Exception Holdings Pty Ltd v Albarran

CATCHWORDS : CORPORATIONS [72]- Charge- Deceased estate loaned money to company to discharge debt to third party- Loan secured by registered charge- Charge previously held to be void ab initio under Corporations Act, s 267- Whether leave under s 267(3) to enforce can nonetheless be granted nunc pro tunc- Discussion of test for insolvency. EQUITY [14]- Subrogation- Deceased estate loaned money to company to pay out company's debt to bank- Bank's loan secured by registered charge- Estate obtained registered charge- Estate's charge subsequently declared void- Clear intention that estate would receive some form of security for loan- Whether estate entitled to be subrogated to bank's security- Whether estate obtained all security it bargained for- Distinction made between charge that is void ab initio and one that becomes void. EQUITY [32]- Oral charge- Content of charge contained in subsequent deed- Whether oral charge merged in deed. PROCEDURE [490]- Leave to re-open and set aside orders- Certain issues canvassed in defence and submissions at previous hearing- Court disallowed ventilation of issues due to limited time- Orders of previous hearing not yet taken out- Unfair to shut out defendant/cross-claimant for failing to argue issues previously.

Conveyancing Act 1919, s 184(1) LEGISLATION CITED : Corporations Act 2001 (Cth), ss 58AA, 95A, 266, 267, 1322

Autodesk Inc v Dyason (No 2) (1993) 176 CLR 300 Brew v Followmont Transport Pty Ltd [2005] QSC 30 Burston Finance Ltd v Speirway Ltd [1974] 1 WLR 1648 Butler v Rice [1910] 2 Ch 277 Capital Finance Co Ltd v Stokes [1969] 1 Ch 261 Challenger Managed Investments Pty Ltd v Direct Money Corporation Pty Ltd (2003) 12 BPR 22,257 Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 291 Dahlenburg v Dahlenburg (1996) 7 BPR 14,885 Day Ford Pty Ltd v Sciacca [1990] 2 Qd R 209 Donne v Lewis (1805) 11 Ves 601; 32 ER 1221 Emanuele v Australian Securities Commission (1997) 188 CLR 114 CASES CITED : Ghana Commercial Bank v Chandiram [1960] AC 732 Goss v Chilcott [1996] AC 788 Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (1994) 13 ACSR 455 Lewis v Doran (2004) 50 ACSR 175 Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187 Porter v Associated Securities Ltd (1976) 1 BPR 9279 Price v Moulton (1851) 10 CB 561; 138 ER 222 Re The 21st Century Sign Company Pty Ltd [1994] 1 Qd R 93 Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; 188 ALR 114 Wentworth v Wentworth [1999] NSWSC 638 White Constructions (ACT) Pty Ltd v White (2004) 49 ACSR 220

Philip Edward Pomfret (Cross-Claimant) Exception Holdings Pty Limited (in liq) (1st Cross-Defendant) PARTIES : Richard Albarran (2nd Cross-Defendant) Julio Cesar Labraga (3rd Cross-Defendant)

G K Burton SC (Cross-Claimant) COUNSEL : A G Bell SC and D A C Robertson (1st Cross-Defendant)

Dibbs Abott Stillman (Cross-Claimant) SOLICITORS : Henry Davis York (1st Cross-Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

3316/05 - EXCEPTION HOLDINGS PTY LTD v ALBARRAN (NO 2) JUDGMENT 1 HIS HONOUR: On 30 June 2005, I delivered reasons for finding that a charge given over Exception Holdings Pty Ltd on 27 January 2005 in favour of the estate of the late Richard Lawrence Highland was validly executed but was invalidated because of s 267 of the Corporations Act 2001. 2 I noted in [41]: "There is an escape in s 267(3) that if the chargee can satisfy the Court that immediately after the creation of the charge the company that created the charge was solvent and in all the circumstances of the case it is just and equitable for the Court to grant leave to enforce the charge, it may do so."

