Hazim v Chipis [2005] NSWSC 199 | Case summary

1718/05 - HAZIM v CHIPIS JUDGMENT 1 HIS HONOUR: This is an application under s 74MA of the Real Property Act 1900 for a declaration that the persons who lodged caveats over the plaintiffs' property have no caveatable interest in that land and for the withdrawal of the caveats. 2 The basal facts are a little strange. The plaintiffs were entrepreneurs of a scheme which involved various people contributing substantial amounts of money to a scheme, whereby the plaintiffs, as managers, would buy properties, would borrow money, would erect new buildings and would sell the buildings. 3 However, under the agreement, all that the "investors" would receive was interest at twelve percent payable at a rate of so much per month and their money back at the end of five years. They were probably lending the money to Folio Investments Pty Ltd, a company now in liquidation, which guaranteed the capital investment and interest, as did also the directors of Folio Investments Pty Ltd, the plaintiffs. 4 In actual fact, it would appear that five properties were purchased, but they were not purchased in the name of the company Folio Investments Pty Ltd, but were purchased in the name of the directors personally. All properties were mortgaged, three of them have been sold, the sale of the fourth is imminent, and the fifth one has been unable to date to attract a buyer. The settlement of the fourth property was close when a search was made which discovered the existence of caveats by the defendants. The defendants, on any view of it, were investors in the scheme and their investment was very substantial indeed; over half a million dollars. 5 The sad facts are that all the investments have been lost unless someone can show that there has been such breach of duties or mismanagement that there are some personal claims. To date the material does not appear to exist, but there are some suspicions engendered by the material which is before me. 6 It would seem that what the plaintiffs were carrying on was a managed investment scheme within the meaning of s 9 of the Corporations Act 2001 (Cth). However, the scheme may not need to have been registered under Chapter 5C of that Act because under s 601ED(a) it did not have more than twenty members. Whether that be so or not, I just do not know because the evidence in the case is insufficient to enable me to make a finding, but Mr Ginges, counsel for the plaintiff, tells me that is the case. If it were not the case then the solution to the problem may be, after appropriate application, to make orders for winding up of the scheme under s 601EE of the Corporations Act, which would ensure that if the money were available, proper inquiries could be made; see Crocombe v Pine Forests of Australia Pty Ltd [2005] NSWSC 151. 7 However, the caveats that were lodged were very rough indeed. The box headed "Nature of the Estate or Interest in the Land" was filled in simply with the words "equitable interest in land"; there was nothing put in the box referring to the instrument from which the alleged equitable interest followed, nor were there any facts set out, nor was there any striking out of any of the actions prohibited by the caveat. 8 By looking at the title deed one can see the caveat was lodged after a mortgage had already been registered on the title, and so the probabilities are that unless fraud can be proved against the mortgagee, and there is absolutely no evidence of that, at least at the moment, then the caveat must take priority after the mortgage. 9 The evidence of the plaintiffs, which is unchallenged at this stage, is that the payout for the mortgage, as at 1 March 2005, is $935,000, and not only will this eat up all the proceeds of sale of the current property, but it will mean that the plaintiffs will have to pay off some of the money themselves. 10 Accordingly, at least at first blush, we have a caveat which does not comply with the Torrens System; we have a situation where, even if it did, the equitable interest specified would not take priority over a registered mortgage, and a mortgage that would take the whole of the property. Accordingly, the caveat should go. 11 However, the material which is put forward on behalf of the defendants is that there has been some strange dealings. The male defendant says that when one looks at the title one can see that eight days prior to the property being placed on the market for sale the first plaintiff increased the mortgage on the property from $750,000 to $900,000. One wonders how it could be said that an additional $150,000 was used for the purpose of the scheme. Of course, it might be. We just do not know. It just looks strange. 12 The purpose of the caveat is to operate as a holding procedure so that people can take the appropriate action to protect their rights. On an application to remove a caveat or to extend a caveat the court has no power or, alternatively, should not determine rights and titles, but should, if the situation is appropriate, allow the caveat to remain for up to a calendar month to enable the caveators to commence the appropriate proceedings. 13 Where the underlying facts as to whether the caveator has an interest in the relevant land are in the registered proprietor's camp, it is a proper exercise of the Court's power under the Real Property Act 1900 to extend a caveat for a short period to allow the caveator to prepare its claim. 14 In the instant case, the appropriate proceedings would be proceedings to enforce some equitable interest, or possibly, if it is a managed investment scheme which needs to be registered, to take action under s 601EE of the Corporations Act 2001; see eg Ex Parte Muston (1903) 3 SR (NSW) 663. 15 The order that I should make is that in accordance with Ex parte Muston, namely that the defendants withdraw caveats AB303016T and AB302991U no later than 4 pm on 15 March 2005, unless before that time they commence a suit to enforce a claim to an equitable interest in the land the subject of these proceedings, or, alternatively, commence proceedings to terminate an unregistered managed investment scheme. If no such suit is commenced by that time then the defendants will pay the costs of the current proceedings to date. If such proceedings are taken then the costs are to be costs in that cause. 16 The new proceedings can either be by cross-claim in the existing proceedings or by a new suit. 17 The next question is whether the plaintiffs have made out a case under s 74P of the Real Property Act 1900 (as amended) for compensation. 18 Section 74P provides that: "(1) Any person who, without reasonable cause: (c) being the caveator, refuses or fails to withdraw ... a caveat after being requested to do so, is liable to pay to any person who sustains pecuniary loss that is attributable to an act, refusal or failure … compensation with respect to that loss." 19 The section was examined by Palmer J in Lee v Ross (No 2) (2003)11 BPR 20,991. At [21] his Honour put the test that reasonable cause for the lodgment of a caveat exists where the caveator has an honest belief, based on reasonable grounds, that the caveator has a caveatable interest. It is for the registered proprietor to demonstrate that lack of reasonable honest belief. 20 As his Honour said at paragraph [25]: "… the test is twofold: It is subjective in that it requires an examination of the caveator's actual belief and whether that belief is honestly held. The latter part of that question will often overlap the examination of the objective elements of the test, namely, whether the caveator's belief is held on reasonable grounds." 21 The material before me does not enable me to find that there was a lack of honest belief based on reasonable grounds. The caveators were left completely in the dark as to what was happening. The managed investment scheme was being wholly managed by the plaintiffs and the matters contained in the male defendant's affidavit show matters which might give rise to an honest belief that there was a caveatable interest, and there is insufficient material to take away that impression. 22 Had I been of the view that there was no honest belief, the very interesting question would have arisen as to the measure of the compensation. The amount claimed is the amount that had to be paid to the mortgagee because there was no settlement of the sale, as there would have been last week had the caveat not existed. It is questionable as to whether that is damages which are attributable to the caveat or whether it is really attributable to the fact that the mortgagor was impecunious or could not refinance. Liesbosch (Dredger) v The Edison [1933] AC 449 and other standard authorities in contract would tend to suggest that the loss was not so attributable. However, the way Palmer J approached the matter in Lee v Ross (No 2) suggests that one does not apply that sort of test, but that, to use Palmer J's words: "The section itself does not use words which invoke or suggest those notions". As I say, fortunately, I do not have to decide it in that case. 23 Accordingly, I do not make any award under s 74P to date, and the orders will be as I indicated.

Hazim v Chipis

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