Bathurst CJ, Ward JA, Gleeson JA, Young J, Shepperd J
Catchwords
[1934] AC 491
AG(CQ) Pty Ltd v A & T Promotions Pty Ltd [2011] 1 Qd R 306
[2010] QCA 83
Australia Capital Financial Management Pty Ltd v Linfield Developments Pty Ltd
Guan v Linfield Developments Pty Ltd [2017] NSWCA 99
46 ER 58
CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98
Source
Original judgment source is linked above.
Catchwords
[1934] AC 491
AG(CQ) Pty Ltd v A & T Promotions Pty Ltd [2011] 1 Qd R 306[2010] QCA 83
Australia Capital Financial Management Pty Ltd v Linfield Developments Pty LtdGuan v Linfield Developments Pty Ltd [2017] NSWCA 9946 ER 58
CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98[2005] HCA 53
Dixon v Mucklestone (1872) LR 8 Ch App 155
Equuscorp Pty Ltd v Glengallen Investments Pty Ltd (2004) 218 CLR 471[2003] HCA 33
Heid v Reliance Finance Corp Pty Ltd (1983) 154 CLR 326[1983] HCA 30
Hill v Peters [1918] 2 Ch 273
IAC (Finance) Pty Ltd v Courtenay (1963) 110 CLR 550[1963] HCA 64
J & H Just (Holdings) Pty Ltd v Bank of New South Wales (1971) 125 CLR 546[1971] HCA 57
Koorootang Nominees Pty Ltd v Australia and New Zealand Banking Group Ltd [1998] 3 VR 16
Lapin v Abigail (1930) 44 CLR 166[1930] HCA 6
Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liquidation) (1965) 113 CLR 265[1965] HCA 17
Lintel Pines Pty Ltd v Nixon [1991] IVR 287
Meth v C.B.C. (NSWSC, Shepperd J, 8 December 1976, unreported)(1977-1978) CLC 40-302
Moffett v Dillon [1999] 2 VR 480[1999] VSCA 32
Parsons v McBain (Trustee of estate of PF Parsons (a bankrupt)) [2001] FCA 376
(2001) 109 FCR 120
Perilya Broken Hill Pty Ltd v Valuer-General [2015] NSWCA 235
Judgment (28 paragraphs)
[1]
Background
The priority in time rule directs attention to the circumstances in which DKEC and Sergienko acquired their interests in the property.
[2]
Klisovic's interest in the property
Mr Daniel Klisovic (Klisovic) is a concreter. He became interested in purchasing the property in around August 2016 and in November 2016, instructed a solicitor, Mr Nikola Velcic (Velcic), to act for him on the purchase of the property from the owner, Zahr Properties Pty Ltd. Three contracts for sale were prepared by the vendor's solicitors, Halas Lawyers. The first contract named Klisovic as the purchaser for a price of $1,500,000 with a deposit of $50,000. Velcic received this contract on 15 November 2016, but the contract was never exchanged because Klisovic did not have the purchase money.
In around February 2017, Klisovic engaged a finance broker, Mr Ian Chalmers (Chalmers), to assist with the purchase of the property. Klisovic described Chalmers as a banker, who had been introduced to him by a mutual friend, Mr Lyle Pendleton (Pendleton), in order to "handle all the financials". Although Chalmers was associated with AXLF, his company AXL Capital Partners Pty Ltd (AXL Capital) had no corporate connection with the AXLF Group.
[3]
DKEC contract
On the advice of Chalmers, DKEC was incorporated on 17 March 2017 with Klisovic as the sole director and shareholder. On 4 May 2017, DKEC entered into a contract with the vendor to purchase the property (DKEC contract). This purchase was never completed. Completion was first scheduled for 12 May 2017, then 16 May 2017, followed by 7 June 2017, but on each occasion the transaction did not proceed, apparently for want of finance. Klisovic denied that there was an issue with respect to finance and gave evidence that it was something to do with GST.
On 1 June 2017, Klisovic, on behalf of DKEC, signed two indicative letters of offer from Moshav Financial Wholesale Pty Ltd for loan facilities of $1,000,000 and $600,000, which were to be secured respectively by a first and second-ranking mortgage over the property and personal guarantees from Klisovic. The letters of offer identified AXLF as "your broker". Klisovic said he signed these letters without reading them and denied ever applying for a loan.
In around June 2017, Chalmers proposed to Klisovic an alternative structure for the purchase of the property involving the settlement of a trust of which DKEC would be the beneficiary and the trustee the purchaser of the property. On 7 July 2017, Chalmers informed Ms Kylie Griffin, an employed solicitor of Velcic, that the new purchaser was "AXL Financial Pty Ltd as trustee for DK Excavation and Concreting Trust" and said that the trust deed was being prepared.
A contemporaneous file note prepared by Velcic on 11 July 2017 recorded that Klisovic indicated that he had no objection to AXLF being the purchaser, and that this new arrangement was occurring because "there are some issues in respect of the way the lending is to be structured on behalf of the trust. Those issues relate to serviceability. Accordingly, the shelf company created in March is unable to satisfy the banking institution". On the same day, Velcic wrote to the vendor's solicitors informing them that DKEC was unable to obtain finance in its own corporate name and sought consent to rescind the DKEC contract. Klisovic denied giving Velcic those instructions, but the primary judge found the file note to be the more reliable evidence: J [90].
[4]
DKEC Trust
A unit trust deed creating the DKEC Trust dated 29 July 2017 (but stated to be effective from 1 May 2017) was executed by Mr Alexander Harmstorf on behalf of AXLF, with DKEC holding all 1,530,000 issued units. According to an ASIC search, Mr Harmstorf was a director of AXLF between 20 January 2017 and 30 September 2019. Klisovic's evidence was that he never met Mr Harmstorf. He said that he "must have" signed the trust documents because his signature is on them, but that he did not read them and did not understand what he was signing. The primary judge accepted that the trust deed was in fact signed: J [68].
Clause 3 of the trust deed recorded that DKEC "has also paid for and the trustee has issued to it, the number of fully and partly paid units in the trust specified in the Schedule". The Schedule to the trust deed recorded the number of fully paid units as 1,530,000 of $1.00 each, and nil partly paid units. That was consistent with the application signed by Klisovic for 1,530,000 "fully paid" ordinary units in the trust, and a certificate of unit holding of 1,530,000 "fully paid" ordinary units signed by Mr Harmstorf on behalf of AXLF. Both documents referred to an "Amount Paid" of $1.53 million. Klisovic was unable to recall whether he had paid $1.53 million on 29 July 2017. The primary judge found that there was no evidence that this payment was made and did not accept that it was: J [70], [118].
The trust deed conferred on AXLF "all the powers in relation to the assets of the trust that it is possible to give a trustee, including all the powers that an individual would have as legal and beneficial owner of the assets" (cl 64), and also specific powers (cl 65) including the power to:
mortgage, pledge, charge or otherwise provide the assets of the trust as security for any borrowing, facility, guarantee, indemnity, lease or other contractual obligation;
encumber or otherwise deal with any real or personal property; and
dispose of or otherwise deal with any assets of the trust.