I allowed a little time for such an application to be made if it were going to be made. 3 On 18 July 2005, Philip Edward Pomfret made such an application, the defendants being Exception Holdings Pty Ltd, Mr Albarran and Mr Labraga. The interlocutory application sought:

(2) Taking such order nunc pro tunc so that the charge was enforceable before the appointment of the receiver that is described in my earlier reasons;

(3) Alternatively, finding that the parties made an agreement to give a charge in September 2004 orally and extending the time for notifying ASIC of that charge;

(4) Declaring that the estate had rights of subrogation in respect of the charge given to Westpac Banking Corporation in 2002. 4 The evidence before me was, in addition to that dealt with in my previous judgment, basically the evidence of Mr Kelly who gave evidence on behalf of the applicants endeavouring to persuade me that Exception Holdings Pty Ltd was solvent at all relevant dates (viz September 2004 when the oral charge was allegedly given, 27 January 2005 when the written charge was given and the present time). On the other side, Mr Olde gave evidence which, if I accept it, would tend to show that solvency had not been established at any of those dates. 5 I should also note that as far as the subrogation point is concerned, Mr Bell SC and Mr D A C Robertson, who appeared for the first cross-defendant, submitted that because of the Anshun principle, this matter should not be allowed to be raised at this stage. Mr Burton SC who appeared for the cross-claimant submitted that the Anshun point just could not succeed but if need be, he asked for leave. I will deal with this matter when I come to deal with subrogation. I merely remind myself of it at this stage. 6 I will deal with each of the matters seriatim, but I think it is best to deal with point 2 first, because if it succeeds, I need only deal with point 1 in an abbreviated way. 7 (2) As noted in my earlier judgment, the charge bears date 27 January 2005 and the purported appointment of a receiver, a step in its enforcement, occurred on 30 May 2005. I held that s 267 applied and the charge must be taken always to have been void. 8 Section 267(3) reads as follows: "On application by the chargee under a charge, the Court may, if it is satisfied that: (a) immediately after the creation of the charge, the company that created the charge was solvent; and (b) in all the circumstances of the case, it is just and equitable for the Court to do so; give leave for the charge to be enforced."

