BETWEEN : HEARTWOOD NOMINEES PTY LTD (ACN 009 171 564)

JOY VICTORIA GIBSON As Executor of the Will of ALFRED ERNEST DUNKLEY (DEC)

NOEL JOHN GIBSON As Executor of the Will of ALFRED ERNEST DUNKLEY (DEC)

Injunction - Mortgagee sale of land - Interlocutory injunction - Section 108 Transfer of Land Act (WA) - "Sale by public auction or private contract" - Whether includes sale by public tender - Transfer of Land Act not a code - Third plaintiffs' claim of constructive trust - Investors' funds paid into trust account - Trust account overdrawn - Inability to trace funds - Whether damages an adequate remedy - Adequacy of plaintiffs' undertaking

Real property - Mortgagee sale - Section 108 Transfer of Land Act (WA) - "Sale by public auction or private contract" - Whether includes sale by public tender

American Cyanamid Co v Ethicon Ltd [1975] UKHL 1; [1975] AC 396

Beswick v Alner [1926] VicLawRp 10; [1926] VLR 72

Castlemaine Tooheys Ltd v South Australia [1986] HCA 58; (1986) 161 CLR 148

Forsyth v Blundell (1973] [1973] HCA 20; 129 CLR 477

Glandore Pty Ltd v Elders Finance and Investment Co Ltd [1984] FCA 407; (1984) 57 ALR 186

Harvey v Watters (1948) 49 SR (NSW) 173

Hawkesdale Nominees Pty Ltd v Honda Australia Pty Ltd, unreported; FCt SCt of WA; 11 November 1990

Inglis & Anor v Commonwealth Trading Bank of Australia [1972] HCA 74; (1972) 126 CLR 161

1 ROBERTS-SMITH J: By notice of motion for interlocutory injunction dated 31 December 2002 the plaintiffs seek interlocutory injunctions that the first and second defendants be restrained and an injunction be granted restraining them from settling or otherwise completing any tender for the sale of property being the subject of mortgage G575752 registered in the Land Titles Office on 5 September 1997 over the land being Melbourne location 3485 and being the whole of the land comprised in Crown lease number 38/1960, and Melbourne location 3494 being the whole of the land comprised in certificate of title volume 19245 folio 622, until the actions endorsed in the writ of summons herein have been heard and determined or until further order.

2 The writ of summons was filed on 11 December 2002. By the indorsement of claim thereon the plaintiffs claim:

(1) a declaration that the first defendant holds its right, title and interest as registered mortgagee in mortgage number G575752 lodged on 5 September 1997 to property known as Hillside Farm and Tutra Farm upon trust in favour of the third plaintiffs in proportion to their contribution towards the moneys advanced to the first and second plaintiffs pursuant to the said mortgage;

(2) orders that the first defendant transfer its right, title and interest as registered mortgagee to the said properties pursuant to a resulting or, alternatively, a constructive trust relationship between the first defendant as trustee and the third plaintiffs as beneficiaries;

(3) further or alternatively, orders that the first defendant account to the third plaintiffs for its receipt of moneys accruing from its registration as mortgagee of the properties;

(4) further or alternatively, that the first defendant pay such restitutionary damages to the third plaintiffs for any breach of trust arising from the first defendant's unauthorised use of the properties;

(i) the first defendant is liable to transfer its interest as registered mortgagee in the properties to the third plaintiffs,

(ii) the first defendant was not entitled to tender for sale nor accept any such tender for sale of the properties by reason that the purported exercise of such a power of sale contravenes s 107 (sic) of the Transfer of Land Act particularly in that there is no power for sale by tender permitted thereunder,

(iii) the notice of demand dated 25 July 2001 issued by the first defendant to the first and second plaintiffs was invalid or otherwise unenforceable inter alia by reason that it claimed the principal sum and interest under the aforementioned mortgage when such principal sum did not become due and owing until the expiry of the notice of demand;

(6) the first defendant do account, or alternatively, pay compensatory damages to the first and second plaintiffs for its unauthorised, or alternatively, wrongful exercise of a power of sale with respect to the Properties, purportedly made under the mortgage;

(7) an interlocutory and permanent injunction be granted in favour of the first, second and third plaintiffs to restrain the completion or settlement of a tender by the first defendants for the sale of the properties.

3 It appears that the reference in par 5(ii) of the endorsement of claim to s 107 of the Transfer of Land Act should be a reference to s 108 of that Act.

