//
© 2026 Zoe. All rights reserved.
Zoe is a legal information platform. Always consult the Federal Register of Legislation for authoritative text.
[2006] NSWCA 318
Court of Appeal (NSW)
2006-06-16
Giles JA, Hodgson JA, Santow JA, Gleeson CJ, Young CJ
Original judgment source is linked above.
Reported Decision : 60 ACSR 223 (2006) 24 ACLC 1576
CITATION: HIGHLAND v EXCEPTION HOLDINGS PTY LTD (in liquidation) and Another [2006] NSWCA 318
JUDGMENT OF: Giles JA at 1; Hodgson JA at 31; Santow JA at 34
CATCHWORDS: CORPORATIONS - Voidness or otherwise of a charge under s267 Corporations Act 2002 (Cth) given to two directors in their trustee or executorial capacity - Principles of subrogation - Whether estate subrogated to security in favour of the Bank paid out by monies advanced under the charge later rendered void under s267.
Companies and Securities Legislation (Miscellaneous Amendments) Act 1985 (Cth) para 259, Explanatory Memorandum LEGISLATION CITED: Corporations Act 2001 (Cth) s418A Corporations Act 2002 (Cth) s267, s588FJ(1)(b)
400 Lonsdale Nominees Pty Ltd v Southern Cross Airlines Ltd (in liquidation) (1993) 10 ACSR 739 Banque Financiere de la Cite v Parc (Battersea) Ltd [1998] 2 WLR 475 Boscawen v Bajwa [1995] 4 All ER 769 Butler v Rice [1910] 2 Ch 277; [1908-10] All ER Rep 1017 Burston Finance Ltd v Speirway Ltd [1974] 1 WLR 1648 Capital Finance Co Limited v Stokes [1969] 1 Ch 261 Challenger Managed Investments Ltd v Direct Money Corporation Pty Limited [2003] NSWSC 1072 Cheltnam & Gloucester plc v Appleyard [2004] EWCA Civ 291 CASES CITED: Cochrane v Cochrane (1985) 3 NSWLR 403 Conference Assn Ltd v Mainline Constructions Pty Ltd (1978) 141 CLR 335 David Securities Pty Ltd v Commonwealth Bank (1992) 175 CLR 353 Ghana Commercial Bank v Chandiram [1960] AC 732 Melsom v Vanpress Pty Ltd (1993) 3 ACSR 109 Orakpo v Manson Investments Ltd [1978] AC 95 Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 Registrar General v Gill (NSWCA, Gleeson CJ, Mahoney and Priestley JJA, 16 August 1994, unreported, BC9402892) Saffron Sun Pty Ltd v Perma-Fit Finance Pty Ltd (in liq) [2005] NSWSC 1317 Union Bank of Australia v Harrison, Jones and Devlin Ltd (1910) 11 CLR 492
Penelope Louise HIGHLAND (Appellant) PARTIES: EXCEPTION HOLDINGS PTY LTD (in liquidation) (First Respondent) Richard ALBARRAN (Second Respondent)
COUNSEL: G K BURTON, SC (Appellant) A G BELL, SC/ D A C ROBERTSON (Respondent)
SOLICITORS: Dibbs Abbott Stillman (Appellant) Henry Davis York (Respondent)
LOWER COURT JURISDICTION: Supreme Court - Equity Division
LOWER COURT JUDICIAL OFFICER: Young CJ in Eq
LOWER COURT MEDIUM NEUTRAL CITATION: [2005] NSWSC 677
IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40867/05 SC 3316/05
GILES JA HODGSON JA SANTOW JA
17 NOVEMBER 2006 Penelope Louise HIGHLAND v EXCEPTION HOLDINGS PTY LTD (in liquidation) and Another Judgment 1 GILES JA: The questions in the appeal were -
(a) whether a charge given over its assets by Exception Holdings Pty Ltd ("Exception") on 27 January 2005 to Messrs Julio Labraga and Philip Pomfret "as trustees for the estate of Richard Lawrence Highland" ("the charge") is and is taken always to have been void by the operation of s 267 of the Corporations Act 2002 ("the Act"); and
(b) if so, whether the estate of Mr Highland is entitled to be subrogated to the rights of Westpac Banking Corporation ("Westpac") under a charge given to it over the assets of Exception. 2 Young CJ in Eq decided both questions adversely to Mrs Penelope Highland, the administratrix of the will of Mr Richard Highland appointed following revocation on 11 October 2005 of the grant of probate to Messrs Labraga and Pomfret. For the reasons which follow, in my opinion his Honour's decisions were correct.
Facts 3 Mr Highland died on 27 March 2003. On 18 November 2003 probate of his will was granted to Messrs Labraga and Pomfret. Messrs Labraga and Pomfret had been co-directors of Exception with Mr Highland, and when the charge was given on 27 January 2005 were still directors of Exception. 4 Messrs Highland, Labraga and Pomfret had carried on business through Exception, in which each had a one-third interest. Westpac had provided an overdraft facility and a fixed loan facility to Exception, on the security of a charge over Exception's assets plus guarantees by Messrs Highland, Labraga and Pomfret, a limited guarantee by Mrs Highland and mortgages over the homes of Mr Highland and Mr Labraga. The Westpac charge was dated 3 July 2002, and was an "all moneys" security. 5 Exception's overdraft came to exceed its limit, and on 20 April 2004 Westpac advised that it was in default and enforcement action would commence. There were negotiations, and the overdraft was reduced by some payments, but Westpac brought recovery proceedings. 6 According to Mr Pomfret - "16. In or about late July-early August 2004 [Mr Labraga] and I agreed in our capacity as executors/trustees of the Estate of Mr Highland, after consultation with Mrs Highland, to advance funds as required (approximately $800,000) from the Estate's Westpac account to [Exception]. The advanced monies were to be used for the repayment of [Exemption's] Westpac loan. [Mr Labraga] and I agreed that the monies advanced from the Estate's Westpac account were to be secured by way of a registered fixed and floating charge. There were at this time discussions between [Mr Labraga] and I as to whether the charger for the fixed and floating charge should be the Plaintiff or Exception Finance Pty Limited. It was clearly agreed between [Mr Labraga] and I that the loan from the Estate's Westpac account would be secured by a fixed and floating charge." 7 On 1 September 2004 Mr Pomfret sent an e-mail to Mrs Highland, which included (4 Bellevue Street, Chatswood being Mr Highland's home) - "Westpac has indicated that it will take whatever action it considers necessary to ensure that the current indebtedness of Exception Holdings Pty Ltd is repaid in full. In particular, it has indicated that it would be prepared to: 1. Enforce its mortgage over 4 Bellevue Street, Chatswood and the personal guarantee given by you if required; and
A void charge? " 267 Charges in favour of certain persons void in certain cases
(1) Where: (a) a company creates a charge on property of the company in favour of a person who is, or in favour of persons at least one of whom is, a relevant person in relation to the charge; and
(b) within 6 months after the creation of the charge, the chargee purports to take a step in the enforcement of the charge without the Court having, under subsection (3), given leave for the charge to be enforced; the charge, and any powers purported to be conferred by an instrument creating or evidencing the charge, are, and are taken always to have been, void.