Under s 58AA of the Corporations Act , this Court is a capital C court with jurisdiction to make an order under s 267(3). 9 Mr Bell and Mr Robertson argue that neither s 267 nor s 1322 of the Corporations Act permits leave to be granted retrospectively. They point to the fact that s 267(1)(b) fixes on the chargee purporting to take a step without the court having given leave under sub-section (3) for its enforcement. Once that act has taken place, the charge has been vitiated and there is no room for the court afterwards to give leave. 10 Although no counsel referred to it I first thought that I might get some assistance in the examination of when one can make an order nunc pro tunc discussed by the High Court in Emanuele v Australian Securities Commission (1997) 188 CLR 114. However, there the court had to consider with respect to s 459P of the Corporations Law whether it was mandatory to get leave to commence proceedings if one was not a person given standing by the Act before the proceedings were commenced or whether one could get leave later. By a three to two majority, the High Court held that the matter was merely procedural and a nunc pro tunc order could be made. 11 However, Brennan CJ (and Gaudron J) dissented, the former saying at 123 that one must approach the question of construction bearing in mind the statutory language and purpose. At 124 Brennan CJ asked whether the purpose of the provision would be undermined if the absolute protection which the provision is expressed to confer were transformed into a discretionary bar that could be relieved by court order. However, Toohey J, a member of the majority said at 132, quoting Lord Eldon in Donne v Lewis (1805) 11 Ves 601 at 601; 32 ER 1221 at 1222: "The Court will enter a decree nunc pro tunc, if satisfied from its own official documents, that it is only doing now what it would have done then." 12 The argument of the first cross-defendant focuses on the wording in section 267(1)(b) as really important. To my mind the words in (1)(b) "without the Court having … given leave for the charge to be enforced" mean what they say, and that is, that if a chargee takes the step of enforcing the charge and at that time has not got the leave of the court to do so, then the charge is vitiated for all purposes. In Re The 21st Century Sign Company Pty Ltd [1994] 1 Qd R 93 at 96, Ryan J said that there was nothing in s 267 of the Corporations Law, which was then in similar form to the present provision, which would authorise the court to give retrospective leave, and if there was any power to validate, it must be found in s 1322(4)(a). 13 At pp 97 and 98, Ryan J said that one needed to construe the Corporations Law, as it then was, to see whether the legislative scheme excluded the operation of s 1322(4). He said that the object of s 267(3) was to ensure that the court will examine the circumstances in which a charge is created to ensure that the other creditors are not prejudiced and "In my opinion it would be inconsistent with that provision to give an operation to s 1322 which would have the effect that an order could be made validating the taking of a step to enforce a charge without the leave of the court having first been obtained, and without any requirement that the court be satisfied as to the matters in s 267(3). Under s 1322(6) the matters as to which the court must be satisfied as preconditions to making an order under s 1322(4) are quite different from those in s 267(3)." 14 In Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (1994) 13 ACSR 455 at 461, I followed what Ryan J had said in that case. 15 I see no reason, even after listening to counsels' addresses, why I should change my view. Indeed, it seems to me that if I were to apply Brennan CJ's test in the Emanuele case as to the purpose of the Act, I would reach the same conclusion. 16 Accordingly, it is of no value to look at s 1322(4) and (6). The question as to whether I can give retrospective leave must be anwered "No". 17 (1) This, of course, makes question (1) otiose. In one sense this is a shame as the parties both spent a lot of time, trouble and money in obtaining evidence to show that the company was solvent or not. 18 The test of solvency is set out in s 95A of the Corporations Act which provides as follows: "(1) a person is solvent if, and only if, the person is able to pay all the person's debts as and when they become due and payable. (2) a person who is not solvent is insolvent." 19 As I said earlier, I will not spend overmuch time on this matter in view of my decision on question 2. Of the two accountants who gave evidence, I was much more impressed with Mr Kelly than I was with Mr Olde. Mr Olde appeared to me to depend too much on Mr Labraga and there was a hint that his evidence was affected by the fact that Mr Labraga's wife was a partner in a firm of solicitors who provided Mr Olde's firm with a proportion of its business. Furthermore, as I noted in another judgment in these series of cases, I was not impressed generally with Mr Olde or with Mr Ryan, the official liquidator (Mr Olde himself is only a registered liquidator) who, despite Mr Olde's statement to the contrary, did not appear to have played any supervisory role in what was happening. 