4 An undertaking as to damages in support of the interlocutory injunction has been filed by the first and second plaintiffs and the application is supported by a short affidavit of William James Grover dated 31 December 2002 which, essentially, simply refers to a number of other affidavits filed in other proceedings in this Court, namely COR 131 of 1999 and CIV 2777 of 2001.

5 At the hearing before me this morning Mr Aristei, who appears for the plaintiffs, varied the nature of the application being made to one for what has been described as an interim injunction pending further hearing of the application for the interlocutory injunction to go to trial. This was put on the basis that Mr Aristei and the plaintiffs required further time and opportunity to obtain material and prepare submissions in support of the interlocutory injunction and that because a contract has apparently already been entered into with settlement intended for 7 January 2003 it would be necessary to obtain an immediate interim injunction to maintain the position until a further hearing could be listed.

6 In addition to the affidavit of Mr Grover to which I have referred, a number of other affidavits have been particularly relied upon by counsel for both sides albeit those affidavits are filed in other proceedings. The defendants, in addition, handed up an affidavit this morning, of Geoffrey Peter Lasscock sworn today, on an undertaking that the affidavit will be filed in the registry in due course.

7 In addition, I have before me and have been referred to, portions of affidavits of Mark Anthony Conlan, the liquidator of Rowena Nominees Pty Ltd and Oakleigh Acquisitions Pty Ltd, dated 24 January 2001, 25 January 2002 and 20 November 2002, as well as further affidavits of Mr Grover dated 5 December 2002 and 13 December 2002.

8 I do not propose to recite the facts in any detail. The first and second plaintiffs respectively are the registered proprietors of the properties referred to in the writ of summons. Heartwood Nominees is the holder of an estate in fee simple in respect of Melbourne location 3494, certificate of title 1924, folio 622, (which has been referred to as Bindi Bindi) the second plaintiffs are the holders of a leasehold interest in the property described as Hillside. The first defendant is the registered mortgagee over the properties, in which the second defendants claim an equitable interest.

9 Pursuant to a notice of demand dated 25 July 2001 the first defendants issued a notice of demand for payment under the mortgage.

10 I am informed that in Supreme Court action 2777 of 2001 the first defendant issued proceedings to enforce its remedy of possession over the mortgaged properties. Summary judgment for possession was obtained before Master Sanderson on 14 May 2002. A notice of appeal is pending against the refusal of leave to appeal against that judgment.

11 In his affidavit sworn 20 November 2002 Mr Conlan deposes that as at that date the plaintiffs in that action, who are the first and second defendants in the present matter, were proceeding to sell the mortgaged premises by way of tender. Copies of the tender documents for each of the mortgaged premises were annexed to the affidavit. It is convenient and appropriate to describe that process as public tender or sale by public tender. The tender was to close on 21 November 2002.

12 It appears that an offer has been made and that a contract for sale has been entered into. According to Mr Aristei, the properties have been purportedly sold for a sum considerably in excess of the mortgaged debt. The sale has presumably been effected pursuant to cl 11 of the mortgage document. Clause 11 provides as follows:

"11. That upon a sale hereunder or in exercise of the said powers of sale implied under the Transfer of Land Act 1893 the Mortgagee may sell the Mortgaged Premises or any part or parts thereof either alone or together with any other real or personal property for the time being held by the Mortgagee as security for all or any of the moneys hereby secured or any part or parts thereof respectively and either all together or in lots by public auction tender or private contract and either at one time or several times upon such terms and subject to such special and other stipulations as the Mortgagee may deem fit and the Mortgagee may buy in at any auction or rescind any contract for sale and re-sell in any manner aforesaid without being liable for any loss occasioned then by and may receive and give valid and effectual receipts and discharges for any purchase money and may make sign and execute all such applications transfers and assurances and do all such acts and things as shall be necessary or expedient for effectuating or completing such sale."

13 The principal contention on the part of the first and second plaintiffs is that s 108 of the Transfer of Land Act limits the forms of sale by a mortgagee to those by public auction or private contract and that accordingly the first defendants have, it is put, acted "ultra vires" of the statutory power to sell by purporting to sell the properties by public tender.

14 The immediate question, accordingly, so far as the first and second plaintiffs are concerned, is whether there is a serious question to be tried. It may perhaps be put this way: that what the first and second plaintiffs seek to argue is whether s 108 of the Transfer of Land Act limits the forms of sale by a mortgagee to a sale by public auction or private contract in such a way as to exclude sale by public tender.