(2) Without limiting the generality of subsection (1), a person who: (a) appoints a receiver of property of a company under powers conferred by an instrument creating or evidencing a charge created by the company; or
(b) whether directly or by an agent, enters into possession or assumes control of property of a company for the purposes of enforcing a charge created by the company; is taken, for the purposes of subsection (1), to take a step in the enforcement of the charge.
(3) 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.
(7) In this section: chargee , in relation to a charge, means: (a) in any case - the holder, or all or any of the holders, of the charge; or
(b) in the case of a charge that is an agreement to give or execute a charge in favour of a person or persons, whether upon demand or otherwise - that person, or all or any of those persons. officer , in relation to a company, includes, in the case of a registered foreign company, a local agent of the foreign company.
relevant person , in relation to a charge created by a company, means: (a) a person who is at the time when the charge is created, or who has been at any time during the period of 6 months ending at that time, an officer of the company; or
(b) a person associated, in relation to the creation of the charge, with a person of a kind referred to in paragraph (a)." 17 Exception gave the charge to Messrs Labraga and Pomfret. Each of Messrs Labraga and Pomfret was at the time a director of Exception. Within six months after the creation of the charge its holders appointed Mr Albarran as receiver and manager, and so took a step in the enforcement of the charge. Leave of the Court was not obtained. Why did s 267 not apply, with the result that the charge was, and was taken always to have been, void? 18 Mrs Highland submitted that s 267 did not apply to a charge created in favour of an officer of the chargor company when that officer was at the time a legal personal representative. She said that Messrs Labraga and Pomfret were not acting in their personal capacity in receiving the charge, but stood in the shoes of Mr Highland and exercised the powers of his estate. Mr Highland could not be a relevant person, because he was dead, and Messrs Labraga and Pomfret were not relevant persons because of their representative capacity. (Young CJ in Eq found that, despite the way they were referred to in the deed of loan and the charge, at all material times they were executors rather than trustees.) Thus there was no relevant person for the purposes of s 267(7), or if there was the charge was not in their favour. 19 A similar, although perhaps not identical, submission was put to Young CJ in Eq. His Honour recorded the submission that Messrs Labraga and Pomfret "were merely trustees of the estate of Mr Highland", and that it was "a mere coincidence" that they, being directors of Exception, also happened to be the persons who represented the estate. He said that counsel for Mrs Highland encouraged him to read the words "a company creates a charge … in favour of a person" as if they were "a company creates a charge … for the benefit of a person", so that where the relevant persons were trustees of an estate s 267 did not apply. His Honour referred to discussions of the words "in favour" in Melsom v Vanpress Pty Ltd (1993) ACSR 109 at 113 and cases there cited, said that they were very wide, and said - "[40] In the present case Mr Pomfret and Mr Labraga are involved as insiders rather than outsiders, as indeed is Mr Highland and his estate and there are mutual obligations under the equitable doctrine of contribution which affect or advantage all of them. It also seems to me that when one sees that the company has created the charge, that the charge is in favour of Mr Labraga and Mr Pomfret, albeit as executors of Mr Highland's estate, that the company has created a charge on the property in favour of persons who were relevant persons either because Mr Labraga or Mr Pomfret are the named chargees or because they represent the estate of Mr Highland." 20 It is not entirely clear, with respect, whether by what his Honour said about involvement as insiders rather than outsiders he meant that the charge was in favour of Messrs Labraga and Pomfret, or the estate of Mr Highland, because they benefited; and the second sentence of this paragraph, it seems an alternative basis for the decision, appears to do no more than state a conclusion on further alternative bases. 21 The submission as developed in this Court went as follows. Once Messrs Labraga and Pomfret had decided that the estate should provide funds to pay out Westpac, it was proper if not obligatory that they obtain security for the estate. In providing that security no offence was done to the purpose of s 267, relevantly to prevent Messrs Labraga and Pomfret as directors of Exception from preferring their interests over the interests of unsecured creditors, because what was protected was the interests of the estate of Mr Highland which they happened to represent. The estate of Mr Highland did not have a separate legal personality, and Messrs Labraga and Pomfret as executors of Mr Highland's will held his estate "in autre droit, that is in the right of [their] testator" and representing "the person of the testator": Union Bank of Australia v Harrison, Jones and Devlin Ltd (1910) 11 CLR 492 at 515 per Isaacs J. It mattered not that an incidental benefit might flow to them (for example, release of the mortgage security and guarantees they had provided). 22 There was a link in the language of s 267 between the person in whose favour a charge was created and the chargee under the charge, seen also in s 267(7) with its added reference to the holder of a charge as encompassing the person in whose favour the charge was created (at least if that person remained the holder of the charge at the time the step in the enforcement of the charge was purportedly taken). Textually, s 267 spoke of the person named as chargee, and it did not matter that that person was named in a representative capacity as legal personal representative (in the present case) or as trustee (in other cases). Similarly," in favour of" in s 267(1) and s 267(7) referred to the identity of the person to whom the charge was given, and not to any benefit received or receivable by the person. 23 The purpose of the predecessor of s 267, identified in the Explanatory Memorandum to the Companies and Securities Legislation (Miscellaneous Amendments) Bill 1985, paras 258-263, was to add to the provisions concerning fraudulent dispositions and avoidance of preferences in order to cope with - " … an apparent practice whereby insolvent companies, shortly before going into liquidation, grant a debenture or charge to principals associated with the company (usually directors) to secure loans or other indebtedness with the consequence that receivers appointed under those charges obtain control of the company's books. In many cases, the charge will be invalid pursuant to the abovementioned Bankruptcy Act provisions. However, the liquidator may have insufficient funds to apply to a court to set aside the invalid charge and require the return of the books." 24 Section 267 was intended to cope with this situation - "by reversing the onus of proving that a charge involves a fraudulent disposition or preference, where it has been given in favour of company officers and an attempt is made to enforce it within 6 months of its creation." 25 At least so far as s 267 was concerned, the charge was valid unless and until the chargee purported to take a step in its enforcement without the leave of the Court. It did not proscribe creation of a charge in favour of a relevant person, or avoid a charge simply because it was created in favour of a relevant person. Avoidance came if the chargee purported to take a step in the enforcement of the charge without leave of the Court, within six months after its creation. Section 267 prevented enforcement of a charge of a particular kind within a particular period, albeit with the heavy sanction of avoidance, alleviated by availability of leave of the Court. As was said by Hayne J in 400 Lonsdale Nominees Pty Ltd v Southern Cross Airlines Ltd (in liquidation) (1993) 10 ACSR 739 at 745, attention was directed by the legislation "not only to the relationship between charger and chargee but also to the nature and quality of the conduct of the chargee: for it is that which leads to the avoidance". 26 Section 267 went beyond the control of books following liquidation, but the mischief to which it was directed existed if the officer took the charge in a representative capacity as well as if the officer took it in his own right. At the level of the control of books following liquidation, the officer (if chargee at the time of enforcement) could divert control of the books. At the level of advantage or benefit, the officer (if chargee at the time of enforcement) could advantage or benefit himself or could advantage or benefit the estate or the trust (as arguably occurred here - it is not necessary to decide, the possibility is illustrated). What was described in the Explanatory Memorandum as reversal of the onus of proof was really not that, since s 267(3) provided its own regime for the grant of leave, but the availability of the regime meant that there was no reason to read down the application of s 267 according to its terms. If the chargee seeking to take a step in the enforcement of the charge was the person in whose favour the charge was created, and held the charge in a representative capacity, that would be a matter relevant to whether leave was given. 27 In my opinion, therefore, the charge was created in favour of relevant persons even though it was given to Messrs Labraga and Pomfret "as trustees for the estate of Richard Lawrence Highland".