20 Mr Kelly, in his initial affidavit, deals with the issue of solvency in three separate ways, namely: (a) based on the balance sheet of Exception Holdings Pty Ltd and its subsidiaries; (b) based on the presentation to Westpac of 2004; and (c) based on current cash flow forecasts. Both his and Mr Olde's assessment of solvency were made more difficult because the companies treated Holdings as the "treasury" and the books did not make it completely clear whose was the legal liability in every case. 21 Under the first method, Mr Kelly conferred with Pomfret and then made allocations between the subsidiary and the holding company. Mr Kelly has reckoned that adjusting the figures on the balance sheet, those assets on hand or which can be realized in less than 12 months amount to $2,059,705.00. However, of this sum, $1,800,000.00 is attributable to the loan books and trailer commission. As against this, the total current liabilities are $879,603.00. Included amongst that figure are trade creditors of $350,000; GST $100,000, PAYG tax $166,000. 22 In view of the fact that statutory demands were issued against the company including one by the Tax Office, even accepting Mr Kelly's balance sheet adjustments, I would be uncomfortable about accepting that the company was solvent. The evidence suggested that the probabilities were that the loan book could be sold within 12 months and that accountants classify an asset as a current asset if it can be sold within 12 months. It would seem, because the mortgagee's consent would have to be obtained, that it is more likely than not that the book could not be sold in less than two to three months. Although Mr Kelly has some expertise in valuing that sort of asset, valuation at any time is not an exact science and there is only a relatively small margin between solvency and insolvency if the test were based on the surplus of current assets over current liabilities. 23 The second method used the figures that were put to Westpac in 2004 which had been agreed to by all the then "partners". Looking at annexure "C" to Mr Kelly's affidavit, his working on those figures as at 31 January 2005 would show that there were losses and short term liabilities to the extent of $352,617, but there were annual receipts from trailer commissions of $660,000 so that there was an adjusted short term net asset position of $307,383. 24 Mr Kelly's third approach was to look at the company's profit and loss forecast for the year ending 30 June 2006. Mr Kelly opined that although actual results are likely to be different from predictions of future operations because anticipated events frequently do not occur as expected, he took the view that the cash flow forecasts were conservative and prudent and notes that on the basis of those forecasts it is reasonable to assume that the company has a financial future and therefore is not insolvent. The cash flow forecasts show that whilst Holdings would break even, Commercial would show a profit after tax of $107,000 and Finance $142,000 (Commercial and Finance are subsidiaries of Holdings). 25 Mr Bell criticised the approaches made by Mr Kelly on the basis that they did not direct attention to the test in s 95A, that is, was the company able to pay all its debts as and when they became due and payable? As to this, Mr Kelly said in his second report: "I understand this definition of solvency, but I consider that there are often circumstances, as in this case, which require careful consideration of the term 'when they become due and payable'. For example, since the new tax system was established on 1 July 2000, the introduction of GST and PAYG instalments has caused many taxpayers to delay payment of their liabilities for these taxes beyond the normal due date. The Australian Taxation Office's view in these cases has been one of patience and assistance, leading to an extension of time for payment, often for more than a year, with a payment programme being entered into only at that time. In this case, the liabilities became due and payable in terms of those extended arrangements, not on the basis of the earlier due date. Similarly, arrangements with creditors for deferral of payment under specific programmes also defers the date that a debt becomes due and payable." 26 One must look at this statement with a bit of scepticism. The material shows that because Holdings has been in the midst of a conflict between Mr Pomfret and Mr Labraga, despite Mr Pomfret attempting to make arrangements with the Australian Tax Office, this has not been able to be consummated, and indeed, the Australian Tax Office has issued a statutory demand. I am asked to ignore the effect of that demand because it expired at a time when the company was already in receivership or provisional liquidation or both, but even if I do this the fact that the statutory demand issued shows that the company had reached the stage where the Australian Tax Office had lost its patience or the assistance which it offered had not been formally accepted by the company because of conflicts within its management and directorate. Likewise, it is not possible to make arrangements with other creditors for the same reason. 27 In any event Mr Kelly's conception of when a debt is due and payable is not one which has been embraced by the authorities. 28 In Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187, Lindgren J, in the Federal Court of Australia at 199 noted that: "The notion of 'become due' is a legal one, and that a debt is not rendered 'not yet due' by reason of nothing more than the fact that the creditor has, to date, forborne from pursuing recovery."