15 Section 106 of the Transfer of Land Act provides that where there is default in payment of interest or principal, a mortgagee may serve a written notice to pay. So far as is relevant to the present application, s 108 of that Act provides:

"... if such default in payment or in performance or observance of covenants shall continue for one month after the service of such notice or for such other period as may in such mortgage or charge be for that purpose fixed the mortgagee ... may sell the land ... or any part thereof either altogether or in lots by public auction or by private contract and either at one or at several times and subject to such terms and conditions as may be deemed fit; with power to vary any contract for sale and to buy in at any auction or to rescind any contract for sale, and to resell without being answerable for any loss occasioned thereby, with power to make such roads, streets and passages, and to grant and reserve such easements as the circumstances of the case require and the mortgagee ... thinks fit; ..."

16 It can at once be seen that this provision is cast in the widest possible form. Mr Aristei draws a distinction between public auction and private contract and in essence submits they are the only two ways in which a mortgagee sale is authorised.

17 In the "Australian Contract Law Reporter" it is noted at par 3-820 that calls for bids at auctions which have a reserve price are regarded as invitations to treat and not as offers, that the bids themselves are offers to purchase at the price stipulated and that acceptance occurs when the auctioneer knocks the goods down to a particular bidder: Payne v Cave (1789) 3 Term Rep 148; British Car Auctions v Wright [1972] 1 WLR 1519. Even where the auctioneer does accept the highest bid, if it falls below the reserve, no binding contract will result: McManus v Fortescue [1907] 2 KB 1.

18 The authors of the commentary note that the position is not quite so clear in respect of calls for bids at auctions without a reserve price. They refer to some authorities in which an auction without reserve has been treated not as an offer to contract with the highest bidder but as an invitation to treat on the one hand and yet other authorities holding that the conditions of sale for particular auctions were such that the highest bidder should be the purchaser.

19 It seems to me that those authorities simply indicate that the precise position in each case will depend upon the terms of the auction contract as distinct from the contract for the sale of the property. In relation to tenders, which are dealt with at par 3-840 (ibid), it is noted that calls for tenders, like calls for bids at auction, are not usually regarded as offers but as invitations to treat and that consequently the person calling for tender is not bound to sell to the highest or to buy from the lowest bidder, whichever the case may be.

20 A private contract, it seems to me, may be a sale by way of acceptance of an offer to sell at a set price or an invitation to treat; that is, to make an offer which may or may not be accepted. In the end, every sale will perforce be by way of contract. By the juxtaposition of the words "public auction" and "private contract" the legislature seems to me to be authorising a contractual sale of any kind, public or private. It is referring to two extremes. A contractual sale by public tender falls somewhere between the two. I think, therefore, there are two answers to the point sought to be argued by the plaintiffs.

21 First, that although public tender has elements of both public auction and private contract it is a process whereby as a result of an invitation to the public to make an offer, the sale is effected by a private contract. On a plain reading of the words in s 108, a sale to an individual purchaser following a public invitation to make offers falls within the description "sale by private contract."

22 Secondly, the Transfer of Land Act is not a code. Thus, even if I were wrong in the conclusion just expressed and that sale by public tender is something different from sale by either public auction or private contract, there is nothing in the Transfer of Land Act which would prevent parties including in a mortgage agreement a covenant that a mortgagee sale may be effected by public tender.

23 Whilst I accept Mr Aristei's submission that a question relating to the propriety of the exercise of a power of sale is a serious issue, whether it constitutes a serious question to be tried is a different matter which will depend upon whether the point sought to be ventilated is arguable and not frivolous or vexatious. For the reasons I have expressed it is my view that the point sought to be argued on behalf of the first and second plaintiffs does not give rise to a serious question to be tried.

24 So far as the question of the adequacy of damages as a remedy is concerned I cannot accept Mr Aristei's submission that in respect of the first and second plaintiffs, damages would not be an adequate remedy. True it is, that an actual or threatened breach of a proprietary right such as a mortgagor's equity of redemption, as a general proposition, could not be adequately compensated by an award of damages, but every case turns on its own facts and here the situation is that the claim sought to be advanced by the first and second plaintiffs is only that the method of sale is not authorised by the Act.

25 As I understand it, it is not disputed that the mortgagors are in default and are out of possession. There is no evidence before me to suggest they have any prospect whatsoever of exercising their equity of redemption. Indeed, the evidence is all the other way. That being so, even were their claim to succeed, it would mean the mortgagees would then simply have to fall back on sale by public auction or sale by private contract, however precisely those terms may be construed. The first and second plaintiffs would still be out of their property. In these circumstances, I accept Mr Hawkins' submission that damages would be an adequate remedy so far as the first and second plaintiffs are concerned.

