Farrugia, V. N. v Official Receiver in Bankruptcy [1982] FCA 55

ORDER that the said sum of $5,250 and the said interest be paid by the Official Receiver to Mrs.

ORDER that the costs of Mrs. Farrugia and the costs of the Official Receiver be paid out of the

RE: GEORGE FARRUGIA EX PARTE: VICTORIA NATALIE FARRUGIA Applicant

This application involves some not uncomplicated questions of law. I have however reached a firm view upon

them. It is preferable that I give my judgment forthwith.

On 31 July, 1979, Mr. George Farrugia and his wife, Mrs. Victoria Farrugia, were registered as proprietors as joint tenants of certain land at Seven Hills which

constituted their matrimonial home. On that day they

-2- borrowed an amount of $23,000 from a Mr. and Mrs. Davis upon the security of a first mortgage over that land. $12,500 of the proceeds of the mortgage was applied in discharging a previous mortgage over the land. The remaining $10,500 were obtained and used by Mr. Farrugia in a building business which he carried on and in which Mrs. Farrugia had no direct

circumstances surrounding the mortgage is as follows:

"I signed the mortgage document dated 3lst July, 1979 after a conversation with my husband to the following effect:-

My Husand: "I need some money for the business. I want to take a bigger mortgage over the property so that I can get some more money. I want you to sign a new mortgage".

He said: "That has nothing to do with you; I need the money for the business".

After the moneys were received from Mr. and Mrs. Davies by Mr. Roberts, the solicitor, my husband collected the money. I did not see the cheque he received from the solicitor nor did I see any of the moneys obtained by means of this mortgage. I did not exercise any control over what happened to the proceeds of the mortgage.

My husband and I did operate a joint cheque account. However, I rarely signed cheques on this account. I do not recall signing any cheque in the sum of $3,538.00 or a cheque for any similar amount in August, 1979".

Evidence from bank records supports Mrs. Farrugia's account

of what took place and I accept her evidence in that regard.

On 17 November, 1980, Mr. Farrugia was made bankrupt. In November of that year, contracts were exchanged for the sale of the subject property for $47,700. Settlement took place on 5 March, 1981. On settlement $24,887.50 was paid to Mr. and Mrs. Davis on discharge of the mortgage. The net proceeds of sale, after discharge of the mortgage, legal costs and adjustments, was, apparently, $18,249.50. The sum of $9,124.75 was paid to Mrs. Farrugia. An equal amount was paid to the Official Receiver as trustee of Mr. Farrugia's

The present application is brought by Mrs. Farrugia against the Official Receiver. In it, Mrs. Farrugia seeks a declaration that, in addition to the $9,124.75 which she has already received, she is entitled to receive a further $5,250 from the proceeds of sale. That figure represents one half of the $10,500 which was received by Mr. Farrugia and used for his own purposes from the proceeds of the mortgage to Mr. and Mrs. Davies. Mrs. Farrugia also claims the benefit of interest paid on that amount which has, apparently, been invested in an interest bearing deposit pending the outcome

Mrs. Bennett, who appears for Mrs. Farrugia, puts her case primarily on the basis of subrogation, that is to say, she argues that her client was subrogated to the rights of the mortgagees under the mortgage. I am, however, unable to see that Mrs. Farrugia could obtain any benefit from any such subrogation (1f it be available) since all the mortgagees' rights under the mortgage have been satisfied and the mortgage is fully discharged. That is not, however, the end of the matter. Reliance 1s also placed, on Mrs. Farrugia's behalf, on the principles underlying the equitable

Where the property of a married woman is mortgaged or charged in order to raise money for the benefit of her husband, it is presumed, in the absence of evidence showing an intention to the contrary, that, as between her husband and herself, she meant to charge her property merely as a surety. In such a case, she is, as between her husband and herself, in the position of surety and entitled both to be idemnified by the husband and to throw the debt primarily on his estate to the exoneration of her own (see, generally, 22 Halsbury's Laws of England (4th Ed.) paras. 1071-1076;

Fisher & Lightwood's Law of Mortgage (8th Ed.) p. 445;

Huntingdon v. Huntingdon [1702] 2 Bro. Parl. Cas. 1; 1 E.R.