However, he noted that it may be because of the terms of the contract or because of an operative estoppel on the facts a result may be produced that a debt has not become "due and payable" in the sense of entitling the creditor to sue the debtor to judgment immediately. 29 In Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; 188 ALR 114, Palmer J, following the same line of thought, held that the commercial reality that creditors will normally allow some latitude in time for payment of their debts does not in itself warrant a conclusion that the debts are not payable at the times contractually stipulated and have become debts payable only upon demand. He also held that a debt became due at the same time as it became payable despite the use of both terms in the relevant section. The same thing was said by McDougall J in White Constructions (ACT) Pty Ltd v White (2004) 49 ACSR 220. In both that case and in Lewis v Doran (2004) 50 ACSR 175 (Palmer J) it was noted that the question of solvency when applying the test in s 95A was to be decided as a question of fact bearing in mind commercial realities. 30 The commercial realities here were that the company was in deadlock, it was unable to make a decision as to how to deal with its creditors, there were two statutory demands issued in 2005, one from the Australian Tax Office, it was making losses at least apart from its entitlement to commissions and there was unpaid PAYG tax and GST. 31 I am asked to find positively that it is solvent so as to satisfy partially s 267(3). I am not able to draw that conclusion on the balance of probabilities even accepting Mr Kelly's material and the financial statements which have been placed before the court, let alone giving any weight to what Mr Olde says. Of course, despite the fact that I am hesitant in accepting all Mr Olde says, he is a qualified accountant and some of the material in his presentation is clearly relevant material on the question of solvency and does not assist the cross-claimant. 32 Because I am not satisfied that the company was solvent at any of the relevant dates, I need not consider whether it is just and equitable to make an order under s 267(3) even if I had power to do so. However, I would think it most probable that in the light of the background material I will be discussing under section (3) of these reasons, I would have come to the conclusion that it was just and equitable to make the order. 33 (3) This matter falls into three sub-heads, viz:

(a) whether it is necessary to obtain leave to argue this point, and if so, whether leave should be given;

(c) whether the time for notifying ASIC of the oral charge should be extended. 34 (a) What I am about to say is equally relevant to the argument as to subrogation dealt with in section (4) of these reasons. 35 The first cross-defendant's complaint is that on 30 June 2005 these proceedings were listed for hearing of the plaintiff's challenge to the appointment of a receiver. These matters were raised in the second defendant's (now cross-claimant's) defence (paras 11 and 24) and dealt with in the plaintiff's reply. They were also referred to in the second defendant's written submissions on 30 June, but not pressed in oral argument. The court has made its decision and if the matters are to be now argued, the plaintiff must ask the court to set aside its orders and also obtain leave to reopen the case and lead further evidence. In any event, it is inappropriate to seek declaratory relief by interlocutory process. If leave is to be granted, then it should be on terms. In view of what I have already decided, I do not need to go into the terms that are proposed. 36 The order has not yet been taken out. 37 The court does expect all matters to be argued at the one time. However, in the instant case, on 30 June, time was short and I insisted that we concentrate on the main points in dispute. There was an attempt to file a cross-claim to flesh out some of the issues now being raised and I declined to allow it. I needed to focus intently on the main matters and was able to give an oral judgment at about 3.00 pm. In that judgment I left open the s 267 question. 38 In all the circumstances it seems to me that it would be quite unfair to shut out the subsidiary matters which the cross-claimant at all material times wanted to argue, but which, because of the way the case was conducted were not in fact argued on 30 June. 39 I do not consider that there is any need to set aside the order that was made, but I do consider that I should give leave to reopen so that the matters can now be ventilated. 40 I have, of course, reread the standard authorities on the point including Autodesk Inc v Dyason (No 2) (1993) 176 CLR 300; Wentworth v Wentworth [1999] NSWSC 638 and the summary of the cases - including some decided by myself - by Jones J in Brew v Followmont Transport Pty Ltd [2005] QSC 30. My decision is, I consider, in accordance with the limited exceptions to finality referred to in those case. 41 (b) The factual basis for the oral charge argument stems from a conversation set out in para 15 of Mr Pomfret's affidavit of 8 June 2005 (DA27): "On one occasion in early July 2004 the Third Defendant (Labraga) and I met with Ms Highland in my office at which time we had a conversation in part with the following words: I said: 'Pene, Julio and I propose that the best thing to do to protect the Estate and your home is to transfer money from the Estate's account to pay out Westpac and to use the Estate's two investment properties as security for the other Westpac loan or to pay out the other Westpac loan. In return, Westpac will release all its security over the Estate, Richard and your personal guarantees and the security over your home for the company loans and we give the Estate security over either the mortgage book, the company or Valecure, whichever is the best thing to do.' Labraga: 'The mortgage book pays in excess of $600,000 per year. There's more than enough money there to pay out the Estate's loans, if there is ever any troubles.' I said: 'Once we pay out Westpac the Estate would be the only secured creditor. This will put you in [sic] position for the first time that your home is no longer related to the business. Do you have any questions?' Highland: 'No'. I said: 'Julio and I will talk to Terry and work out the best way to do this.' "