Clause 65 also provided that the trustee could exercise a power or discretion even though the trustee has or may have a direct or indirect interest in the method or result of exercising the power or discretion, or may benefit directly or indirectly from its exercise, provided that such power or direction is exercised in good faith and for a proper purpose, and that the trustee could exercise all or any of these powers as the trustee sees fit, and in relation to the assets of the trust, as if the trustee was the beneficial owner of those assets. In addition, the trust deed conferred unlimited power on the trustee to borrow and offer guarantees to the extent that the trustee thinks fit (cl 66).
[5]
AXLF contract
In September 2017, Velcic agreed to act for AXLF as trustee for DKEC on the purchase of the property. However, AXLF terminated Velcic's retainer on 16 October 2017. Klisovic gave evidence that he was not asked for permission to withdraw Velcic's instructions and that he did not know that this was occurring until it had already happened. Klisovic gave evidence that he discussed the matter with Velcic on 16 October 2018 who told him:
I just heard from AXL. They are sacking me as your lawyer. I am angry at you for allowing this to happen. I don't trust them; I don't like Chalmers. Please don't be dumb and do not sign anything without ringing me first.
Klisovic accepted in cross-examination that Velcic's advice that AXLF was untrustworthy "[d]id concern me a little bit", however he was content to go without a solicitor of his own. Klisovic ignored Velcic's advice not to sign any document without first consulting Velcic. On about 20 November 2017, Klisovic signed documents at Chalmers' office, although he could not recall exactly what he signed. Klisovic's evidence was that Chalmers was not present, and Mr John Costigan (Costigan), who he believed to be Chalmers' solicitor, told him:
Don't worry about Chalmers. I don't like [Ian] Chalmers and you do not need him - you just need to sign documents to get this moving. Once you sign these documents, the property will be yours.
In fact, Costigan was a representative of AXLF. After he signed the documents, Klisovic said he met Chalmers who told him "it's all done, the Property is yours now". Klisovic's evidence was that from that day he was under the impression that he owned the property, although he was never given any paperwork in relation to the property.
It seems that one of the documents signed by Klisovic at the request of Costigan was the deed of rescission of the second contract, which became effective on 15 December 2017 upon exchange of a contract for sale between the vendor of the property and AXLF "ATF DK Excavation & Concreting" as purchaser (AXLF contract). It was common ground that the abbreviation "ATF" is to be understood as meaning "as trustee for". The purchase price was $1.5 million and the deposit was $50,000. This sale completed on 7 February 2018.
[6]
Source of the funds to purchase the property
Klisovic's evidence was that he obtained the funds to purchase the property in March 2017 from Mr Lajos Kovacs (Kovacs), whom he referred to as "Uncle Louie". Klisovic told Kovacs that "Chalmers, the banker, wants it in cash. He said it's better for tax purposes and easier to work with". Klisovic gave evidence that the request to provide the purchase funds in cash did not ring any alarm bells. The primary judge observed that the supposed tax advantages of paying in cash were never explained: J [61].
Kovacs' evidence was that in February and March 2017 he borrowed $1.8 million in cash in three tranches of $600,000 from an associate, Mr Tony Madormo (Madormo), signed three loan agreements with Madormo, and on about 18 March 2017 provided the cash to Klisovic in a suitcase and a canvas bag. The primary judge found that the loan agreements were not genuine and that no money was in fact advanced pursuant to them or indeed otherwise: J [56].
Klisovic said he collected the $1.8 million in cash from Kovacs on about 18 March 2017 and then provided the cash to Chalmers at his office on 20 March 2017, where a receipt was signed by each of them, but that a copy was not provided to him by Chalmers. According to Klisovic, Chalmers did not tell him what he was going to do with the money between that time and completion of the purchase of the property.
Chalmers' evidence was that he received $1.8 million from Klisovic a year earlier on 20 May 2016 and issued a document bearing that date purporting to be a receipt for "property purchased". This evidence was inconsistent with Klisovic's evidence of his first interest in the property in August 2017, and Kovacs' evidence of receiving the cash from Madormo in February 2017.The primary judge found that no credence could be given to the genuineness of this receipt: J [59]. Chalmers also gave evidence that he later gave this money back to Klisovic. There is no receipt for this transaction, which Chalmers said was recorded in his diary that was later stolen from his garage. The primary judge did not accept that these events happened: J [64].
Klisovic never told Velcic about the cash which he said was available to buy the property. The primary judge found that Klisovic had no convincing explanation for why he kept this from his lawyer: J [92]. The primary judge observed that "[t]he ultimate state of the evidence does not permit a finding to be made with any confidence as to what was the real source of the money used by AXLF to buy the Property": J [104].
[7]
Sergienko's unregistered mortgage
In March 2018, Sergienko commenced proceedings in the Supreme Court against AXLF, Roths, and Roths Holdings Australia Pty Ltd to recover money he had paid to them in connection with a proposal to acquire a controlling interest in PLC Financial Solutions Ltd. Those proceedings were settled on the terms contained in a deed of settlement dated 9 April 2018. The deed required AXLF to pay certain sums to Sergienko on specified dates, totalling $1,960,833.37 plus interest. That amount was secured by an equitable mortgage over the property, and AXLF undertook to deliver to Sergienko the certificate of title for the property and a mortgage in registerable form. In return, Sergienko promised to discontinue the proceedings with no order as to costs. By cl 2.2.6 of the deed, AXLF warranted that the property was unencumbered. The proceedings were discontinued on 9 April 2018 in accordance with the deed of settlement.
As indicated, Sergienko lodged a caveat against the title of the property on 9 April 2018, and although his solicitor received the certificate of title for the property on 13 April 2018, AXLF failed to deliver a mortgage in registerable form. Subsequently, AXLF failed to pay the amounts owing under the deed.
[8]
Events after April 2018
Kovacs gave evidence that in about June 2018 he told Klisovic that he wanted the property transferred out of the trust and placed within his control. He said that there was a discussion about a purchase price of about $1.5 million. In December 2018, Kovacs' solicitor told him that something was not right. Kovacs gave evidence that he met with Roths and told him he wanted to take over the property and asked him what the reason was for the hold-up. According to Kovacs, Roths said that he wanted a deposit from Kovacs. Kovacs later found out through his solicitor that a caveat had been lodged against the property. The primary judge found that Kovacs provided no rational explanation for his motivation in wanting the property transferred out of the trust: J [96].
On 13 December 2018, Roths, on behalf of AXLF, sent a letter to Klisovic attaching "a final statement of accounts for this property". The letterhead described AXLF as the "[a]uthorised AFS Representative of Moshav Financial Wholesale Pty Limited". The statement of account was from Agility Finance and included three loan drawdowns totalling $1.5 million. The primary judge found that Klisovic could not explain why loans were recorded: J [98].