Subrogation? 28 Young CJ in Eq accepted that, subject to what followed, "the estate" was entitled to be subrogated to Westpac's charge. His Honour held, however, that subrogation did not assist the estate because it had received the security for which it bargained; he said that the charge was valid when it was created, but became void when "the person having the benefit of the charge was lax in not taking the appropriate steps". 29 The argument in this Court ranged more widely, extending to the impact of registration requirements upon entitlement to subrogation, to the continued validity of the Westpac charge, and to whether the appointment of Mr Albarran as receiver and manager could be upheld when he had been expressly appointed pursuant to the power in the charge. It is unnecessary to enter upon these matters. For the reasons given by Santow JA, which I have had the advantage of reading in draft, the estate of Mr Highland was not subrogated to the Westpac charge.
Orders 30 In my opinion, the appeal should be dismissed with costs. 31 HODGSON JA: In my opinion, the appeal should be dismissed. 32 On the question of the effect of s.267 of the Corporations Act, I agree with the reasons of Giles JA. 33 On the question of subrogation, I agree with the reasons of Santow JA. 34 SANTOW JA: INTRODUCTION This appeal concerns the voidness or otherwise of a charge under s267 of the Corporations Act 2002 (Cth). It was given by a corporation, Exception Holdings Pty Limited, in favour of two of its directors, Mr Julio Labraga and Mr Philip Pomfret. They were described in the charge as being " trustees for the estate of Richard Lawrence Highland ". The principal beneficiary of that estate, Mrs Penelope Highland as appellant, seeks to rely on that trustee and executorial capacity to avoid the application of s267. 35 Section 267 was held to apply and to have been triggered when the charge was enforced (by appointment of receiver) within six months of its creation without the chargee seeking leave of the Court to do so, as required by s267(3). If, notwithstanding the directors taking the charge in their capacity as trustees of the estate, that charge were thereby rendered void, there arises a further question. It is whether the estate was subrogated to security in favour of Westpac Banking Corporation paid out by monies advanced under the charge later rendered void under s267. If subrogation did apply, there are three further issues. These are (a) whether the subrogated security was required to be re-registered by reason of a memorandum of its satisfaction being filed, and (b) whether a receiver appointed under the charge later rendered void can be deemed appointed under the subrogated security, and (c) the validity of the subrogated security under s588FJ(1)(b) of the Corporations Act. 36 The circumstances briefly were these. The co-executor and trustee of the estate Mr Labraga (the Highland estate), purporting to act on behalf of himself and his co-executor and co-trustee Mr Pomfret, took a fixed and floating charge for the benefit of that estate. It was given by Exception Holdings Pty Ltd (now in liquidation), the first respondent in this appeal. Exception Holdings was at the time one-third owned by the estate (via a discretionary trust whose beneficiaries included Mr Highland's widow Ms Penelope Highland who is the appellant). The other two-thirds were owned by Mr Labraga and Mr Pomfret in their own right. Importantly, both Mr Labraga and Mr Pomfret were directors of the company, as had been the deceased Mr Highland. The charge was to secure a loan by the estate to Exception Holdings to enable it to discharge a pre-existing secured debt owed to its bankers, Westpac Banking Corporation ("Westpac"). It was secured to Westpac by a fixed and floating charge. One consequence of that discharge was to discharge guarantees of that indebtedness jointly given by Messrs Labraga, Pomfret and the deceased. 37 Subsequently, and within six months after the creation of the charge and without leave of the Court, the estate purported to appoint a receiver to Exception Holdings pursuant to its charge. The question this poses is the first of the two central issues of this appeal. It is whether s267 of the Corporations Act 2001 ("the Act") thereby renders void the estate's charge. This is on the basis that the charge, in terms of s267(1), was in favour of a "relevant person" being an officer of the company in circumstances where Messrs Labraga and Pomfret, though acting as trustees and executors, were also directors of that company. If s267 applies notwithstanding that status, it is not otherwise disputed that s267 applies to render void the estate's charge. The further question is then whether the estate was subrogated to Westpac's security, because discharged by monies advanced by the estate on the security thereby rendered void, with the further issues I have earlier described. 38 Essentially this appeal challenges the determination of the trial judge, Young CJ in Eq, that: (a) as decided in his judgment of 30 June 2005, the estate's charge was rendered void by s267(1) of the Act, and (b) as decided in his judgment of 29 September 2005, the estate was not entitled to be subrogated to the security taken by Westpac. 39 In the event that the challenge fails on the application of s267 but succeeds as to subrogation, there remain further issues, namely: (a) the implications of there being any requirement to register the subrogated security, having regard to the fact that upon its discharge a memorandum of satisfaction was filed, (b) whether such charge was itself rendered void by s588FJ of the Act as a floating charge created by a company now being wound up in insolvency, within the period specified in s588FJ(1)(b), and (c) whether the receiver purportedly appointed under the estate's charge rendered void by s267 of the Act could be taken to be appointed under the subrogated security without any further appointment being necessary. 40 The following elaboration of the salient facts is essentially undisputed.
