letter dated 31 August from CB Richard Ellis which provides a proposed timeline for the sale of the security property. We advise that, in the absence of any alternate source of funds, the Receivers have offered to advance funds from their overdraft facility in order to fund the third party costs of the marketing campaign on the following conditions: (a) the Receivers are reimbursed for these costs in full (in addition to any remuneration, costs and expenses incurred by the Receivers during the course of the Receivership); (b) the Receivers are reimbursed for any interest which accrues on the borrowed funds at the rate equal to the overdraft rate applying to the banking facilities presently maintained by the Receivers (which, as at 31 August 2004 was calculated daily at the rate of 9.1% payable in arrears); and (c) the reimbursements described in (a) and (b) above are to occur direct from the net proceeds of sale, that is, in priority of your client's interest, or that of any other secured creditor. As you are no doubt aware, there is a general equitable principle that, where a party by his efforts generates a fund in which various parties are interested, his costs and expenses should be the first claim upon the fund. This general principle has long been recognised as applying to insolvency practitioners such as receivers and managers and liquidators, and extends to their remuneration and expenses for work done for the exclusive purpose of raising the fund: see Re Universal Distributing Co Limited (in liquidation) (1933) 48 CLR 171 (High Court of Australia). Such claims arising from the realisation by the Receivers, Adam Shephard and Ron Dean-Willcocks, of mortgaged or charged assets will rank ahead of the secured debts owed to the respective mortgagees or chargees. Therefore, in our view, the Receivers would in any case be entitled to first claim upon the sale proceeds of the property for their remuneration, costs and expenses, including any amounts paid to CB Richard Ellis on account of their fees as agents retained in relation to the sale of the property and interest paid on money borrowed to meet those expenses. Please confirm that your client has no objections to the Receivers' proposal to fund the marketing of the property on the terms set out above. Yours faithfully" 30 The reply from the second defendant's solicitors dated 23 September 2004 was: "Dear Sir, RE: Sovereign Capital Limited ats Nothintoohard P/L Security: 182-106 O'Riordan Street, Mascot Your ref: SCW:GSU 20-4434801 We refer to your letters dated 2 and 20 September 2004. Our client agrees to the proposed marketing campaign funded by the receiver and to the receiver being reimbursed for the costs outlined in paragraphs (a) and (b) of you [sic] letter dated 2 September 2004. Our client reserves its rights in relation to priority of payment in the event of a shortfall on the sale of the security. Yours faithfully" 31 Thereafter, the plaintiffs took further preparatory steps with a view to sale and the second defendant continued to complain about delay in selling of the property by the plaintiffs. On several occasions, the second defendant said that if something did not happen soon, it would exercise its own power of sale. In a letter of 22 October 2004 to a valuer apparently retained by the third defendant, the solicitors for the second defendant referred to "a flurry of activity but nothing which would convince an objective observer there is a serious effort under way by the receiver to sell the property". By 28 October 2004, the second defendant had begun to take active steps of its own towards sale and the plaintiffs, in a letter to the second defendant's solicitors, said that they had "now ceased taking steps associated with the sale of the Mascot property". 32 On 10 November 2004, the plaintiffs' solicitors sent the second defendant's solicitors a long letter detailing the efforts the plaintiffs had made and seeking an undertaking from the second defendant that it would meet the remuneration and expenses of the plaintiffs as receivers out of the proceeds of sale of the property (the only sale then in contemplation being sale by the second defendant as mortgagee) and that this would be in priority to any payment to either mortgagee. The response, by letter dated 15 November 2004 was: "We will consider this issue in an orderly fashion and will obtain Counsel's advice if we feel that there is any credibility to the receiver's claim." 33 By letter dated 9 December 2004, the plaintiffs' solicitors renewed the request for an undertaking and asserted an entitlement of the plaintiffs to an equitable lien that "ranks in priority to any right of repayment to either the first mortgagee or the second mortgagee". The response of the second defendant's solicitors was to ask for further substantiation and to say: "We stand by the comments in our letter [of 15 November 2004] and will study your response to this letter to determine whether we agree or disagree with your assertions and advise you in good time." 34 In late 2004 and early 2005, there were various legal proceedings involving the property, including proceedings for the removal of caveats and proceedings directed towards disposal of chattels on the property. None of these has any direct bearing on the matters presently relevant. 35 On 8 February 2005, the plaintiffs' solicitors again asked for confirmation that the plaintiffs' fees and expenses would be paid in priority out of the proceeds of the sale by the second defendant as mortgagee. The reply of the same date was: "We deny that you have a claim over the funds realised from the sale of the property in priority to those of our client, the registered first mortgagee." 36 The only agreement that might conceivably be found in the correspondence and be relevant to the priority question before me is any agreement that was created by the plaintiffs' solicitors' letter of 2 September 2004 and the second defendant's solicitors' reply of 23 September 2004 (see paragraphs [29] and [30] above. By the latter letter, the second defendant agreed to the proposals in paragraphs (a) and (b) of the former, but did not agree to paragraph (c), as to which the second defendant's position was reserved. On one view, the second defendant's failure to agree unequivocally to all paragraphs meant that there was no agreement at all. But even if there was an agreement, it was, at best, an agreement as to disposition of, and recoupment out of, the proceeds of the sale by the plaintiffs that was then in contemplation. No such sale ever eventuated, with the result that, if there was an agreement affecting the priority rights to the proceeds of sale enjoyed by the second defendant as first mortgagee, it was not an agreement applicable to the circumstances that have now in fact transpired - that is, circumstances in which the second defendant has itself taken action to sell rather than awaiting a sale by the plaintiffs. 37 In the result, therefore, the plaintiffs have not shown any factor that would cause any equitable lien enjoyed by them as security for the whole or any part of their remuneration, costs and expenses to be afforded priority, in point of security, over the legal (first registered) mortgage of the second defendant. 38 The amended originating process must therefore be dismissed with costs. 39 I would add, by way of postscript, that I have taken at face value the proposition that an equitable lien for remuneration, costs and expenses may be asserted by a receiver appointed out of court (that is, in exercise of a power of appointment created by a security), as it can be in the case of a court appointed receiver, liquidator or provisional liquidator. There are statements to that effect in Moodemere Pty Ltd v Waters (above) - although the possibility of contrary effects of the instrument is also mentioned. The fact remains, however, that most of the cases have involved court appointed officials or, more recently, administrators appointed under Part 5.3A of the Corporations Act. In all such cases, of course, the appointment is usually for the benefit of all persons interested in the particular property or fund and, as was said in Shirlaw v Taylor (above), the court is concerned, in such cases, "to protect the position of its officer, in particular, lest there be in the future an absence of persons willing to take such appointments". The applicability of the decisions in cases of that kind to a receiver who is appointed by a chargee under a contractual power and who thereby becomes the chargor's agent with the task of realising the security in the interests of the particular chargee (and as a means of obtaining satisfaction for that chargee alone), usually in the context of a contractual right of the chargee to treat the receiver's remuneration and expenses as part of the secured moneys, may require detailed consideration on some future occasion.

Dean-Willcocks v Nothintoohard Pty Ltd

At a glance

Court

Decision date

Before

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Judgment (12 paragraphs)

Parties

Cases Cited (9)

Cited By (2)