9 The background facts are as follows: a company known as Windy Drop Down Pty Limited agreed to borrow $5.1 million from Equitiloan Securities for the purposes of a property development. On 26 March 1999 Windy Drop Down and Equititrust, a separate but related entity to Equitiloan, entered into a profit-sharing agreement in relation to the development.
10 On 23 March 2000 Equitiloan transferred to itself and Equititrust the mortgage and the related credit facility together with fixed and floating charge. There were reasons for this to occur, which related to the introduction of the Managed Investments Act 1998, the phasing out of the solicitors mortgage lending scheme of Equitiloan, and the fact that Equitiloan no longer had any role or purpose and had minimal assets.
11 In May 2000 Windy Drop Down, Equitiloan and Equititrust began to dispute their respective entitlements under the transaction documents. On 26 October 2000 Windy Drop Down instituted proceedings for redemption of the mortgage. Brereton J heard the principal proceedings, and in the course of his judgment, exhibited a close understanding of the difference between Equitiloan and Equititrust in relation to the transactions, and the circumstances which necessitated the undertaking that was given on 13 November 2000 by Equititrust.
12 The substance of the proceedings involved a claim by Windy Drop Down for restitution, first from Equitiloan of the amount paid as interest at the default rate, and second from Equititrust for the amount which Windy Drop Down had paid to it under the profit-sharing agreement. There was a third aspect to the proceedings which consisted of a cross claim by Equititrust.
13 It was in that context that on 13 November 2000 the undertaking was given which is now in issue. The result at which Brereton J arrived was that there should be judgment that Equitiloan pay to the plaintiff the sum of $252,090 plus interest, which represented the amount paid by way of default interest in excess of the amount found to be due by the Court under the mortgage. Brereton J also gave judgment on the cross claim in favour of Equititrust.
14 On 4 April 2008 Brereton J gave judgment on the costs of the proceedings in Franks v Equitiloan Securities Pty Ltd (No 2) [2008] NSWSC 456. In the originating process before him, namely the further amended statement of claim dated 12 March 2003, the plaintiff sought costs of the proceedings against both Equitiloan and Equititrust. In the course of his reasons Brereton J explained the purpose of the undertaking. He also explained that it was not the purpose of the undertaking to effect a transfer of primary liability to give restitution from the first defendant to the second defendant, but to ensure that recourse could if necessary be had to Equititrust. He said in paragraphs [5], [6] and [7]:
5. On 13 November 2000, when Equititrust was joined as a defendant, it gave an undertaking to the Court that it would pay to the plaintiff any amount which was found by the Court to have been paid by the plaintiff to the defendants or either of them in excess of the amount found by the Court to be due under the mortgage. That undertaking was given in the context of, first, a partial transfer of the mortgage by Equitiloan Securities to itself and Equititrust; secondly, the refusal of Windy Dropdown's application for an order requiring the discharge of the mortgage without payment of the full amount claimed; and thirdly, as it seems to me, in order to protect and preserve the position of Windy Dropdown in circumstances where there was a partial transfer of the mortgage and the funds might be paid by the first defendant to the second defendant and the ability of Windy Dropdown to recover any overpayment complicated in that way.
6. In my view, the purpose of the undertaking was to ensure that the transfer of the mortgage and the application - as between the defendants - of the funds received upon its discharge would not defeat any equity of the plaintiff to recover them. It was not the purpose of the undertaking to effect a transfer of primary liability to give restitution from the first defendant to the second defendant, but to ensure that recourse could, if necessary, be had to Equititrust.
7. In the substantive proceedings, I concluded (at[84]) that the hclaim for restitution of the overpaid interest was brought and lay against the first defendant Equitiloan Securities, which was the real lender to Windy Dropdown and which received the benefit of the overpayment. That means that it was Equitiloan Securities that was primarily liable, at the suit of Windy Dropdown or its assignee, to give restitution. The fact that Equititrust chose to expose itself to liability to make that payment also, in order to avoid the consequences which might otherwise have arisen on 11 November 2000, is no reason for diminishing Equitiloan Securities' obligation to so, let alone to give judgment jointly and severally against Equititrust as well as Equitiloan Securities, when the plaintiff does not seek that outcome - although, if Equitiloan Securities were not to pay, some ancillary procedure might be appropriate to enforce the undertaking against Equititrust, as in effect a guarantor.