Klisovic gave evidence that in about mid-February 2019 he was told by a solicitor, whom he had instructed to act on the conveyance of the property to IWC, that there was a caveat on the title. Klisovic said that he met with Chalmers who told him that Roths handled the whole thing and the trouble with the property was because Roths owed a debt to a "Russian mate of mine" and had given security over the property.
On 6 June 2019, Klisovic, on behalf of DKEC, removed AXLF as trustee and appointed IWC as trustee of the DKEC Trust by a deed of appointment to which AXLF was also a party. IWC was incorporated the previous day on 5 June 2019 with Kovacs as the sole director, secretary and shareholder. DKEC and IWC jointly and severally released and discharged AXLF from "all actions, suits, causes of action, claims and demands" which they may or may have in the future against AXLF "arising out of its administration of the Trust" (cl 4).
[9]
The appellants' case at trial
At trial, DKEC's case was that the priority in time rule applied and Sergienko had not discharged the onus of demonstrating why the earlier interest of DKEC should be displaced. Alternatively, to the extent that there was inequality of merits between the two equities, DKEC contended that Sergienko's equity had lesser merit because he took his interest in the property with imputed notice of DKEC's prior interest, as Chalmers' knowledge that the property was held on trust for DKEC was to be imputed to his principal, Sergienko.
[10]
The primary judge's reasons
The primary judge expressed adverse credit views in relation to all the witnesses who gave oral evidence, apart from one who is not presently relevant. He found that none of their evidence is to be believed where it is not corroborated by independent, objective circumstances or contemporaneous documents which can be demonstrated to be genuine: J [3].
After detailing the circumstances in which DKEC and Sergienko each acquired their interests in the property, the primary judge made the following findings. First, Sergienko obtained his interest, as equitable mortgagee, under the deed with AXLF securing the amounts due by AXLF to Sergienko, and that the deed was enforceable: J [108]-[112]. Second, DKEC had not established where the money to buy the property came from and had certainly not established that it was the source of the funds: J [117]. Third, the DKEC Trust was a genuine trust and although there was no proof that the units had been paid for and non-payment may once have given AXLF an entitlement to revoke the trust, it was no longer open for it to do so (citing Valoutin Pty Ltd v Furst (1998) 154 ALR 119 at 134-135): J [118] and [120].
There is no challenge to the first finding. The appellants challenge aspects of the second and third findings.
The dispositive reasoning of the primary judge is:
[121] Under the Trust Deed, DKEC expressly conferred on AXLF the means of representing itself as the beneficial owner of the property. It expressly conferred upon it the power to do what it did, notwithstanding that as between them this was a flagrant breach of trust by its trustee. AXLF was an agent which exceeded the limits of its authority but it acted within its apparent indicia. DKEC has a claim against AXLF but Sergienko's interest prevails against DKEC: Abigail v Lapin (1934) 51 CLR 58; Hyde [sic] v Reliance (1983) 154 CLR 326.
[122] Sergienko gave value for the interests which the Deed gives him. I find that he gave value without notice of DKEC's interest: Latec Investments Ltd v Hotel Terrigal Pty Ltd (1965) 113 CLR 265.
[123] I have already said that I do not believe Chalmers that he disclosed. I believe Wei (and for that matter Docker and Corbett) that he did not disclose DKEC's interest.
[124] I reject the submission that Chalmers' knowledge of DKEC's interest is to be attributed to Sergienko. …
There is no challenge to the findings at [122]-[123] that Sergienko acquired his equitable interest in the property for value and without notice of DKEC's interest. Nor is there any challenge to the finding at [124] rejecting DKEC's submission of imputed notice.
[11]
Whether DKEC was a volunteer: ground 2
It is common ground that the primary judge did not expressly say that DKEC was a volunteer. However, Sergienko pointed to the primary judge's acceptance of the submission that, in circumstances where the declaration of trust was supposed to be for consideration but none was provided, the trust was revocable at the instance of the trustee (citing Valoutin at 134), although it was no longer open to AXLF to do so.
In Valoutin, Finkelstein J held at 133-134 that where a trust is created for consideration and the consideration fails, the trust may be rescinded. The appellants say that Valoutin does not assist Sergienko's contention that DKEC was a volunteer because here the trust was not set aside for failure of consideration. That misses the point. Having found that no consideration had been provided by DKEC for its units in the DKEC Trust, the primary judge distinguished Valoutin on the basis that it was no longer open to AXLF to rescind the trust. It was not open for AXLF to rescind the trust, among other reasons, because AXLF was no longer the trustee; it had been replaced by IWC.
Next, the appellants advanced three arguments as to why DKEC was not a volunteer. The first was that this Court should find that DKEC acquired its interest in the property for value, given the evidence below of the "possible sources of funds", being either DKEC's own funds, or using funds borrowed by AXLF as trustee of the DKEC Trust.
As to DKEC providing the funds, his Honour expressly rejected the appellants' pleaded case that DKEC provided the funds for the purchase price of the property to AXLF. There is no ground of appeal challenging this finding. As to AXLF borrowing the funds for the DKEC Trust, his Honour made no such finding, having observed that the evidence concerning such borrowing by AXLF was inconsistent with other evidence (J [80]-[81]) and that the appellants' witnesses were unable to explain such evidence (J [83], [86] and [98]).
The AXLF "borrowing" scenario is also inconsistent with the appellants' closing submissions below that "no loan was ever obtained by or for DKEC for the purchase of the Property". That submission was repeated in this Court in the appellants' reply submissions which drew attention to three matters: first, AXLF represented that the property was unencumbered when instructing its agents on 7 February 2018 to attend to the settlement; second, when IWC was appointed trustee in place of AXLF, AXLF did not assert that it was owed any money in its capacity as trustee, AXLF withdrew a caveat lodged against the property and informed IWC that nothing was outstanding to AXLF; and third, there was no evidence of any mortgage finance obtained by AXLF in its capacity as trustee to fund the purchase of the property.
[12]
Whether prior interest postponed to later interest: ground 1
[13]
Submissions
The appellants submitted that DKEC's prior equitable interest in the property could only be postponed to Sergienko's later interest if DKEC engaged in some act or omission, the natural or foreseeable consequence of which was that Sergienko should have assumed that no prior equity existed when taking his own interest. This argument relied upon the following essential propositions:
1. Sergienko had failed to prove that the merits between the two equities were unequal, in the sense described by Ormiston JA in Moffett v Dillon [1999] 2 VR 480; [1999] VSCA 32 at [84] - that "tangible and distinct" acts or omissions of DKEC caused Sergienko to proceed in ignorance of the prior equity;
2. DKEC's conduct in permitting the property to be held on trust for it by AXLF was immaterial. On the correct application of principles in Shropshire Union Railways and Canal Co v The Queen (1875) LR 7 HL 496 and Abigail v Lapin (1934) 51 CLR 58; [1934] AC 491, the fact that DKEC expressly conferred on AXLF the means of representing itself as the beneficial owner of the property cannot constitute postponing conduct; and
3. since Sergienko did not establish that the merits between the two equities were unequal, the priority in time rule prevails with the consequence that DKEC's interest in the property has priority over Sergienko's interest.
