Elnic Holdings Pty Ltd v New Wave Development [2005] NSWSC 1226 | Case summary

4862/05 Elnic Holdings Pty Limited v New Wave Development (NSW) Pty Limited JUDGMENT (ex tempore - revised 19 December 2005) 1 HIS HONOUR: These proceedings concern land at 447-449 Sydney Road, Balgowlah, of which the first defendant New Wave Development (NSW) Pty Limited is the registered proprietor, and on which it has built a multi-unit development of ten residential home units and two commercial units, some of which have since been sold, leaving units 3, 7, 10 and 12 unsold. 2 The fifth defendant, Eclipse Prudent Mortgage Limited, is the mortgagee pursuant to mortgage 9123875 of the remaining unsold units. It was formerly mortgagee of the entire property, before some of the units were sold and others were refinanced with another financier. Eclipse is presently still owed approximately $1.036 million. Its mortgage was registered on 1 November 2002 and is the second notification in the second schedule of the certificate of title for each of the remaining units, after only the interests recorded on the common property folio. New Wave is in default under the Eclipse mortgage. 3 The third defendants James, Prem and Vince Lal have lodged caveat No. AA824281 in respect of the remaining units, claiming an equitable interest pursuant to a loan agreement said to be dated 9 September 2003 for $9,000. 4 The second defendant Vincent Newey lodged caveat No. AB94412 in respect of the entire property prior to registration of the strata plan, claiming an interest pursuant to Loan Agreement dated 24 August 2004. Mr Newey's caveat has, in other proceedings, been extended until further order of the court, in circumstances where, prior to lodgement of the strata plan, a lapsing notice had been served, apparently by Eclipse. 5 The fourth defendant Kantoam Pty Ltd has lodged caveat No. AB535470 in respect of unit 3 only. Kantoam claims an interest pursuant to a loan agreement dated 24 September 2003 for $155,000. 6 The first plaintiff, Elnic Holdings Pty Limited, and the second and third plaintiffs, James and Sing Wai Lee, are purchasers from New Wave of, respectively, units 7 and 3, pursuant to contracts dated 7 May 2004, for prices of $450,000 and $350,000 respectfully. The contracts record that the balance purchase prices under them have been paid by the application of amounts due to Elnic and the Lees by way of repayment of advances previously made by the Lees to New Wave under a loan agreement dated 31 January 2005, whereby the Lees advanced to associates of New Wave, namely Cashgain Pty Limited and Gilzan Pty Limited, a sum of $1 million to fund the acquisition of another property at Homebush West. 7 Eclipse wishes to sell units 7 and 3 in exercise of its power of sale, and if necessary also units 10 and 12, to satisfy New Wave's remaining indebtedness to it of about $1.036 million. In these proceedings, Elnic and the Lees ultimately seek orders that New Wave give clear title and convey to them units 7 and 3 respectively. They also seek "declarations determining the priorities between the competing claims of the parties in relation to unit 7 and unit 3." 8 On 6 September 2005, Mr Sneddon, who appears for Elnic and the Lees, obtained leave to file a summons and an abridgement of time for service to enable it to be returnable before the duty judge on 8 September 2005. On that day, and today, there were appearances by Mr Watson, solicitor, for Mr Newey, Mr Lal in person for the Lals, and Mr Darvall of counsel for Eclipse. There was no appearance for Elnic, nor for Kantoam. 9 Mr Sneddon sought the orders in claim 8 of the summons (for withdrawal of the Lal caveat), claim 9 (for withdrawal of the Newey caveat), claim 10 (for withdrawal of the Kantoam caveat), and, on an interim basis, claim 11 (being an injunction restraining Eclipse from selling unit 7 or unit 3), and claim 12 (requiring Eclipse first to sell units 12 and 10, and to have recourse to units 7 or 3 only by further leave of the court if units 10 and 12 were insufficient to discharge its debt). Directions were also sought to enable the determination of priorities. 10 In substance, the only real issue that falls for determination is whether the proposed exercise by Eclipse of its power of sale should be restrained: if so, considerable urgency attends the resolution of these proceedings, so that the security is not further eroded pending sale. Eclipse has purchasers who are prepared to exchange contracts today for lots 3 and 7 - albeit at prices somewhat lower than the valuations asserted on behalf of Elnic and the Lees, namely, $425,000 for unit 3 and $430,000 for unit 7 - whereas Mr Craig, the plaintiffs' valuer, values unit 3 at $480,000 and unit 7 at $495,000. If the mortgagee sale proceeds, then even on the evidence relied on by Elnic and the Lees, the proceeds of sale of units 3 and 7 will be insufficient to satisfy in whole Eclipse's debt, and while there might ultimately be questions as to priorities and marshalling to be resolved in respect of any proceeds of sale of units 10 and 12, no apparent urgency attends that issue. 