753; Peirs v. Peirs [1750] 1 Ves. Sen. 521; 27 E.R. 1180;

Pocock v. Lee [1707] 2 Vern. 604; 23 E.R. 995; Hall v.

The present case is not, however, the simple one where the whole of the moneys borrowed jointly by husband and wife on the security of their joint property have been applied for the benefit of the husband. As has been mentioned, $12,500 of the amount borrowed was applied for the joint benefit of Mr. and Mrs. Farrugia upon the discharge of the previous mortgage under which they were jointly liable. It was only the balance of $10,500 that was applied for the benefit of Mr. Farrugia alone. A question which arises 1s whether the one borrowing can, for the purposes of the application of the relevant equitable principles, be in effect subdivided into what was borrowed and applied for the joint benefit of Mr. and Mrs. Farrugia and what was borrowed and applied for Mr. Farrugia's benefit alone. In my view it can. It seems to me that where the Joint property is charged partially for the benefit of the husband alone and partly for the benefit of both husband and wife and it is possible to apportion the principal between the two, there is room for the application of the equitable doctrine of exoneration and the wife is, in the absence of agreement to the contrary, entitled to exoneration to the extent of what was borrowed and applied for the benefit of the husband alone (see, 22 Halsbury's Laws of England (4th Ed.) para. 1073; Gee v.

Smart [1875] 8 El. & Bl. 313 at p. 319; 120 E.R. 116 at

I turn to the application of these principles to the facts of the present case. In so far as the mortgagees were concerned, Mr. and Mrs. Farrugia were both principal debtors in respect of the whole of the $23,000 which was advanced under the mortgage. As between Mr. and Mrs. Farrugia however, they were principal debtors in respect of $12,500 of that money. Between themselves, Mr. Farrugia was in the position of principal debtor and Mrs. Farrugia the position of surety as regards the balance of the $10,500 which Mr. Farrugia applied for his own purposes. Mrs. Farrugia was entitled to throw that part of the borrowing on her husband's interest in the land to the exoneration of her own. If Mr. Parrugia had not become bankrupt, Mrs. Farrugia would, upon the sale of the property, have been entitled to require that the whole of the $10,500 applied for Mr. Farrugia's benefit be repaid out of Mr. Farrugia's share of the proceeds of sale. More importantly, Mrs. Farrugia had a charge upon Mr. Farrugia's interest in the land by way of indemnity to secure her right of exoneration (see, Gee v. Liddell [1913] 2 Ch. 62 at p. 72). That charge was not obliterated by Mr. Farrugia's bankruptcy. Mr. Farrugia's interest in the property which passed to the Official

Receiver was subject to it (see Aguilar v. Aguilar [1820] 5

Madd. 414; 56 E.R. 953; Re Berry [1976] 2 N.Z.L.R. 449). I am fortified in that conclusion by the fact that it accords with the views of no less an authority on the law of bankruptcy than the late Mr. Justice Riley (see Re Thompson

No specific argument has been advanced before me to

the effect that s.1il of the Bankruptcy Act, 1966 applies in

the present case to defeat or postpone Mrs. Farrugia's rights. It seems to me that the provisions of that section do not have that result in the particular circumstances of the present case. Mrs. Farrugia cannot be said, for the purposes of that section, to have made available her interest, as a joint tenant with her husband, in the land

(see Thompson v. Smith (1976) 135 C.L.R. 102). Nor can it

properly be said that, in the particular circumstances of the present case, a loan by Mrs. Farrugia to her husband resulted from the mere fact that Mr. Farrugia applied part of the proceeds of the mortgage, to which he and his wife were jointly entitled, to his own purposes (see, Gosling v.

McCombie (1972) 126 C.L.R. 487 at p. 504; In re Cronmire

In the result, I am of the view that the whole burden of the repayment of the $10,500 should, in calculating the respective entitlement of Mr. and Mrs. Farrugia to the net proceeds of the sale of their property, have been cast upon Mr. Farrugia. It follows that Mrs. Farrugia was entitled to receive, in addition to the $9,124.75 paid to her, a further amount of $5,250. She is also entitled to the benefit of any interest earned on that amount while it has

I propose to make declarations and orders to that effect and to order that the costs of Mrs. Farrugia and of

the Official Receiver to be paid out of Mr. Farrugia's