Sergienko sought to uphold the primary judge's reasons. He also relied on a notice of contention asserting that the decision of the primary judge should be affirmed because, in all the circumstances, he has the better equity. This was said to be for four reasons:
1. IWC and DKEC had released AXLF from all claims arising out of its administration of the trust with knowledge of Sergienko's mortgage over the property;
2. DKEC failed to lodge a caveat on the title to protect its interest in the property;
3. DKEC was a volunteer and was not ready, willing or able to pay the consideration required in order to acquire its interest in the property; and
4. Sergienko had contributed substantially more to the purchase price of the property than IWC and DKEC, given that AXLF had purchased the property in part using funds misappropriated from Sergienko and funds borrowed from Sergienko.
No submissions were advanced by Sergienko in support of the fourth reason, which may be put aside.
[14]
Competition between prior and later equitable interests
It is necessary first to refer to some matters of principle concerning the priority in time rule before addressing the facts.
Priority in time: It is common ground that the principles for determining the order of priority of competing equitable interests were concisely stated by Kitto J in Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liquidation) (1965) 113 CLR 265 at 276; [1965] HCA 17:
In all cases where a claim to enforce an equitable interest in property is opposed on the ground that after the interest is said to have arisen a third party innocently acquired an equitable interest in the same property, the problem, if the facts relied upon as having given rise to the interests be established, is to determine where the better equity lies. If the merits are equal, priority in time of creation is considered to give the better equity. … But where the merits are unequal, as for instance where conduct on the part of the owner of the earlier interest has led the other to acquire his interest on the supposition that the earlier did not exist, the maxim may be displaced and priority accorded to the later interest. (Emphasis added.)
This passage was approved by Gibbs CJ at 333 (Wilson J agreeing at 348) in Heid v Reliance Finance Corporation Pty Ltd (1983) 154 CLR 326; [1983] HCA 30. The emphasised part of the passage above was approved by Mason and Deane JJ at 339.
There is some debate in the authorities as to whether the priority in time rule is one of first or last resort: cf Moffett v Dillon at [81]-[86] (Ormiston JA) and AG(CQ) Pty Ltd v A & T Promotions Pty Ltd [2011] 1 Qd R 306; [2010] QCA 83 at [26]-[35] (Holmes JA, McMurdo P and McMeekin J agreeing). The authorities support the view that the maxim is not applied mechanically, and the Court should search for the better equity: Latec Investments at 276 (Kitto J); Heid at 341 (Mason and Deane JJ); Thorpe v Bristle Ltd (1997) 80 FCR 330 at 334-336 (Burchett J). However, it is not necessary to determine this question as senior counsel for Sergienko accepted that nothing turned on this in the present case. This appeal can be dealt with on the basis most favourable to DKEC that priority is to be afforded to the equitable interest first created in the absence of proof of any better later equity: Moffett v Dillon at [85].
Onus of proof: It is well-established that the onus of displacing the prior equity rests upon the holder of the later equity, which in this case is Sergienko: General Finance Agency & Guarantee Co of Australia Ltd v Perpetual Executors & Trustees Association of Australia Ltd (1902) 27 VLR 739 at 743; Platzer v Commonwealth Bank of Australia [1997] 1 Qd R 266 at 279 (McPherson JA); Moffett v Dillon at 501-502, 504 (Ormiston J); Cash Resources Australia Pty Ltd v BT Securities Ltd [1990] VR 576 at 586 (Brooking J); Re Carter Holt Harvey Woodproducts (Australia) Pty Ltd (No 1) [2017] VSC 499 at [101] (Robson J).
[15]
Abigail v Lapin
Abigail v Lapin involved an agent exceeding the limits of his authority. The registered proprietors had transferred land, by transfers absolute in form and expressed to be made in consideration of payment of money, to the nominee of a creditor as security for a debt, and the creditor had raised a loan on security of the land by granting an equitable mortgage. Lord Wright found at 71-72 that the case fell within the general principle in Brocklesby v Temperance Permanent Building Society (1895) AC 173 at 180-181, where Lord Herschell LC said:
… where a person has thus been entrusted with the possession of title deeds with authority to raise money upon them, the owner of the deeds cannot take advantage of any limitation in point of amount which he has placed upon the authority to raise money as against a lender who had no notice of it.
Although Abigail v Lapin was decided on agency principles, Lord Wright addressed the rule in Shropshire, which had been relied upon by the majority in the High Court in Lapin v Abigail. After acknowledging that it may be that the application of this rule "has been induced by the partiality of Courts of equity for their protégé, the cestui que trust", and clarifying that the equity of a beneficiary may still be defeated as Lord Cairns said in Shropshire at 506 (as reproduced at [80] above), Lord Wright distinguished the facts in Abigail v Lapin from the English cases, such as Shropshire, and continued at 69 by explaining that the rule laid down in Shropshire was:
… one which has been applied to trusts, and not to equitable estates or interests, such as those of unpaid vendors and equitable mortgagees, or to equities like an equity to set aside a conveyance for fraud; it cannot be said that in regard to such equities there is any recognised system of trusts which ought to put the parties on inquiry in dealing with the party clothed with the legal estate.
Lord Wright went on to say that it was not necessary to consider whether the same rule was applicable under the Torrens system with its procedure for protection of equitable interests by caveats: at 69-70.
[16]
Rimmer v Webster and Burgis v Constantine
The distinction between cases decided on agency principles and the rule in Shropshire is reflected in two English authorities.
Rimmer v Webster (1902) 2 Ch D 163 involved a mortgage bond deposited with a stockbroker. Farwell J (as he then was) held that where an owner of property gives all the indicia of title to another person with the intention that he or she should deal with the property, the principles of agency apply and any limit which has imposed on the agent's dealing cannot be enforced against an innocent purchaser or mortgagee, who has no notice of the limit. Farwell J said at 172-173:
The principle underlying those cases [Carritt v Real and Personal Advance Co; Shropshire; Perry v Attwood] is that the man possessed of the prior equity cannot be deprived of his title unless he has been guilty of some negligence. But the word "negligence" imports the neglect of some duty towards the person injured. A man is entitled to deposit his deeds with his solicitor or his banker, or to send his certificates to his broker, or to vest his property in the name of another person and hand him the title-deeds, without thereby giving rise to any implication inconsistent with his own beneficial title, because his acts are in accordance with the common usage of mankind; and no other member of the community, therefore, is entitled to allege that such a course of action contains any invitation to him to act, from which a duty to him can be inferred. But the course of action above mentioned is also consistent with an intention that the person to whom the indicia of title are intrusted should deal with them; and if it is once proved, or admitted, that such was the intention, the case then falls to be decided in accordance with the principles governing the cases of authority given by a principal to an agent; and the owner comes under a duty to the persons whom he intends to act on such authority to give them notice of any limit that he places on the authority, which he has by his own act made apparently co-extensive with absolute ownership. … (Citations omitted. Emphasis added.)