SALIENT FACTS - ELABORATION 41 The late Mr Highland and the defendants below, Mr Labraga and Mr Pomfret entered into business together via the establishment of Exception Holdings Pty Ltd ("Exception Holdings"). Each owned a one-third interest. At all relevant times Mr Pomfret and Mr Labraga were directors of Exception Holdings. 42 Mr Highland held his interest via a discretionary trust, which had a number of beneficiaries including his widow, Mrs Penelope Highland (the appellant). The trustee was Nowhere in Particular Pty Ltd. Mr Pomfret and Mr Labraga were directors of the trustee company. 43 Mr Highland died on 27 March 2003. Upon his death, the estate passed to Nowhere in Particular Pty Ltd, to be held as part of the trust. In addition to being directors of the trustee, Mr Labraga and Mr Pomfret were also the executors of Mr Highland's will and they duly took out probate after his death. 44 In 2002 Westpac had advanced money to Exception Holdings. 45 The security for the Westpac loan had included not only a fixed and floating charge over Exception Holdings' assets but also a joint unlimited guarantee by Mr Pomfret, Mr Labraga and the late Mr Highland (now the estate), a limited guarantee by Ms Highland, and registered mortgages over homes owned by the late Mr Highland and Mr Labraga. At the time of the later advance of $808,000 from the Highland estate made in October 2004 to Exception Holdings to discharge the bank debt (see below), Westpac had commenced proceedings to recover the debt. 46 Before then, in early July 2004, Mr Labraga, Mr Pomfret and Ms Highland met and discussed an arrangement whereby the Highland estate would make repayments on the Exception Holdings' debt. It was assumed that some security would be given with respect to the payment. It appears it was anticipated that the estate would be able to claim rights of contribution from Mr Labraga and Mr Pomfret, each for one-third of the moneys paid. 47 On 1 September 2004 Mr Pomfret sent an email to Ms Highland confirming an advance by the estate of $800,000 to Exception Holdings to pay out Exception Holdings' indebtedness to the Bank, linked to security over the mortgage book held by Exception Holdings. On the same day Mr Pomfret also sent Ms Highland a letter stating that the advance would be repayable within six years and be secured by a first fixed and floating charge over the assets of an affiliate Exception Services Pty Ltd to the estate. Ms Highland read and signed both documents. 48 On 19 October 2004, $808,000 was transferred from the estate bank account to the Exception Holdings' account and then to the Bank. On 24 November 2004, a further $385,000 was transferred. Mr Labraga also paid substantial moneys on behalf of the company. 49 On 27 January 2005 a loan agreement and a deed of fixed and floating charge (the "Charge Document") were produced in favour of the estate of Mr Highland. On 3 March 2005 the Charge Document was registered with ASIC. 50 The Charge Document was described as being made between Mr Labraga and Mr Pomfret as trustees for the Highland estate (the chargee) and Exception Holdings (the chargor). The deed was executed with Mr Pomfret essentially signing for all parties; see primary judgment at [11] and [12]. 51 The repayment of the Westpac advance personally benefited Messrs Labraga and Pomfret in that it relieved them of their liability to Westpac pursuant to their guarantees. 52 At the same time Messrs Pomfret and Labraga incurred a liability to the estate for contribution in respect of the estate's repayment of the Westpac loan. 53 The granting of the charge by the first respondent in January 2005 benefited Labraga and Pomfret in that it secured the repayment to the estate of its advance to the first respondent and therefore reduced the likelihood of the estate seeking contribution from Messrs Pomfret and Labraga. 54 Clause 18.1 of the Charge Document allowed the chargee to appoint a receiver in the event of default. Mr Albarran was appointed as receiver purportedly under the estate's charge by an undated document agreed to be as from 30 May 2005 (Blue, 51). Mr Pomfret signed this document on behalf of the Highland estate. 55 Exception Holdings was wound up by an order by Nicholas J on 26 May 2005. Mrs Highland is the administratrix appointed following the revocation of the grant of probate to the executors Mr Pomfret and Mr Labraga. The Appellant was so appointed by order of Young CJ in Eq (11 October 2005).
The Statute 56 It is convenient here to set out the terms of s267 of the Act. s267 Charges in favour of certain persons void in certain cases
(a) a company creates a charge on property of the company in favour of a person who is, or in favour of persons at least one of whom is, a relevant person in relation to the charge; and (b) within 6 months after the creation of the charge, the chargee purports to take a step in the enforcement of the charge without the Court having, under subsection (3), given leave for the charge to be enforced; the charge, and any powers purported to be conferred by an instrument creating or evidencing the charge, are, and are taken always to have been, void.
(2) Without limiting the generality of subsection (1), a person who:
(a) appoints a receiver of property of a company under powers conferred by an instrument creating or evidencing a charge created by the company; or (b) whether directly or by an agent, enters into possession or assumes control of property of a company for the purposes of enforcing a charge created by the company; is taken, for the purposes of subsection (1), to take a step in the enforcement of the charge.
(3) 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.
(4) Nothing in subsection (1) affects a debt, liability or obligation of a company that would, if that subsection had not been enacted, have been secured by a charge created by the company.
(5) Nothing in subsection (1) operates to affect the title of a person to property (other than the charge concerned or an interest in the charge concerned) purchased for value from a chargee under a charge, from an agent of a chargee under a charge, or from a receiver appointed by a chargee under a charge in the exercise of powers conferred by the charge or implied by law, if that person purchased the property in good faith and without notice that the charge was created in favour of a person who is, or in favour of persons at least one of whom is, as the case may be, a relevant person in relation to the charge.
(6) The onus of proving that a person purchased property in good faith and without notice that a charge was created as mentioned in subsection (5) is on the person asserting that the property was so purchased.
(7) In this section: "chargee" , in relation to a charge, means: (a) in any case - the holder, or all or any of the holders, of the charge; or (b) in the case of a charge that is an agreement to give or execute a charge in favour of a person or persons, whether upon demand or otherwise - that person, or all or any of those persons.
"officer", in relation to a company, includes, in the case of a registered foreign company, a local agent of the foreign company.
"relevant person" , in relation to a charge created by a company, means: (a) a person who is at the time when the charge is created, or who has been at any time during the period of 6 months ending at that time, an officer of the company; or (b) a person associated, in relation to the creation of the charge, with a person of a kind referred to in paragraph (a).
The Primary Judgment 57 The appeal relates to two elements of decisions by Young CJ in Eq on 30 June 2005 and 29 September 2005. (a) The decision (made on 30 June 2005) that the charge dated 27 January 2005 was rendered void by s267(1) of the Act, (b) The decision (made on 29 September 2005) that any oral agreement to create a charge, or equitable charge, in about September 2004 merged in the written charge dated 27 January 2005 (that part is conceded) and that the cross-claimant (Mr Pomfret) was not entitled to be subrogated to the security taken by the prior chargee (the Bank) which was discharged out of funds advanced by the estate for that purpose.
Decision of 30 June 2005 on s267 of the Act 58 Exception Holdings sought an order under s418A, Corporations Act 2001 (Cth) that the appointment of Richard Albarran as receiver and manager was invalid (the appointment being a step in enforcement of the charge dated 27 January 2005 that was alleged to be invalid under s267), and consequential orders. 59 His Honour considered the elements of s267, including the definition of "relevant person" in s267(7): [35]. 60 A key issue was whether the charge was "in favour of" such a "relevant person". His Honour approved the survey of authorities by Malcolm CJ in Melsom v Vanpress Pty Ltd (1990) 3 ACSR 109 at 113, endorsing the conclusion that "in favour of" covers a very wide ambit: [38]. 61 His Honour noted that if circumstances were such that the executor was "completely independent" then the Court might view the charge as not "in favour of" that person or entity: [39]. In the present case however, Mr Labraga and Mr Pomfret were "insiders rather than outsiders" and mutual obligations under the equitable doctrine of contribution would affect or advantage all three parties (Mr Labraga, Mr Pomfret and Mr Highland's estate). As such, Mr Pomfret and Mr Labraga were "relevant persons" when the charge was created either in their own capacities and/or because they represented the estate of Mr Highland: [40].
Decision of 29 September 2005 - subrogation 62 Prima facie, subrogation was available in respect of the charge in favour of Westpac as the estate paid out the indebtedness to Westpac in return for a charge over the assets of Exception Holdings: [52]. His Honour noted that in circumstances of convoluted mortgage transactions, subrogation may not be available, but that no such circumstances existed in this case: [58]-[59]. 63 His Honour applied English authority in support of the proposition that a lender cannot claim subrogation if it has already obtained all the security bargained for (Cheltnam & Gloucester plc v Appleyard [2004] EWCA Civ 291): [62]. The English cases (in particular Burston Finance Ltd v Speirway Ltd [1974] 1 WLR 1648) distinguish between receiving a valid charge that subsequently becomes void (for example via lack of registration) and receiving a charge that is void from the start: [64]. In this case, the estate received the charge they had bargained for and the charge was enforceable when created, although it was later deemed void ab initio via s267. His Honour concluded in those circumstances that subrogation could not assist the estate: [70].