26 The foregoing conclusions necessarily mean that any question of the balance of convenience in respect of the first and second plaintiffs also falls against them.

27 I come to the rights of the beneficiaries of the trust relationship; that is to say, the claim by the third plaintiffs. This is a claim of a constructive trust over the properties. Reference was made to Bahr (No 2) v Nicolay [1988] HCA 16; (1988) 164 CLR 604 in which the Bahrs were held to be entitled to specific performance against registered proprietors of land where the registered proprietors had acknowledged that an earlier option by the Bahrs to repurchase the land was enforceable against them.

28 By the registered proprietors' purchase of the property, with knowledge of the vendor's obligation to resell and accepting that obligation, it was held that the registered proprietors became subject to a constructive trust in favour of the original owners.

29 The facts of the present matter are, apparently, that the first defendant became the registered first mortgagee of the properties by virtue of the financial contributions made by a number of investors of which the third plaintiffs form a significant number. It was intended by the investors that they would personally be registered as mortgagees over the properties in consideration for the advance of moneys by them to the first and second plaintiffs.

30 The contribution of moneys supplied by the third plaintiffs resulted in the first defendant being registered as mortgagee over the properties in circumstances where it would have had actual, if not constructive, notice that it was so registered for the benefit of the third plaintiffs and others who had supplied moneys for the secured loan to the first and second plaintiffs.

31 The situation is essentially similar to and is related to the facts which were canvassed in the judgment of Owen J in Conlan v Registrar of Titles & Ors [2001] WASC 201; (2001) 24 WAR 299.

32 In that case his Honour considered a range of situations which, on the face of it, included circumstances of the kind in which the third plaintiffs find themselves here. His Honour made a number of findings by way of directions to Mr Conlan, the liquidator. Again without descending to very much in the way of particularisation of the facts, the position there, as here, was that investors provided funds to a business operated under the name of Graham Grubb Finance Broker.

33 The way in which the fund operated and the moneys provided by investors were subsequently directed to particular investments and the manner in which securities were obtained in respect of those investments is set out in considerable detail by his Honour in Conlan, particularly at 304 and 305. In addition, his Honour then discussed the position of particular investors in the succeeding pages.

34 It is not necessary, I think, for me to reiterate that what his Honour so clearly set out there. It is enough, I think, to make the observation that the funds initially were placed into Graham Grubb's trust account, which was the only trust account operated by him, and that from time to time, payments were made out of that trust account both by way of advances or loans to people seeking them or by way of payments of purported interest to investors.

35 In any event, the result of the manner of operation of the fund was that at various times the trust account ran into deficit. It was essentially as a result of that feature that his Honour concluded that the funds of individual investors could not be traced to particular properties. The problem was compounded by the wholly inadequate form of financial record-keeping which was being maintained.

36 His Honour's conclusion accordingly was, again in broad terms, that the investors had no claim against the registered proprietors although they did have a right in personam. Even investors who had in some way obtained a registered mortgage (which I note is not the position here), because of the problem of tracing the funds and also because of considerations of unconscionability, were not able to make out an in personam claim against the registered proprietors capable of giving rise to an exception to the indefeasibility of the registered interest.

37 As his Honour found, when moneys of any investor were paid into the overdrawn trust account, the right to trace the funds was lost. Accordingly, while the investors who did not become the holder of a registered mortgage had an interest in the loan arrangements represented by the mortgage, it was a mere equity to which it was not possible to ascribe any proprietary characteristics. It was not a claim that could attach to the mortgage because of the loss of the right to trace.

38 The unregistered investors were therefore compelled to assert their claims in the general administration of Rowena Nominees Pty Ltd and Oakleigh.

39 Mr Aristei submits that here the investors advanced funds for the specific purpose of obtaining a registered interest against these particular properties and that accordingly, at the very least, they must have obtained and have an equitable right. It is further put on behalf of the third plaintiffs that Oakleigh was unjustly enriched as a result of this exercise, bearing in mind that the company never put any money into the loans which were secured over the properties.

40 Whether or not the position of the third plaintiffs in the present proceedings is to be distinguished in any relevant or meaningful way from the position of investors in Conlan v Registrar of Titles is something which I do not need to determine.

41 Mr Hawkins for the defendants contends, on the other hand, that the factual situation here is similar to that in Conlan and for that reason there is no serious question to be tried in respect of the third plaintiffs' claim. He points to the evidence before me, again to which I do not presently find it necessary to refer, but particularly contained in the affidavits of Mr Conlan as to the lack of accurate record-keeping and to the state of the trust account between 27 May 1997 when funds were initially advanced to Heartwood and 6 October of that year when the last of the money was advanced to Heartwood.