Rimmer v Webster is to be distinguished from Burgis v Constantine, a decision of the Court of Appeal of which Farwell LJ was a member. In Burgis, the beneficial owners of shares in a ship had executed transfers of their shares to a manager as trustee, who, in breach of trust, granted a subsequent equitable mortgage of the shares. Section 56 of the Merchant Shipping Act 1894, 57 & 58 Vic, c 60 prevented any notice of a trust from being entered on the register of ships. In that context, Farwell LJ said at 502 that "[i]t is obvious in such a case that a person dealing with the registered owner knows, or must be taken to know, that he may be, and very likely is, a trustee." The Court of Appeal held that the fact that the beneficial owners of the shares had conferred legal title of the shares in the ship on a third party, and allowed the third party to appear as such on the register, did not constitute postponing conduct as against the later equitable mortgagee.
[17]
Australian cases involving beneficiaries of a trust
The distinction between the two types of cases mentioned above has been referred to in the Australian authorities. Two of the cases involved competing equities in shares. In Cash Resources at 580-581, although Brooking J rejected the submission by the holder of the prior equity seeking to equate the position of an equitable mortgagee of shares with a beneficiary of a trust, his Honour referred with apparent approval to "the approach appropriate for delinquent trustees", and to the fact that "[t]he Shropshire line of cases rejected the notion that a beneficiary should be required to watch his or her trustee".
In Koorootang Nominees Pty Ltd v Australia and New Zealand Banking Group Ltd [1998] 3 VR 16 at 109, Hanson J observed that, although there are "no rigid principles", one of the principles to be borne in mind "is the entitlement of a beneficiary under an express trust to allow the trustee to have possession of title documents", referring to Cash Resources at 580-581, and continued at 109:
… Even if it can be said that in the common law of this country today Shropshire Union represents (as counsel for the bank said) "a peculiar 19th century view about trusts", in my view it remains true that in the ordinary case a beneficiary under an express trust will not be postponed merely by reason of having given possession of title documents to his or her trustee (not being a trustee for sale).
Reference to four other Australian cases involving beneficiaries of a trust (express, resulting and constructive) are of assistance.
[18]
Meth v CBC
In Meth & Co (Australia) Pty Ltd v Commercial Banking Company of Sydney Ltd (NSWSC, Sheppard J, 8 December 1976, unreported); (1977-1978) CLC 40-302, a provision in a contract (called a Carry Account Agreement) between a stockbroker and the client provided that certificates for shares purchased with the funds from the broker under the agreement, and any other certificates to be lodged as security, were to be registered in the name of the brokers nominee company. This was held to be sufficient to create a trustee and beneficiary relationship. Sheppard J found that the clients had empowered both the nominee company and the stockbroker, who were the clients' fiduciary agents, to deal with the shares in terms of cl 6 of the agreements, which provided a power to pledge or lend "property of the undersigned".
After observing that the point of distinction between Rimmer and Burgis was that the extent of the authority given to the trustee in the latter case did not entitle him to enter into a transaction of the kind which the plaintiffs sought to impeach (at [29,237]), Sheppard J held that cl 6 of the agreements took the case away from Shropshire and towards Brocklesby, where Lord Watson said at 183:
A principal employs an agent to raise money on certain securities, and at the same time directs him not to borrow more than a specified sum. The agent goes into the market, and in exchange for the securities, obtains a loan in excess of the amount prescribed, from a bona fide lender who has neither notice nor knowledge of the limitation. The agent, instead of accounting to his principal, applies the excess to his own purposes, and absconds. Does the loss in these circumstances fall upon the principal, or upon the lender?
I entertain no doubt as to the answer which must be made to that question. I think the principal, who gave him the means of committing it, must bear the consequences of his agent's fraud; it appears to me to be just and reasonable that, the agent having the control of the securities, for the purpose of borrowing, with the consent of the principal, a lender, who has no notice to the contrary, should be entitled to deal with him on the footing that he had authority to pledge the securities to the full amount of their value. That such is the rule in equity appears to me to be a corollary from the judgment of Lord Chancellor Cranworth in Perry-Herrick v. Attwood 2 De G. & J. 21.
[19]
Thorpe v Bristle Ltd
Thorpe v Bristle Ltd involved competing interests of a beneficial owner of land, which had been purchased by an agent (Newby) in order to avoid disclosing the interest of Thorpe, and a subsequent equitable chargee in respect of a debt owed by Newby for the supply of building materials. In the Full Federal Court, Burchett J found that, assuming Thorpe's interest as beneficial owner was prior in time, it was postponed to the supplier's subsequent security which was protected by a caveat (at 336). Burchett J concluded that the merits were not equal because Thorpe had made it appear that the acquisition of the land was not by him but by Newby, that the appearance of absolute ownership in Newby was reinforced when Thorpe permitted Newby to utilise the land as security for an overdraft associated with his building business, and that Thorpe had personally witnessed the document by which Newby gave security to the supplier by way of equitable charge (at 335-336). Burchett J observed at 336 that:
Here, Newby applied the land by an offer made in the role of an agent, and never shook off that role. Later events additionally armed him to misrepresent, but they did not transform his trusteeship into an office unrelated to the agency from which it arose.
[20]
Platzer
Platzer involved competing interests of a beneficiary of a resulting trust and a later equitable mortgagee of land under the Torrens system. It was not necessary to answer the point left open by Lord Wright in Abigail v Lapin (see [83] above), as McPherson JA found that there were other considerations which favoured postponing the prior equity of Mrs Platzer in the land, as beneficiary of a resulting trust, to the bank's later equity (at 286). The case, however, was decided on the fact that the bank had notice of Mrs Platzer's earlier equitable interest in the land (at 287).
[21]
Parsons v McBain
Parsons v McBain (Trustee of estate of PF Parsons (a bankrupt)) [2001] FCA 376; (2001) 109 FCR 120 involved competing interests of a beneficiary of a "common intention" constructive trust and a trustee in bankruptcy seeking to take possession of property under the Torrens system for the benefit of unsecured creditors. Again, it was not necessary for the point left open by Lord Wright to be answered in this case. However, Black CJ, Kiefel and Finkelstein JJ accepted at [16] that, in an appropriate case, an equitable interest arising under a constructive trust may be defeated by, or must defer to, competing claims, citing the statement of Lord Cairns in Shropshire at 506 (see [80] above), and stated that "[w]hat must be shown to take away a pre-existing equitable title is 'something tangible and distinct having grave and strong effect to accomplish the purpose'", citing Abigail v Lapin at 68.