DISPOSITION Application of s267(1) of the Act 64 Section 267(1) of the Corporations Act and the attendant definition of "relevant person" contained in s267(7) are quoted earlier. 65 Section 267, read literally, applies to the present circumstances. Thus the charge was "in favour of" Messrs Labraga and Pomfret, both directors of the charger, though describing themselves as trustees for the estate and advancing monies on behalf of the estate. They subsequently caused the charge to be enforced within six months of its creation without seeking court leave. 66 The question is whether that literal reading should give way to an interpretation which relies on Messrs Labraga and Pomfret taking the charge as trustees so as to fall outside s267. To answer that question requires some exegesis of s267. 67 Section 267 does not invalidate a charge created in favour of directors of the chargor unless also the chargee purports to take a step in its enforcement within six months of creation and does so without obtaining court leave. Under s267(3), the court may give leave for the charge to be enforced if satisfied as to two matters: "(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". 68 Where s267 avoids the security, the actual debt previously secured becomes unsecured but it is not otherwise affected. 69 The purpose of s267 is explained in para 259 of the Explanatory Memorandum to the Companies and Securities Legislation (Miscellaneous Amendments) Act 1985 (Cth). The provision is aimed at the mischief of a failing company giving a charge to an officer so as to be able to have a friendly receiver appointed in such a way as to impede a liquidator seeking to obtain the company's books. 70 The appellant's written submissions made much of the reason for obtaining the security; that the estate was in great jeopardy of having its assets exposed to immediate enforcement proceedings by an external lender when the principal debtor, Exception Holdings, was in default to Westpac. Thus at para 5 of those submissions it is said that "Section 267 operates in respect of the charge not the advance, and once the decision had been taken to commit the estate's assets in this fashion it was clearly the duty of the executors, in their representative capacity, to obtain proper security for the estate". 71 But this misses the point of s267. The vice was not in taking security. It was in enforcing it within six months without court leave, as I explain below. 72 It was submitted by the respondents that repayment of the Westpac advance personally benefited Messrs Labraga and Pomfret in that it relieved them of their liability to Westpac pursuant to their guarantees. At the same time Messrs Pomfret and Labraga incurred a liability to the Estate for contribution in respect of the Estate's repayment of the Westpac loan. The granting of the charge by the first respondent in January 2005 benefited Labraga and Pomfret in that it secured the repayment to the Estate of its advance to the first respondent and therefore reduced the likelihood of the Estate seeking contribution from Messrs Pomfret and Labraga. 73 But this too misses the point of s267. The section is not directed in its terms to personal benefit to directors, though its operation may have a prophylactic effect in that regard. 74 I shall assume for the purpose of the argument that the appellant's proposition is correct, namely that it was the duty of the executors in their representative capacity to obtain as trustees for the estate proper security for the estate from Exception Holdings. That, however, is not the point. The mischief at which the section is aimed is not eliminated by the fact that a charge is given in favour of a director of the charger who takes its benefit as executor. Once Messrs Labraga and Pomfret take enforcement steps without first seeking court approval, they thereby gain the capacity to have a friendly receiver appointed in such a way as for example to impede a liquidator seeking to obtain the company's books. Were the Court satisfied that there was no such intent to interfere and assuming that it were otherwise just and equitable to do so, then so long as the company were solvent immediately after the creation of the charge the Court's leave, though discretionary, if sought could ordinarily have been anticipated. It was not sought, with the result that the safeguards that attend such an exercise of curial discretion were not engaged. 75 Moreover, what is at issue here is not the receipt of a payment such as may constitute a preference pursuant to s122 of the Bankruptcy Act 1966. That was the subject of Melsom v Vanpress Pty Ltd (supra). Rather it concerns the taking of security with its concomitant security powers now vested in the two directors of the chargor, Messrs Labraga and Pomfret. It is unreal to suppose that the mischief no longer exists to which s267 is directed because Messrs Labraga and Pomfret take enforcement steps in their capacity as executor in each case. They may still take advantage of their control over the security with its attendant rights over Exception Holdings, so as to disadvantage other creditors lacking that advantage. 76 It was said that because the executors had a duty to obtain such security, they would be denied the capacity to fulfil that duty in a fully effective fashion by this interpretation of s267. I do not agree. They could have refrained from enforcing within six months or else sought court leave to do so. They could, before taking the charge have resigned as directors and had others replace them. Or they could have resigned as executors and had others replace them to take the charge. Accordingly, arguments based upon averting adverse consequences for the estate by taking the security or enforcing it are beside the point. 77 It is necessary to consider paragraph (b) of the definition of "relevant person" in s267(7). That definition, in relation to a charge created by a company, catches "a person associated, in relation to the creation of the charge, with an officer of the company". 78 The appellant correctly points out that Messrs Labraga and Pomfret stood in the shoes of the deceased (Mr Highland) and exercised the powers of his estate. These were powers which Mr Highland exercised while he was alive. Because Mr Highland had ceased, by death some eighteen months before September 2004, to have a governance or ownership stake in the chargor there could be no association through Mr Highland as a relevant officer. 79 That still leaves to be considered whether there was an association between the relevant persons qua directors of Exception Holdings on the one hand and qua executors of the estate on the other, insofar as they acted in concert in granting the charge and obtaining its benefit. It will be apparent that we are here dealing with the self-same Messrs Labraga and Pomfret, differentiated only because of their different capacities. That may be said to be wholly artificial. But it is the differentiation pressed for by the appellant. Were that differentiation justified, a proposition I reject, the question of such an association could arise. What follows is on the assumption of that differentiation. 