11 The plaintiffs are purchasers from the mortgagor. It is clear that they are not offering to redeem the mortgage, by paying Eclipse the amount of the mortgage debts in return for a discharge, although as assignees of the mortgagor they are persons having standing to redeem. It is also clear that they do not offer to pay in to court the total amount claimed by Eclipse, Mr Sneddon having informed the court that his instructions to offer to pay money into court are limited to the sum of $500,000. 12 In support of the claim for an injunction, Mr Sneddon refers to the judgment of Walsh J at first instance in the High Court of Australia in Inglis v Commonwealth Trading Bank (1972) 126 CLR 161, a judgment that was affirmed on appeal by the Full Court [126 CLR 161, 168-169]. The issue in that case was whether the mortgagors were required, as a condition of obtaining an injunction restraining a mortgagee sale, to pay into court the total amount claimed by the mortgagee, notwithstanding that they alleged that they had an offsetting claim against the mortgagee in excess of the amount of the mortgage. Walsh J held that they were indeed, even in those circumstances, bound to pay into court the total amount of the mortgagee's claim. His Honour said (at 164):- A general rule has long been established, in relation to applications to restrain the exercise by a mortgagee of powers given by a mortgage and in particular the exercise of a power of sale, that such an injunction will not be granted unless the amount of the mortgage debt, if this be not in dispute, be paid or unless, if the amount be disputed, the amount claimed by the mortgagee be paid into court. 13 Mr Sneddon claims support from a further passage in his Honour's judgment (at 164-165), as follows (emphasis added):- In my opinion, the authorities which I have been able to examine establish that for the purposes of the application of the general rule to which I have referred, nothing short of actual payment is regarded as sufficient to extinguish a mortgage debt. If the debt has not been actually paid, the court will not, at any rate as a general rule, interfere to deprive the mortgagee of the benefit of his security, except upon terms that an equivalent safeguard is provided to him , by means of the plaintiff bringing in an amount sufficient to meet what is claimed by the mortgagee to be due. 14 Mr Sneddon argues that this passage envisages that if the mortgagee's interests are safeguarded by there being adequate security for the mortgagee's debt, that is sufficient ground upon which an injunction should be granted. However, this submission overlooks two things: first, Walsh J does not hold that the mere circumstance that an equivalent safeguard can be provided is sufficient to grant an injunction. What his Honour held is that if an equity to restrain the sale otherwise arises - for example, from a dispute over the amount of the debt or some claimed impropriety in the exercise of power of sale - then an injunction may be granted if the mortgage money is brought into court but not otherwise. Secondly, his Honour envisages only one safeguard equivalent to actual payment (to the mortgagee of the mortgage debt), namely, bringing into court the amount due to the mortgagee. The passage upon which Mr Sneddon relies does not suggest that any other equivalent safeguard is available or open. 15 Mr Sneddon's argument might be thought at first sight to gain some support from two sources. 16 The Restatement of the Law -- Security & Suretyship And Guaranty: Restatement (First) of Security states, in s53c:- Where a debt is secured by chattels which can be conveniently sold in parcels and as to some of the chattels a third person has a junior security interest, the pledgee can be compelled by a court of equity to sell first the chattels in which he has the exclusive security interest, provided the third person can show that such sale will not be inequitable to the pledgee. 17 And in Webb v Smith (1885) 30 Ch D 192, Cotton LJ (at 200) spoke as if the double claimant (that is, a first mortgagee having security for its debt over two funds), could be restrained by a single claimant (that is a subsequent mortgagee having security over only one of those two funds), from first resorting to the joint fund. 18 However, this dictum of Cotton LJ has not been taken to support the view that equity would restrain the double claimant from first resorting to the joint fund. 19 In Bank of NSW v City Mutual Life Assurance Society Limited [1969] VR 556, Gillard J, after referring to Cotton LJ's statement, added: It should be added that from this statement it may be suggested that the doctrine of equity requires the first mortgagee to act in favour of the second mortgagee and accordingly that the second mortgagee's equity is against the first mortgagee. However, in Flint v Howard [1893] 2 Ch 54 at 73 Kay LJ pointed out the true position when he said: 'The right of a subsequent mortgagee of one of the estates to marshall - that is, to throw the prior charge on both estates upon that which is not mortgaged to him - is an equity which is not enforced against third parties, that is, against anyone except the mortgagor and his legal representatives claiming as volunteers under him. It is not enforced against the mortgagee or purchaser of the other estate.' See also Gorell-Barnes J in The Chioggia [1898] P 1 at 6 and Baglioni v Cavalli (1900) 83 LT 500. 