[22]
Does the rule in Shropshire apply in Australia?
Abigail v Lapin is a decision of the Privy Council allowing an appeal from a majority decision of the High Court of Australia in Lapin v Abigail. As an intermediate appellate court, this Court is bound by Abigail v Lapin: see the reasoning in Perilya Broken Hill Pty Ltd v Valuer-General [2015] NSWCA 235; (2015) 10 APLR 235 at [71]-[76] (Leeming JA, Bathurst CJ and Macfarlan JA agreeing); Gifford v Strang Patrick Stevedoring Pty Ltd (2003) 214 CLR 269; [2003] HCA 33 at [82] (Gummow and Kirby JJ).
The appellants submitted that the statement of Lord Wright in Abigail v Lapin at 69 recognising that the rule in Shropshire has been induced by "the partiality of Courts of equity for their protégé, the cestui que trust" means that the rule is sufficiently entrenched that it could only be for the High Court to withdraw it. This submission misses the significance of Abigail v Lapin.
First, Abigail v Lapin was decided on agency principles. The Privy Council distinguished the rule in Shropshire on the facts. Second, Abigail v Lapin recognises that the rule in Shropshire is not absolute; it is subject to the qualification stated by Lord Cairns for disentitling conduct by the beneficiary, which is set out at [80] above. Third, the Australian authorities referred to above have recognised the rule in Shropshire and its qualification. Aside from Torrens system land, it is to be accepted that the conduct of a beneficiary under a trust in allowing a trustee to hold all the indicia of title does not of itself render the beneficiary bound by the trustee's dealings with the property (Shropshire), however an act, neglect or default on the part of the beneficiary of the kind referred to in the authorities may postpone the prior equity of a beneficiary (Abigail v Lapin and Heid). Fourth, none of the Australian authorities has addressed the point left open by Lord Wright in Abigail v Lapin, being whether the Shropshire principle applies to Torrens system land. That point falls to be answered here unless there are other considerations which favour postponing DKEC's equity in the property. I now turn to that issue.
[23]
Are the merits unequal?
Senior counsel for Sergienko submitted that the following conduct of DKEC ought to be regarded as postponing conduct:
1. DKEC allowed the property to be acquired by a trustee (AXLF) of whom DKEC had no knowledge or connection;
2. Klisovic, on behalf of DKEC, went ahead with the transaction in the form in which it ultimately took against the express advice of his solicitor, Velcic;
3. Klisovic paid no money towards the purchase of the property, nor did he pay any money for the units in the DKEC Trust issued to DKEC;
4. DKEC empowered AXLF under the terms of the trust deed to deal with trust property, including to mortgage the assets of the trust as security for contractual obligations (cl 65), and agreed to the restriction on unitholders from lodging a caveat in relation to an asset, or interfering with the trustee's exercise of any right or power (cl 16);
5. Klisovic took no steps before Sergienko acquired his interest on 9 April 2018 to protect any interest DKEC may have had in the property as beneficiary under the DKEC Trust, such as lodging a caveat against the title;
6. Klisovic took no steps whatsoever in relation to the property until Kovacs told him later in 2018 that he wanted the property placed under his control for reasons which the primary judge found Kovacs gave no rational explanation;
7. in February 2019, when Klisovic was told of the caveat against the title to the property by his solicitor acting on the conveyance of the property back to Kovacs, Klisovic's response was to speak to Chalmers who told him that Roths had said that he had given security over the property to a "Russian mate of mine"; and
8. Klisovic yielded to Kovacs' unexplained desire to have the property transferred to him in circumstances where Kovacs had paid no money towards the purchase of the property, and caused DKEC to join in removing AXLF as trustee and appointing IWC in its place in circumstances where DKEC released all claims against AXLF as trustee of the DKEC Trust.
The appellants drew attention to the fact that DKEC's conduct in (6)-(8) above occurred after Sergienko had acquired his interest in the property. Although this conduct was consistent with DKEC not treating the property as one in which it had an interest, given that it had paid nothing towards the purchase price or for the issue of units in the DKEC Trust, the conduct did not in any relevant sense lead Sergienko to assume that the property was unencumbered. In my view, the later conduct of DKEC is properly disregarded in this case.
[24]
Conduct of DKEC prior to Sergienko acquiring his interest
The conduct of DKEC in (1)-(5) above is all relevant to the question of whether the risk of some deception as that practised by AXLF on Sergienko was reasonably foreseeable. It is convenient to address the conduct in (1)-(4) above separately from the conduct in (5) concerning the failure to caveat, which raises other issues.
The appellants say that the significance of Velcic's remarks casting aspersions over AXLF and Chalmers is lessened, and by implication Klisovic in ignoring that warning, was not negligent because those remarks were made in circumstances where Velcic's instructions had just been withdrawn by AXLF. But that is no answer to the reasonably foreseeable consequences of Klisovic's conduct in disregarding Velcic's warning that AXLF was untrustworthy, especially when the termination of Velcic's retainer had occurred without Klisovic's permission.
Although Klisovic said that he did not read the terms of the trust deed, DKEC is taken to be bound by its terms: Equuscorp Pty Ltd v Glengallen Investments Pty Ltd (2004) 218 CLR 471; [2004] HCA 55 at [33]. DKEC empowered AXLF by the terms of the trust deed to deal with the property adversely by a transaction of the type entered into by AXLF with Sergienko, such as by granting a mortgage over the property.
Contrary to the appellants' submission, there is no analogy between this case and Shropshire, where a prior breach of trust by the same trustee was held to be insufficient to render the beneficiaries continuing to repose trust in the trustee as disentitling conduct: at 508-509. In Shropshire, there was a finding that the beneficiaries' confidence in the trustee did not appear to be shaken: at 508. By contrast, in this case the commercial circumstances of the transaction should have alerted Klisovic that he could not have any confidence that AXLF would act in DKEC's interests in acquiring the property. This was for several reasons.
First, Klisovic had no connection or knowledge of AXLF. He had never met Mr Harmstorf, the director of AXLF who signed the trust deed on behalf of AXLF, and he erroneously believed, without enquiry, when he signed documents at the request of Costigan in late November 2017, that Costigan was Chalmers' solicitor; in fact, Costigan was not a solicitor and worked for AXLF.
Second, Klisovic knew that DKEC had not paid any money towards the purchase price of the property or for the issue of units in the DKEC Trust, and AXLF had removed DKEC's solicitor from acting on the purchase of the property without Klisovic's permission.
[25]
Failure to lodge a caveat
In light of the above conclusion, it is not necessary to address the point left open by Lord Wright in Abigail v Lapin as to whether the rule in Shropshire is applicable under the Torrens system with its procedure for protection of equitable interests by caveat. Nor is it necessary to decide, assuming the rule does apply to Torrens system land, whether in the circumstances of this case DKEC's failure to lodge a caveat is also postponing conduct. Nonetheless, I will indicate my views.