80 The primary judge described the mode of execution as peculiar and bizarre in these terms: "12 The document was executed in a very peculiar way. It was said to be executed as a deed in Sydney by Julio Labraga and Philip Pomfret as trustees for the estate of Richard Lawrence Highland, but Mr Labraga was said to sign by Mr Pomfret, his attorney. Mr Pomfret signed on his own behalf. The plaintiff company signed by Mr Pomfret, who signed as director/secretary and also signed for Julio Labraga acting as Mr Labraga's attorney under power. There is no doubt that Mr Labraga did give Mr Pomfret a general power of attorney of 28 June 2002, but that power of attorney did not confer any authority at all on Mr Pomfret to sign, either for Mr Labraga in his capacity as a trustee, or as Mr Labraga in his capacity as a director of Exception Holdings Pty Ltd. The effect of the bizarre execution is not however a matter that is before me for decision in the present proceedings." (Red, 30) 81 However, this very clearly points to Messrs Pomfret and Labraga acting in concert in their respective capacities; on the one hand to give the charge and on the other to take its benefit. 82 Thus it could be said that Mr Pomfret, acting as director/secretary in causing Exception Holdings to execute the charge, was an associate of himself and Mr Labraga as executors and trustees in receiving the benefit of the charge. This is because they clearly were acting in concert pursuant to s15(1)(a) of the Corporations Act in the granting and taking of the security. None of the exclusions from s15 found in s16 apply. Clearly enough the association, if it be found, is "in relation to the creation of the charge". 83 To this it may be said that it is quite artificial to differentiate between Mr Pomfret (or Mr Pomfret and Mr Labraga) as director on the one hand and on the other Messrs Pomfret and Labraga as executor and trustee, when it comes to determining whether they were, in their different capacities, capable of acting in concert. But that differentiation is no more artificial than that sought to be made in construing s267(1) with the definition of "relevant person"; that is, to construe "an officer of the company" as if it were qualified by words such as "acting in that capacity", so as to exclude an officer who claims to take the benefit of a charge in some other capacity. 84 It is not necessary to resolve this question definitively since on either basis s267 applies. I would moreover conclude that s267 would apply even were there no particular advantages to Messrs Labraga and Pomfret from the loan transaction by the estate made possible by the charge. I refer here to the fact that but for repaying Westpac's loan, their guarantees would not have been discharged and the likelihood of any call for contribution reduced. 85 The test for applying s267 is not whether the charge favours the company's directors but whether it is in their favour. An interpretation to the contrary would lend itself to ready abuse. If the argument holds good that it is necessary for the charge to be in favour of a person in his or her capacity as a director of the company granting the charge, then it would equally follow that the section would be readily avoided if, for example, the director concerned took the benefit of the charge for the benefit of a discretionary trust. While the latter may be an associate of that director so as still to be caught, avoidance of that outcome might still be contrived. It is only by giving a purposive reading to s267, which here accords with its literal terms, that potential anomalies of this kind are avoided. 86 Indeed that example highlights the purpose of s267. It recognises that a charge in favour of directors of the charge giving company, whatever the capacity in which they take it but nonetheless as insiders, gives them, through early exercise of its enforcement powers, the capacity to take unfair advantage of their favoured position over other creditors, particularly those unsecured and any liquidator representing their interests. Obtaining the Court's leave to enforce is the safeguard against such abuse. With leave there is then no constraint on early enforcement. These directors, whether from lack of awareness or otherwise, failed to seek that leave, thereby losing what would otherwise have been perfectly good security for the estate.
Conclusion 87 The primary judge was correct in concluding that s267 did apply to render the charge void under s267 of the Corporations Act.
Subrogation 88 The issue here is whether, as concluded by the primary judge in his second judgment of 29 September 2005, the estate was not entitled to be subrogated to the security taken by Westpac as a prior chargee and discharged out of the funds advanced by the estate for that purpose. Only if the answer to that question is in the affirmative do I have to consider related questions: (a) would such subrogated Westpac charge fail under s266 as against the liquidator, because a memorandum of satisfaction lodged against it rendered it unregistered, or does it remain registered notwithstanding, (b) whether the Westpac charge was itself rendered void by s588FJ of the Act as a floating charge created by a company now being wound up in insolvency, within the period specified in s588FJ(1)(b), and (c) is the existing receiver appointed under the estate's failed charge to be taken to be appointed under the subrogated Westpac charge? 89 The primary judge concluded that subrogation was not available, essentially on the basis that a lender cannot claim subrogation if it had already obtained all the security bargained for. I agree with that conclusion and the basis for it. I explain my reasons below. 90 Subrogation is a remedy that involves the substitution of one party for another with respect to rights against third parties. It is the "process by which one party is substituted for another so that he may enforce that other's rights against a third party for his own benefit" (Charles Mitchell, "The Law of Subrogation", 1994 at 3). 91 Subrogation may be of a contractual character (as where an insurance contract makes specific provision for subrogation between the insured and insurer) or, as here, of an equitable nature. As a creature of equity subrogation does not depend on contract (see for example Australasian Conference Assn Ltd v Mainline Constructions Pty Ltd (1978) 141 CLR 335 at 348). Nonetheless parties may contract on terms which exclude or modify what would otherwise be their equitable right of subrogation; see for example O'Day v Commercial Bank of Australia Ltd (1933) 50 CLR 200 at 213. If a party takes substitute security to that discharged, there is ordinarily no occasion for subrogation to operate. 92 Equitable subrogation may arise with respect to mortgage and security arrangements. It has been said that "[I]t is not open to doubt that where a third party pays off a mortgage he is presumed, unless the contrary appears, to intend that the mortgage shall be kept alive for his own benefit": Ghana Commercial Bank v Chandiram [1960] AC 732 at 745; Cochrane v Cochrane (1985) 3 NSWLR 403 at 405 (emphasis added). In Burston Finance Ltd v Speirway Ltd. (in liq) (supra) Walton J described the typical case of subrogation in the following general terms (at 1652): "What is the basis of the doctrine of subrogation? It is simply that, where A's money is used to pay off the claim of B, who is a secured creditor, A is entitled to be regarded in equity as having had an assignment to him of B's rights as a secured creditor…It finds one of its chief uses in the situation where one person advances money on the understanding that he is to have certain security for the money he has advanced, and, for one reason or another, he does not receive the promised security." 93 The earlier emphasised words, while not repeated by Walton J in this necessarily general statement become relevant in the present case.