42 In substance his submission is that the situation here is not so materially different from that summarised by Owen J as to warrant enjoining the registered mortgagees from completing the sale of the property. He further submits that it is not the case that Oakleigh will be unjustly enriched as a consequence of the sale. He puts that submission on the basis that Oakleigh holds its interest on trust for all who have a claim against Rowena and Oakleigh. The mortgage simply secures the repayment of money. He says the exercise of the power of sale will result in a fund and that the liquidator of Oakleigh and Rowena will make an application to this court for orders and directions for the distribution of the fund and other funds that have arisen in like circumstances when appropriate. The submission then is that the third plaintiffs will have the opportunity at that point to argue that Owen J's decision in Conlan should be distinguished and that they are entitled to the proceeds of sale.

43 I think the primary point, or at least one of the primary points, made in relation to the findings of Owen J in Conlan is that which concluded that if the position of the plaintiffs could not attach by way of rights to the mortgage, it could not give rise to rights on discharge of the mortgage. That is a point to which I will return in a moment.

44 The outcome of Conlan, again in broad terms, was that because it was not possible to trace whose money was used for what purpose and in relation to what securities, his Honour concluded that the only equitable outcome was to treat all investors alike so that they would share the loss rateably. That, I think, summarises the defendants' position here insofar as on the basis of that proposition it is said first that there is no serious question to be tried, and secondly, that in any event damages would be an adequate remedy.

45 I think the tracing issue is something of a red herring so far as the present application is concerned. As Mr Aristei properly conceded in argument, if the third plaintiffs were to be precluded from recovering their investments and interest from the proceeds of sale because the moneys could not be traced in the relevant sense, then they would inevitably fail in their claim in relation to the land for the same reason.

46 I am prepared to accept that there is a serious question to be tried insofar as it concerns the equitable claim made by the third plaintiffs and I would not regard the tracing problem as excluding it. The critical factor here, I think, is whether damages would be an adequate remedy. As to that, the starting point is that the third plaintiffs' interest in the land is only as security for their investment moneys and interest.

47 There is some force in Mr Aristei's submission in this regard that any step done without authority of the beneficiaries of the constructive trust sought to be established must prejudice them. More specifically, in his submission, that the liquidator apparently intends that moneys recovered both from these sales and others would be used to meet all of the different claims from all of the different investors.

48 That would result in prejudice, it is submitted, to the third plaintiffs because on the basis of the constructive trust, were that upheld, they would obtain a proprietary interest safeguarding their investment. In other words, it would take their recourse out of the hands of the liquidator. However, the liquidator was appointed by the Court and I am informed it is his intention to seek the directions of the Court as to the payment out of moneys received by or as a result of the sale.

49 I accept the submission made by counsel for the defendants that if this Court were to make an order that the settlement proceeds be held in a separate fund and the liquidator were later to apply the proceeds of that fund only in accordance with the directions of this Court, the third plaintiffs would nonetheless have the opportunity to argue that Conlan should be distinguished and they specifically should be entitled to the full proceeds, so far as their interests extend, of the sale.

50 The conclusion to which I come therefore is that, subject to the making of an order by me that the proceeds of the sale be held in a separate fund to be distributed in accordance with the directions of this Court, damages would be an adequate remedy for the third plaintiffs. If they can then sustain an argument that their funds can be traced and they have an equitable right to the full return of their investment plus interest, such a distribution could be made. If not, then presumably they will fall to be dealt with in the same way as other investors.

51 For that reason I would refuse the interim injunction in respect of the claim by the third plaintiffs.

52 I should also say something about the plaintiffs' undertakings. First, I would not be prepared to accept the undertaking given by the first and second plaintiffs. The affidavit material referred to before me reveals their financial situation to be quite parlous, to use Mr Hawkins' word. Again without descending to particulars, it is apparent that the properties themselves are subject to, in each case, two subsequent mortgages and in one case a further caveat.

53 There is no indication that the first and second plaintiffs have any prospect of making payment of outstanding debts evidenced in the affidavit material before me. In these circumstances there is no reasonable basis to think there is any realistic prospect that compensatory damages and costs could be met out of any remaining equity in the property. So far as the third plaintiffs are concerned, I would not be prepared to grant an interim injunction in the absence of a satisfactory undertaking from them, and I note Mr Aristei expressly stated there was no intention that any undertaking would be given by them.

54 The application for an interim injunction pending the further hearing of the application for an interlocutory injunction pending trial will be dismissed.