It is well-established that the mere failure of the holder of a prior equitable interest in land to lodge a caveat does not of itself constitute disentitling conduct. Rather, it is one of the circumstances to be considered in combination with others in determining whether it is inequitable that the prior equitable holder should retain his or her priority: J & H Just (Holdings) Pty Ltd v Bank of New South Wales (1971) 125 CLR 546 at 554-555 (Barwick CJ); [1971] HCA 57; Heid at 342 (Mason and Deane JJ).
In Thorpe v Bristle Ltd at 334-335, Burchett J summarised the consequences of the failure to caveat:
In considering the prior owner's conduct, Gibbs CJ (with whom Wilson J agreed) said [in Heid] (at 338) that failure to lodge a caveat "was not in itself fatal", while Mason and Deane JJ said (at 342) that "the mere failure of the holder of a prior equitable interest in land to lodge a caveat does not in itself involve the loss of priority which the time of the creation of the equitable interest would otherwise give". These statements, of course, leave it open to hold that a failure to lodge a caveat may, when combined with other circumstances, prove to be the final straw, and indeed may be much more than a straw. That is in accordance with what Barwick CJ (with whom McTiernan and Owen JJ agreed) said in J & H Just (Holdings) Pty Ltd v Bank of New South Wales (1971) 125 CLR 546 at 555: "the failure to lodge a protective caveat cannot properly be said necessarily to be such an act or default [that is, an act or default having a postponing effect]. (emphasis added)." Barwick CJ had said as much (at 554). Also, Gavan Duffy and Starke JJ, in a dissenting judgment which prevailed on appeal to the Privy Council and is cited by Mason and Deane JJ in Heid v Reliance Finance Corporation Pty Ltd at 339, said in Lapin v Abigail (1930) 44 CLR 166 at 197, as part of their reasoning leading to the conclusion that the interest of the prior equitable owners ought to be postponed, "they reinforced the apparent absolute ownership of [the transferee of the legal estate] by neglecting the well-known method of protecting their rights and interests by means of a caveat pursuant to the provisions of the Real Property Act 1900 (NSW)." And when the matter came before the Privy Council, as Abigail v Lapin (1934) 51 CLR 58, Lord Wright (at 69-70) expressly left open the effect of the Torrens "system of registration of legal titles and for protection of equitable interests by caveats". On the other hand, a well explained failure to lodge a caveat, unaccompanied by any significant circumstances adverse to the holder of the prior interest, was insufficient to postpone that interest in Jacobs v Platt Nominees Pty Ltd [1990] VR 146, discussed in L A McCrimmon, "Protection of Equitable Interests under the Torrens System: Polishing the Mirror of Title" (1994) 20 Monash Law Review 300 at 307-308.
[26]
Who has the better equity?
The considerations addressed above demonstrate that the merits are not equal and, in my view, when all the circumstances are taken into consideration, Sergienko has the better equity.
In summary, the commercial circumstances of the transaction should have alerted Klisovic that there was no reasonable basis to repose any confidence in AXLF to act in DKEC's interests in holding the property on trust, in circumstances where DKEC had no knowledge or connection with AXLF, had been warned by its solicitor that AXLF was untrustworthy, and where it knew that it had provided no money towards the purchase of the property or for the issue of units in the DKEC Trust. By contrast, Sergienko acquired his interest in the property for value and without notice of DKEC's prior equity. The grant of the mortgage to Sergienko was the type of transaction which AXLF was authorised to enter into by the terms of the trust deed, albeit AXLF exceeded the limits of its authority and thereby committed a breach of trust. DKEC was negligent in not objecting to AXLF terminating Velcic's retainer on the purchase of the property, in insulating itself from the means of legal advice, and in empowering AXLF under the trust deed to deal with the property such that AXLF could readily misrepresent to a third party that the property was unencumbered. If it were necessary to decide, I would also conclude that DKEC was negligent in failing to caveat, however, this finding is not essential to my conclusion.
Although these reasons are more expansive than those of the primary judge given the new argument advanced by the appellants on appeal, in my view, there is no error in the finding that DKEC's interest in the property is postponed to Sergienko's interest.
[27]
Conclusion
The appeal has failed. As to costs, since AXLF did not appear or take part in the hearing, no costs order should be made in its favour. There is no reason why costs otherwise should not follow the event as between the active parties to the appeal: Uniform Civil Procedure Rules 2005 (NSW), r 42.1.
I propose the following orders:
1. Appeal dismissed.
2. Appellants to pay the first respondent's costs of the appeal.
[28]
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.
Decision last updated: 01 December 2021
Hill v Peters [1918] 2 Ch 273
IAC (Finance) Pty Ltd v Courtenay (1963) 110 CLR 550; [1963] HCA 64
J & H Just (Holdings) Pty Ltd v Bank of New South Wales (1971) 125 CLR 546; [1971] HCA 57
Koorootang Nominees Pty Ltd v Australia and New Zealand Banking Group Ltd [1998] 3 VR 16
Lapin v Abigail (1930) 44 CLR 166; [1930] HCA 6
Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liquidation) (1965) 113 CLR 265; [1965] HCA 17
Lintel Pines Pty Ltd v Nixon [1991] IVR 287
Meth v C.B.C. (NSWSC, Shepperd J, 8 December 1976, unreported); (1977-1978) CLC 40-302
Moffett v Dillon [1999] 2 VR 480; [1999] VSCA 32
Parsons v McBain (Trustee of estate of PF Parsons (a bankrupt)) [2001] FCA 376; (2001) 109 FCR 120
Perilya Broken Hill Pty Ltd v Valuer-General [2015] NSWCA 235; (2015) 10 APLR 235
Platzer v Commonwealth Bank of Australia [1997] 1 Qd R 266
Re Carter Holt Harvey Woodproducts (Australia) Pty Ltd (No 1) [2017] VSC 499
Rice v Rice (1853) 2 Drew 73; 61 ER 646
Rimmer v Webster [1902] 2 Ch 163
Shropshire Union Railways and Canal Co v The Queen (1875) LR 7 HL 496
Taylor v London and County Banking Co [1901] 2 Ch 231
Thorpe v Bristle Ltd (1997) 80 FCR 330
Valoutin Pty Ltd v Furst (1998) 154 ALR 119
Water Board v Moustakas (1988) 180 CLR 491; [1998] HCA 12
Texts Cited: B Edgeworth, Butt's Land Law (7th Ed, LawBook Co, 2017)
Category: Principal judgment
Parties: IWC Industries Pty Ltd (First appellant)
DK Excavation and Concreting Pty Ltd (Second appellant)
Sergei Sergienko (First respondent)
AXL Financial Pty Ltd (Second respondent)
Representation: Counsel:
F Corsaro SC / T Rogan (Appellants)
B Coles SC / D Meyerowitz-Katz (Respondents)
Solicitors:
Citilawyers Pty Ltd (Appellants)
Guardian Legal (Respondents)
File Number(s): 2021/96251
Decision under appeal Court or tribunal: Supreme Court of New South Wales
Jurisdiction: Equity Division
Citation: [2021] NSWSC 297
Date of Decision: 26 March 2021
Before: Hammerschlag J
File Number(s): 2018/203377
HEADNOTE
[This headnote is not to be read as part of the judgment]
This appeal involved competing claims to a residential property at Killarney Heights by the second appellant, DK Excavation and Concreting Pty Ltd (DKEC), as beneficiary under a unit trust (DKEC Trust), and by the first respondent, Mr Sergei Sergienko (Sergienko), under an equitable mortgage. The second respondent, AXL Financial Pty Ltd (AXLF), is the registered proprietor of the property and the former trustee of the DKEC Trust. AXLF took no part in the appeal. The first appellant, IWC Industries Pty Ltd (IWC), was appointed by DKEC as trustee of the DKEC Trust in place of AXLF in June 2019. The competing claims arose in the following circumstances.