The doctrinal basis of equitable subrogation 94 Although subrogation is undoubtedly a recognised remedy, the doctrinal basis for equitable subrogation in Australian law remains unsettled. In the United Kingdom, the House of Lords has expressly established that subrogation is a remedy premised on the prevention of unjust enrichment. This was settled in Banque Financiere de la Cite v Parc (Battersea) Ltd [1998] 2 WLR 475, where Lord Hoffmann said (at 487-488): "It is important to remember that, as Millett LJ pointed out in Boscawen v Bajwa [1996] 1 WLR 328, 335, subrogation is not a right or cause of action but an equitable remedy against a party who would otherwise be unjustly enriched. It is a means by which the court regulates the legal relationships between a plaintiff and a defendant or defendants in order to prevent unjust enrichment . When judges say that the charge is 'kept alive' for the benefit of the plaintiff, what they mean is that his legal relations with the defendant who would otherwise be unjustly enriched are regulated as if the benefit of the charge had been assigned to him. It does not by any means follow that the plaintiff must for all purposes be treated as an actual assignee of the benefit of the charge and, in particular, that he would be so treated in relation to someone who would not be unjustly enriched." [emphasis added] 95 Prior to Banque Financiere, an even broader basis for application of the doctrine had been articulated namely "reason and justice". For example, in Orakpo v Manson Investments Ltd [1978] AC 95, Lord Salmon said (at 110): "The test as to whether the courts will apply the doctrine of subrogation to the facts of any particular case is entirely empirical. It is, I think, impossible to formulate any narrower principle than that the doctrine will be applied only when the courts are satisfied that reason and justice demand that it should be." 96 More recently, in Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 291 (15 March 2004) (CA), Neuberger LJ affirmed that the doctrinal foundation for equitable subrogation was indeed unjust enrichment, stating the following as the second of thirteen principles summarising the law of subrogation in England (at 33): "Secondly, subrogation is a remedy primarily aimed at preventing unjust enrichment. That is clear from what was said by Lord Diplock in Orakpo -v- Manson Investments Limited [1978] AC 95 at 104C-D, and it has been recently repeated by Millett LJ in Boscawen at 335C, and by Lord Hoffman and by Lord Clyde in Banque Financiere respectively at 231G-H, and 237D-E." 97 Banque Financiere has not been generally accepted in Australia on this point. Therefore the second principle stated by Neuberger LJ cannot be taken as a statement of Australian law (cf Port of Brisbane Corporation v ANZ Securities Ltd [2001] QSC 466 (at 70) where that decision was cited but not on this issue). In Challenger Managed Investments Ltd v Direct Money Corporation Pty Limited [2003] NSWSC 1072 at 50 Bryson J referred to the approach of Lord Hoffman in Banque Financiere in the following terms which I would adopt: "I would respectfully say that Lord Hoffman's relation, at 234, of subrogation to unjust enrichment was not articulated in the authorities to which his Lordship referred, and is not established in Australian case law. In my understanding explanation of subrogation in terms of restitution and unjust enrichment was introduced by Millett LJ in Boscawen v. Bajwa [1996] 1 WLR 328 at 334, and was not earlier found. Lord Hoffmann's reference to the law of restitution does not, in my respectful opinion, provide an explanation for the mortgagor's being treated as bound, in equity, to treat the person who paid off the previous mortgage as entitled to security under it. Restitution would provide a basis for treating the mortgagor as obliged to restore to the person who paid it the amount which had been paid to the mortgagee: the concept is inadequate for also treating the mortgagor as obliged to hold the payer secured. This is particularly clear where, as in this case, and in other cases where subrogation has been held to exist, the mortgagor in fact had no dealings with the payer, or where the payer believed that he was getting security under arrangements in which the mortgagor was not in fact involved. To my mind it is enough to see subrogation as an entitlement which equity accords to the payer, firmly established by judicial decisions notwithstanding that a satisfactory doctrinal basis is difficult to identify, and notwithstanding that classification of the mortgagor's position as unconscionable seems very attenuated." 98 See also Saffron Sun Pty Ltd v Perma-Fit Finance Pty Ltd (in liq) [2005] NSWSC 1317 at 13 per Windeyer J. 99 On this issue, Meagher, Heydon and Leeming (Equity Doctrines and Remedies, 4th edition, 2002) state at [9-075]: "Regrettably, the House of Lords in Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] 1 AC 221; [1998] 1 All ER 737 formulated subrogation as a remedy available only when the narrow calculus of unjust enrichment so dictated, an approach at odds with the equitable origins of the doctrine and the authorities referred to above…" 100 Those authorities included Butler v Rice [1910] 2 Ch 277; [1908-10] All ER Rep 1017, Ghana Commercial Bank v Chandiram [1960] AC 732, Boscawen v Bajwa [1995] 4 All ER 769; [1996] 1 WLR 328, and Orakpo v Manson Investments Ltd (supra). 101 In David Securities Pty Ltd v Commonwealth Bank (1992) 175 CLR 353 Mason CJ, Deane, Toohey, Gaudron and McHugh J cast unjust enrichment as a "concept", not a "definitive legal principle" (at 378), notwithstanding Deane J's reference to it in Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 as a "unifying legal concept". 102 The principles underlying subrogation in Australia were considered by Kearney J in Cochrane v Cochrane (1985) 3 NSWLR 403. His Honour stated what he saw as the fundamental basis of subrogation (at 405): "This principle is based on equity's concern to prevent one party obtaining an advantage at the expense of another which in the circumstances of the case is unconscionable. Hence, there is a common thread running through the relevant cases to the effect that the conscience of the mortgagor should be affected so as to cause the mortgage to be kept alive. This is illustrated in the text book examples first, of a third party not being entitled to a right by way of subrogation where he simply lends the money on an unsecured basis to the mortgagor who then uses such funds to pay off the mortgage; and secondly, of a third party being so entitled where he advances the money to pay out the mortgage on the understanding that security would be provided for such advance upon the mortgage being paid out.
As a corollary to this basis for the principle, there is no occasion for equity to intervene by way of subrogation where there is available to the third party a remedy at law or in equity sufficient to avoid an unconscionable result." 103 This is premised on a distinct basis, albeit necessarily imprecise, of unconscionable dealing rather than the concept of unjust enrichment. Equitable subrogation has not since emerged as one of those known restitutionary categories foreshadowed by Deane J in Pavey & Matthews (supra) under the rubric of unjust enrichment; see generally Gareth Tilley, "Restitution and the law of subrogation in England and Australia", (2005) 79 ALJ 518; Saffron Sun Pty Ltd v Perma-Fit Finance Pty Ltd (in liq) (supra) at 13 per Windeyer J. 104 In Registrar General v Gill (NSWCA, Gleeson CJ, Mahoney and Priestley JJA, 16 August 1994, unreported, BC9402892), Gleeson CJ and Priestley JA said: "The equitable principles relating to subrogation aim to adjust the interest of three parties, such as a creditor, a debtor and an insurer or surety, in such a way as to avoid the unconscionable result of double recovery by the creditor or inequitable discharge of the liability of the debtor." 105 Notwithstanding the doctrinal divergence between the United Kingdom and Australia, a recent Court of Appeal decision provides a useful summary of the English law. In Cheltenham & Gloucester plc v Appleyard (supra) Neuberger LJ attempted to formulate guiding principles relating to subrogation, having first accepted the earlier quoted definition of subrogation by Walton J Burston Finance Ltd at 1652. 106 Of the thirteen principles formulated by his Lordship the principles four to eleven deal with the issue of failed security: "Fourthly, a classic case of subrogation is that described by Walton J in Burston Finance…[cited above at [?]]…The reasons that a lender's anticipated security may not have been forthcoming so that he has sought to invoke subrogation are various. Examples include the lender's ineptitude (as in Burston Finance), the lender being misled (as in Banque Financiere and in Boscawen), the borrower being an infant (as in Thurstan -v- Nottingham Building Society [1903] AC 6), and the borrowing being ultra vires the borrower (as in Re Cork and Youghall Railway Co (1860) LR 4 Ch App 748).
Fifthly, although the classic case of subrogation involves a lender who expected to receive security (in the proprietary sense - eg a mortgage) claiming subrogation to another security, it can apply to personal rights…
Sixthly, the fact that a lender of money gets some security does not prevent him from claiming to be subrogated to another security: see Banque Financiere, perhaps most clearly per Lord Hutton at 241C-D…
Seventhly, a lender cannot claim subrogation if he obtains all the security which he bargained for, as in Burston Finance (applying Capital Finance Co Limited -v- Stokes [1969] 1 Ch 261) or where he has specifically bargained on the basis that he would receive no security as in Paul -v- Speirway Limited (in liquidation) [1976] 1 WLR 220.
Eighthly, the fact that the lender's failure to obtain the security he bargained for was attributable to his negligence is irrelevant. It does not prevent him from claiming subrogation - see per Lord Hoffmann at 235E-G in Banque Financiere. The effect of that observation was probably impliedly to disapprove observations of Walton J in Burston Finance at 1657C and F. However, Walton J was concerned with a case where the lender obtained the security, but negligently failed to protect himself by registering it, whereas in Banque Financiere the lender's negligence was in failing to check that he had obtained the security.