20 The same view has been taken in this court, in Mir Bros Projects Pty Ltd v Lyons [1977] 2 NSWLR 192, in which Waddell J, as he then was, said (at 196) that it was well established that the doctrine of marshalling did not prevent an earlier mortgagee satisfying his charge against whatever fund or security he thought fit - for which view he cited as authority Meagher, Gummow and Lehane, Equity Doctrines and Remedies, 1st Edition, [1102] [now reflected in paragraph 11-010 of the 4th edition]; Noyes v Pollock (1886) 32 Ch D 53, 70; Commonwealth Trading Bank v Colonial Mutual Life Assurance Society Ltd [1970] Tas SR 120; Jenkins v Brahe & Gair (1902) 27 VLR 643, 645-647; Manks v Whitely [1911] 2 Ch 448, 466; Wallis v Woodyear (1855) 2 Jur NS 179, 180; and Flint v Howard [1893] 2 Ch 54, 73. Referring to the remarks of Cotton LJ in Webb about restraining first resort to the joint fund, Waddell J agreed that the passage did seem to bear that interpretation, but rejected the suggestion that it was quoted with approval by Gillard J in Bank of NSW v City Mutual Life Assurance Society Ltd, and continued: His Honour undoubtedly adopted the statement as an example of how the doctrine of marshalling may be applied to securities. But he went on in the following paragraph to dismiss any implication from the statement that the doctrine of marshalling requires the first mortgagee to act in favour of the second mortgagee. The dictum of Cotton LJ (13) was obiter, and contrary to the great weight of authority and, in my opinion, should not be followed. 21 As Meagher, Gummow and Lehane state in the paragraph to which I have referred, it is fundamental that the double creditor is not to be delayed or inconvenienced in the enforcement of its security and further, if it has been of sufficient prudence to take several securities for the one debt, then its alone is the choice as to which security it first enforces. For this the authors cite Equity Jurisprudence 3rd Edition, 1414; Union Bank of Georgetown v Laird 15 US 390 (1817), 392 (Story J); Adamson, The Doctrines of Equity (1850) pp 272-273; and Jenkins v Brahe, 648. To hold otherwise would be to diminish the prior mortgagee's paramount claim in favour of a puisne encumbrancee with a weaker security; the double claimant has a right to take the first money that is realised by any of its securities which first comes to hand [Wallis, 180 (Pagewood V-C)]. 22 Mr Sneddon's clients are not lesser mortgagees, but purchasers from the mortgagors. An assignee of the mortgagor could not be in a stronger position than the mortgagor itself or a subsequent mortgagee. Neither the mortgagor nor a subsequent mortgagee would be entitled to delay the prior mortgagee in the collection of its debt and the enforcement of whichsoever of its various securities it wishes first to enforce. The first mortgagee is entitled to choose which security it first enforces. 23 It may be that, notwithstanding that the plaintiffs are not encumbrancees but purchasers, equity might regard their interest as analogous to that of a subsequent mortgagee, so as to give Elnic and the Lees a right to require Eclipse to marshal its securities, ultimately providing access for Elnic and the Lees to units 10 and 12, but I mention this merely as a view which might prove open on further consideration and without argument or analysis at this stage. 24 It follows that even if there were a serious question to be tried about the manner and mode of exercise by Eclipse of its power of sale, there is in the present circumstances no basis on which Elnic or the Lees are entitled to restrain Eclipse from exercising that power of sale. Ultimately, questions of priorities may fall to be resolved if there is a surplus from units 11 and 12, in which case they could be resolved on a summons for payment out, upon the mortgagee, Eclipse, paying any surplus into court. But I do not see any urgent requirement to resolve the question of the priorities of the various caveators in respect of units 7 and 3 since, prima facie, there will be no surplus from the sale of those units for application to any of the persons claiming an interest other than Eclipse. 25 I have given consideration as to whether on the present application I ought to remove the Kantoam caveat, Kantoam not having appeared to defend it. There does not appear to be any urgency in doing so at the instance of Elnic or the Lees, although different issues might arise if such relief were sought by Eclipse. 26 Moreover, the affidavit of service of the proceedings on Kantoam is an affidavit of Sing Wai Lee sworn 9 September 2005 which simply deposes that she served the fourth defendants with a sealed copy of the summons by leaving a copy of it at the address of the fourth defendant, without deposing to the address at which it was left. A search of Kantoam does prove where its registered office is, but the affidavit of service is less than sufficient to prove service at that address. And even if service were proved adequately, I would require more than has appeared in the context of this application to be satisfied that it was appropriate peremptorily to remove the Kantoam caveat at the suit of the present plaintiffs, when prima facie it claims a security interest in that property, although not one which would entitle it to prevent Eclipse's proposed sale. 27 Accordingly, I make the following orders:

Elnic Holdings Pty Ltd v New Wave Development

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