Terry was Mr McCabe who was a solicitor acting for all parties at that stage. Mr Pomfret then goes on to say that the executors, after consultation with Mrs Highland, decided to advance funds of about $800,000 to Exception Holdings Pty Ltd so that that company could pay off its Westpac loan. He said that he and Labraga agreed that the monies were to be secured by way of registered fixed and floating charge. However, they discussed whether the chargor should be Exception Holdings or Exception Finance. On 1 September 2004, Mr Pomfret gave Mrs Highland an email which included the following: "I outlined the proposal of the estate doing the following: (a) Advancing $800,000 in funds to pay out Westpac … . In order to protect the estates advance we will be offering the estate security over the mortgage book …. ". 42 That day Mr Pomfret also wrote Mrs Highland a letter which stated that the estate's advance of $800,000 "should be repayable within 6 years of the date of the advance and be secured by a first fixed and floating charge over the assets of Exception Services Pty Limited. The advance would of course accrue interest, with such interest to be paid monthly." Mr Pomfret said that he gave both of these documents to Mrs Highland and she signed them after reading them. On 19 October 2004, $808,000 was electronically transferred from the estate's account to Exception Holdings' account and then on to the bank. On 24 November 2004, a further $385,000 followed the same course. On 27 January 2005, the deed of fixed and floating charge was executed and on 3 March 2005 was registered with ASIC. It was this document which became void under s 267 of the Corporations Act. 43 Mr Bell and Mr Robertson submitted that the evidence was insufficient. Para 21 of DA 27 is about all that exists and that does not go far enough, as all it proves is a discussion occurred before the loan where a written charge was proposed. Everyone contemplated that there would be a written deed of charge. It follows that (i) the writing was a condition precedent to the operation of the equitable charge; (ii) that the parties had not brought to mind the terms and conditions of the charge such as whether it could be enforced by the appointment of a receiver; (iii) any oral agreement to create a charge merged in the deed of 27 January 2005. 44 Dealing with (iii) first, the first cross-defendant relied on the decision of the Full Court of Common Pleas on demurrer in Price v Moulton (1851) 10 CB 561 at 572; 138 ER 222, 227 where Jervis CJ said: "Prima facie, the general rule is, that, where a security of a higher nature is taken for the same debt, it operates a merger of the lower security: a party cannot sue for money had and received, where he has got a security for the same debt, which gives him a remedy of a higher degree." 45 The first cross-defendant also relied on the decision of the Queensland Full Court in Day Ford Pty Ltd v Sciacca [1990] 2 Qd R 209 where at 213 Macrossan CJ, giving the decision of the court, summarised the court's view of the cases in this area by saying: "It is probably correct to put the proposition as high as this: that there is what amounts to a presumption that the parties intend that their relationship shall be governed solely by the terms of the written contract which they have signed notwithstanding the existence of a preceding oral agreement arrived and that they should be taken as having agreed to rescind the effect of their earlier oral contract." 46 Up until its abolition by s 184(1) of the Conveyancing Act, the rule in Pigot's case meant that a material alteration to a deed vitiated it. What should happen if there was a material alteration to a mortgage when money had been lent under it? 47 In Goss v Chilcott [1996] AC 788, the Privy Council on an appeal from New Zealand, held at 796 that upon execution of the deed, any preliminary oral agreement would be merged in the deed and superseded. In that case that was clearly intended as shown particularly by the deed containing detailed personal covenants for repayment as well as providing for security. However, the Privy Council did allow the claim for recovery of the money lent under the count of money had and received, which the Board called restitution, something which could never have been contemplated in 1851 by the Full Bench of the Common Pleas. 48 Another escape route may be available. In Dahlenburg v Dahlenburg (1996) 7 BPR 14,885, I said that one may get a situation where all the circumstances, including the prior oral agreement and whether that oral agreement at law had merged in the written agreement which subsequently was vitiated or not, may show that it would be unconscionable for a party not to enter into a fully valid agreement at law in the same terms as the earlier oral agreement. However, this gateway is not open to the cross-claimant as there is no unconscionable conduct on the part of the first cross-defendant. The formal document became void because of an act of the cross-claimant in putting in a receiver and so enforcing the charge without leave. Furthermore, this is not a case where the borrower is attempting to avoid repayment of the money as a debt. 49 I can see no answer to the point that if there was any oral agreement the same merged in the written charge. This is what the parties contemplated and this is what happened, and had it not been for the cross-claimant's own act, the parties would have, if asked, said of course the antecedent oral agreement had ceased to exist when the deed was executed. 50 Accordingly, I do not need to deal with the question as to whether the conversation that I have set out was sufficient to bring about an oral equitable charge. True it is that these days courts find equitable charges from situations where money has been paid over on the understanding that the money will be secured, as I have noted in other judgments in this litigation, but in the instant case the supporting communications with Mrs Highland were still vague as to whether it would be Holdings that would give the security or some other company in the group and there was no real consideration of the remedies that the equitable chargee might have. 51 (c) Thus it is unnecessary to consider whether I should give leave under s 266(4) of the Corporations Act 2001 to extend the time to notify ASIC of the oral charge. My feeling is that I would have extended the time, probably subject to some condition (which condition was not opposed) protecting persons who may have given credit to the company in ignorance of the charge. 52 (4) Mr Burton submits that the purpose and use of the advances from the estate were to pay out the indebtedness to Westpac secured inter alia by a charge over the assets and undertakings of Exception Holdings. The rights of Westpac included the right to appoint a receiver and manager of the assets and undertakings of Exception Holdings. Under standard doctrine, the estate is entitled to be subrogated to the Westpac security. He cited the decision of Bryson J in Challenger Managed Investments Pty Ltd v Direct Money Corporation Pty Ltd (2003) 12 BPR 22,257 at 22,268 and following. (The case is also reported in (2003) 59 NSWLR 452, but the relevant passages for present purposes have been omitted from that report). 53 In that case, Bryson J said at [50] that subrogation in equity is firmly established by judicial decisions, notwithstanding that a satisfactory doctrinal basis is difficult to identify. His Honour rejected the view that it could be explained in terms of restitution and unjust enrichment. His Honour said at [58] that it did not matter that it was not the intention of the parties that they should be secured by subrogation, but "it is sufficient that the plaintiffs intended to have security of some kind and that their payment went towards discharging the previously existing security." 54 In Porter v Associated Securities Ltd (1976) 1 BPR 9279 at 9294, Needham J said: "There is no doubt of the principle of subrogation as it applies to a person paying off a mortgage, or lending money for that purpose which is so used."