Ninthly, the absence of a common intention on the part of the borrower and the lender that the lender should have security is by no means fatal to a lender's subsequent claim for subrogation: see Banque Financiere at 232B-234C. However, the intention of the parties to the arrangement which is said to give rise to a claim for subrogation may be "highly relevant": ibid at 234D. It would seem that the intention of the lender is particularly important (see for example Banque Financiere at 235A-B and Boscawen at 339H-340A).
Tenthly, subrogation cannot be invoked so as to put the lender in a better position than that in which would have been if he had obtained all the rights for which he bargained: see Banque Financiere at 235D and 236G-273B per Lord Hoffmann. This point was also made by Lindley MR in Wrexham at 447.
Eleventhly, it is difficult, and may be impossible, for a lender who has obtained security to invoke subrogation where the security he has obtained gives him all the rights and remedies of security to which he claims to be subrogated (see Burston Finance at 1653D-E), or is a security in which the original security would naturally merge (see Burston Finance at 1653C and per Lord Diplock in Orakpo at 105B-C)…" 107 The essential facts of Cheltenham & Gloucester were that the Appleyards owned certain property, which secured a first mortgage to B & B and a second mortgage to BCCI. The Appleyards borrowed funds from the plaintiff (C & G). This loan was obtained in order to pay out the existing mortgages and replace them with a single first mortgage in favour of C & G. C & G provided the funds, the B & B mortgage was paid out and the balance was paid to the second mortgagee, BCCI. The payment to BCCI was made on the day it went into provisional liquidation. BCCI argued that the payment did not satisfy its mortgage and that its mortgage should take priority over the C & G mortgage. The C & G mortgage was later registered. The court held that as C&G had bargained for a legal charge but had only received an equitable charge, through no fault of its own, it was appropriate to subrogate C&G to B&B's stronger, earlier mortgage. 108 In disposing of the argument that, having obtained registration of the mortgage for which it had bargained, subrogation was not available to C&G, the Court dealt with the question of whether receiving an equitable charge displaced a right to be subrogated to a legal charge. In doing so, the court dealt with two earlier English cases. The court said (at 71): "…unlike the lenders in Burston Finance and in Capital Finance, C&G did not obtain the security they bargained for. In the two earlier cases, the failure to register the charge under s 95 did not affect the character of the charge obtained by the plaintiff in each case. Non-registration under s 95 did not prevent the charge in either case being a legal charge. It merely rendered it "void" as against a subsequent creditor or a liquidator. On the other hand, non-registration of the C&G mortgage at the Land Registry prevented it from being a legal charge: it was merely an equitable charge. Yet it was a legal charge for which the parties bargained." 109 In Burston Finance, the plaintiffs lent a substantial sum to the defendants to assist them in purchasing properties, and the properties were duly transferred to the defendants. In accordance with their obligation, the defendants executed in favour of the plaintiffs a charge over the property, which was duly registered at the Land Registry. However, the charge was not registered under s95 of the Companies' Act 1948 ("s95"). After the defendants had failed to make any repayment, the claimants appointed a receiver. The defendants then went into voluntary liquidation, and the liquidator took the point that the charge was void against him by virtue of lack of registration under s95. In those circumstances, the plaintiffs contended that they were entitled, by way of subrogation, to the unpaid vendor's lien over the properties, which the vendors would have had, but for the payment of the purchase price by the plaintiffs. In other words, the plaintiffs were contending that (i) it was intended that they should be secured creditors, (ii) their security had become ineffective due to failure to register the charge in their favour under s95, (iii) the vendors of the properties would, in the absence of payment, have had an unpaid vendor's lien over the properties, (iv) because the lien had been satisfied by the plaintiffs paying the vendors, the plaintiffs were subrogated to the lien. This argument was rejected. 110 In Capital Finance Co Limited v Stokes [1969] 1 Ch 261 the first defendant sold a property to the second defendant, on the basis that part of the purchase price would remain outstanding, and would be secured by a legal charge. Although this was done, the first defendant failed to register the charge under s95. The plaintiff, as a subsequent debenture holder of the first defendant, appointed a receiver, who contended that the charge in favour of the first defendant was void as against him because of non-registration under s95. The first defendant contended that, in light of the non-registration of the charge, he was entitled, in effect, to fall back on his lien as an unpaid vendor. Harman LJ rejected this argument on the basis that the lien was abandoned when the contract was completed. Further, "from the happening of that event the vendor [being the first defendant] obtained all that he had bargained for, namely one-quarter of the purchase money in cash and the balance by way of the stipulated legal charge" (at 279).
Application of subrogation principles to the present case 111 Whether subrogation be based upon notions of restitution in order to prevent unjust enrichment, or on some broader basis such as the notion of unconscionable conduct or to avoid an inequitable discharge of the liability or even on a basis as broad as that which reason and justice demand, there is in my judgment no basis for allowing subrogation here. By comparison with the cases referred to above where a security is discharged from proceeds derived from a new security which the lender then fails to have registered, here the circumstances leading to the failure of the appellant's security are even less deserving of equity's intervention by way of subrogation. The security obtained by the estate was precisely what the estate bargained for. The subsequent failure of that security occurred not at the time security was taken and nor was defective security taken. That failure occurred by reason of actions in enforcement of the security and some months after its creation, which the appellant took without leave of the court in disregard of s267 of the Corporations Act. 112 Even if it could be said that the estate had no alternative but to enforce the security, there was no reason why the estate could not have applied for leave of the court in terms of s267(1)(b) and s267(3), which leave may well, if solvency had been proved, have been given. The lender and chargee in such circumstances, having obtained all the security bargained for, is himself the author of that security failing. Such a lender cannot have resort to the doctrine of subrogation to extricate himself from the consequence of his own failure to comply with s267. 113 Indeed subrogation could hardly allow the lender to be so lax as to take actions which lose the security bargained for and then find salvage in the security earlier discharged. Quite apart from the inequity of so doing, persons dealing with the borrowing company in the interim have dealt with it on the basis that the earlier security was discharged and replaced by a new security; a security furthermore which gave known protection under s267 to other creditors against its enforcement within the first six months after the security was taken, save with leave of the court.
Conclusion 114 In the circumstances, there is no basis for allowing subrogation. In that event, I do not need to consider the questions that would have arisen had subrogation been allowed, namely whether the Westpac charge, the subject of the Memorandum of Satisfaction, is to be taken still to be registered, whether the receiver appointed under the estate's charge should be deemed to be appointed under a subrogated Westpac charge, and whether s588FJ of the Act applies to the new charge.
OVERALL CONCLUSION 115 I consider that this appeal should be dismissed with costs. Accordingly, I propose orders as follows: (1) Appeal dismissed. (2) Appellant to pay respondent's costs of the appeal.
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
HIGHLAND
EXCEPTION HOLDINGS PTY LTD
[2001] QSC 466
(1985) 3 NSWLR 403
(1978) 141 CLR 335
(1992) 175 CLR 353
(1987) 162 CLR 221
(1910) 11 CLR 492
(1933) 50 CLR 200