Needham J cited Butler v Rice [1910] 2 Ch 277 and Ghana Commercial Bank v Chandiram [1960] AC 732. 55 Butler v Rice was a case where, to simplify the facts, Mrs Rice owned land which was mortgaged to a bank. Mr Rice asked Butler to lend him £450 to pay off the mortgage. Butler thought Mr Rice owned the land. The bank's mortgage was discharged but Mrs Rice refused to execute a mortgage to Butler. Butler was held to be subrogated to the bank's mortgage. He had intended to obtain a security and the fact that the security was completely different to that for which he bargained was of no moment. 56 In Porter's case itself, Porter had two parcels of land at Merimbula described in the judgment as the shopping centre and the beachfront land. The beachfront land was sold under mortgagee sale to Edroga Investments Pty Ltd. The defendant, Associated Securities, lent $46,900 to Edroga to do this. Edroga paid the Commonwealth Bank on account of Porter's monies to clear the mortgage. Needham J held that even though it was the defendant's money lent to Edroga that could be traced as being the source of the monies that discharged the Commonwealth Bank's mortgage the defendant was not entitled to be subrogated to the Commonwealth Bank because it was the plaintiff that had paid off the bank, not the defendant. 57 This distinction was taken up by Bryson J in the Challenger case. His Honour quoted Porter and then said at [61]: "I observe that in Porter's case there was no subrogation where the money of the payer was advanced to the debtor notwithstanding that money could be traced as then having been used by the debtor to pay the secured debt. The circumstances showed that the payer did not intend to have security at all." 58 His Honour is not to be read as saying that if A lends money to B and B then (as was intended) uses that money to discharge its mortgage to C, that there can be no subrogation. Indeed, the facts of Butler v Rice and the facts in a later case Burston Finance Ltd v Speirway Ltd [1974] 1 WLR 1648, as well as the way Needham J put the proposition in Porter's case in the passage that I have quoted, show that this could not be so. However, the circumstances of a convoluted chain of transactions before the mortgage is discharged may indicate that the person from whom the money derived was not intended to obtain security. 59 This cannot be so in the present case because all the discussions with the estate were on the basis that there would be a security, albeit a security over the mortgage book. 60 Accordingly, the fact that the money was lent from the estate to Exception Holdings and then paid by Exception Holdings to Westpac would not disqualify the estate from obtaining rights by way of subrogation. 61 However, Messrs Bell and Robertson say that the subrogation claim must fail because the estate actually received the security for which it bargained and when this occurs subrogation cannot apply. 62 The English law as to subrogation was recently summarised in 13 points by Neuberger LJ (with whom Lord Nicholls MR and Kennedy LJ agreed) in Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 291. The seventh of Neuberger LJ's propositions was: "Seventhly, a lender cannot claim subrogation if he obtains all the security which he bargained for." 63 His Lordship cited the Burston Finance case which had applied in turn the English Court of Appeal's decision in Capital Finance Co Ltd v Stokes [1969] 1 Ch 261. 64 The simplified facts in Burston were that the plaintiff agreed to lend the defendant £420,000 so that the defendant could buy land on the basis that the defendant would give it a first legal charge over the land. The land was purchased. The legal charge was given but because it was not registered it became void for lack of registration under s 95 of the English Companies Act 1948. Walton J said that immediately before the money was paid over to the vendor of the land the vendor had a vendor's lien. This was discharged by the payment. The lender would have been subrogated to that security. However, because the lender actually received the legal charge and that as at the date when it received it the charge was valid, there could not be subrogation. Walton J distinguished the situation where a person takes a charge which is void from its inception as was the situation in the Ghana Bank case. 65 Although at least part of the juristic basis on which Neuberger LJ's 13 points depend may in some respects be criticised in Australia, as the article written by Mr Tilley, Restitution and the Law of Subrogation in England and Australia (2005) 79 ALJ 518 at 523 demonstrates, proposition seven represents the law in Australia. 66 This view is reinforced by statements of policy that were made in the textbooks or at least the English textbooks. In Mitchell, The Law of Subrogation (Clarendon Press, Oxford, 1994) p 142 and Goff and Jones Law of Restitution 6th ed (Sweet & Maxwell, London, 2002) para 3.064, each take the view that this proposition is laid down for sound policy reasons because if it were not so, the policy of legislation invalidating charges would be able to be circumvented. 67 As has been seen, there is a distinction between a case where a charge is invalid from inception and a charge which becomes invalid because it was not registered within the required time. Section 267(1) of the Corporations Act provides that on an attempted enforcement without leave the charge is and is taken always to have been void. Does this put the matter in the complete invalidity class or the subsequent invalidity class? To my mind it must be in the latter. 68 The distinction seems to me not to be the same as between rescission ab initio and termination de futuro, but between a charge which is initially valid but later becomes void (even deemed to become void ab initio) because someone does or does not do what is required to ensure its continued validity. 69 As Walton J said in the Burston Finance case at 1657, the charge was not void as it was enforceable when it was created, but the person having the benefit of the charge was lax in not taking the appropriate steps so it became void. 70 Accordingly, in my view, subrogation does not assist the cross-claimant. 71 Thus, on all grounds the cross-claim made in the interlocutory process fails and it must be dismissed with costs.

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