In November 2016, Mr Daniel Klisovic (Klisovic) instructed a solicitor, Mr Nikola Velcic (Velcic), to act for him on the purchase of the property, however, the first contract for sale was never exchanged because Klisovic did not have the purchase money of $1.5 milliion. In around February 2017, Klisovic engaged a finance broker, Mr Ian Chalmers (Chalmers), to assist with the purchase of the property. On the advice of Chalmers, DKEC was incorporated on 17 March 2017 with Klisovic as the sole director and shareholder. The primary judge did not accept Klisovic's evidence that he provided $1.8 million in cash to Chalmers in March 2017 to purchase the property. On 4 May 2017, DKEC entered into a contract with the vendor to purchase the property. Again, however, the purchase did not proceed for want of finance.
In around June 2017, Chalmers proposed to Klisovic an alternative structure for the purchase of the property by a trustee of a unit trust of which DKEC would be the beneficiary. A unit trust deed was executed by AXLF dated 29 July 2017, creating the DKEC Trust. Clause 3 and the Schedule of the trust deed recorded that DKEC held and had paid for all 1,530,000 "fully paid units" in the trust of $1.00 each. The primary judge found that there was no evidence that DKEC in fact paid for the units. The trust deed conferred on AXLF wide powers including the power to mortgage, pledge, charge or otherwise provide the assets of the trust, as well as restricting the rights of unitholders to lodge a caveat in respect of any trust asset.
In September 2017, Velcic agreed to act for AXLF as trustee for DKEC on the purchase of the property, however, his retainer was terminated by AXLF a month later. Velcic advised Klisovic not to trust either AXLF or Chalmers and told Klisovic not to sign anything without first contracting him. Klisovic did not follow this advice and signed some documents in October 2017, including, it seems, a deed of rescission of the second contract. In December 2017, AXLF entered into a third contract for sale (as trustee for DKEC) which was completed in February 2018. There was conflicting and inconsistent evidence as to the source of the funds to purchase the property. The primary judge concluded that the state of the evidence did not permit a finding to be made as to the real source of the money used by AXLF to buy the property.
On 9 April 2018, AXLF, in breach of the trust deed, gave an equitable mortgage over the property to Sergienko securing amounts owing by AXLF to Sergienko under a deed of settlement relating to a separate dispute between them. Sergienko's solicitor had searched the title immediately prior to entry into the deed and found that no caveats had been lodged against the property. Sergienko lodged a caveat against the property. On 13 April 2018, his solicitor received the certificate of title to the property, however, AXLF failed to deliver a registerable mortgage as required by the deed, nor did AXLF pay the amounts due to Sergienko under the deed.
Sergienko brought proceedings against AXLF and others seeking relief in relation to breaches of the deed, including an order for specific performance of AXLF's obligation to provide a mortgage over the property in registerable form. On their own application, IWC and DKEC were joined as defendants to the proceedings and brought a cross-claim seeking a declaration that AXLF held the property on trust for the beneficiaries of the DKEC Trust and an order that AXLF transfer the property to IWC as the trustee of the DKEC Trust.
The primary judge (Hammerschlag J) concluded that the interest of Sergienko in the property, as equitable mortgagee, had priority over the interest of DKEC, as beneficiary of the DKEC Trust. He found that Sergienko's interest, although later in time, should prevail since DKEC had armed AXLF with express authority to grant a mortgage over the property such that DKEC is bound by the mortgage, and that Sergienko had acquired his interest for value and without notice of DKEC's interest.
By their appeal, IWC and DKEC contended that:
the primary judge should have found that the merits of the competing equities were equal and, accordingly, the usual rule affording priority to the equity first in time applied (ground 1); and
to the extent that it is material to the priority dispute, the primary judge should have found that DKEC gave valuable consideration for its interest in the property and was not a volunteer (ground 2).
Held, dismissing the appeal (per Gleeson JA, Bathurst CJ agreeing, and Ward JA also agreeing, but not deciding 6 below):
As to ground 2 - whether DKEC provided valuable consideration
There was no challenge to the primary judge's finding rejecting the appellants' case that DKEC acquired its interest in the property for value using its own funds: at [49]. There was no error by the primary judge in not finding that AXLF borrowed funds for the purchase price as trustee for the DKEC Trust, given that this was the subject of conflicting evidence and was inconsistent with the appellants' closing submissions at trial: [48]-[51].
Even if DKEC had a liability to the trustee to pay for the "fully paid" units, IWC as the successor trustee to AXLF would be estopped from denying the correctness of the matters stated in the trust deed and the certificate of unit holding, namely that the units had been fully paid for by DKEC: [55]-[57]. It should be concluded that DKEC was a volunteer: [58].
As to ground 1 and whether the merits of the equities were equal
The rule in Shropshire's case establishes that allowing a trustee to hold all the indicia of title does not of itself render the beneficiary bound by the trustee's dealings with the property. However, the rule is not absolute; it is subject to the qualification that an act, neglect or default on the part of the beneficiary may postpone the prior equity of a beneficiary. Given the other postponing conduct of DKEC in this case, it is not necessary to decide whether the rule in Shropshire applies to Torrens system land: [99]-[101], [116].
Abigail v Lapin (1934) 51 CLR 58; [1934] AC 491; Heid v Reliance Finance Corp Pty Ltd (1983) 154 CLR 326; [1983] HCA 30; Lapin v Abigail (1930) 44 CLR 166; [1930] HCA 6; Shropshire Union Railways and Canal Co v The Queen (1875) LR 7 HL 496 considered.
Addressing DKEC's conduct prior to Sergienko acquiring his interest, the question to be asked is whether the risk of some deception as that practised by AXLF on Sergienko was reasonably foreseeable: [104]. It was relevant that Velcic had warned Klisovic that AXLF was untrustworthy and that Velcic's instructions were withdrawn without Klisovic's permission: [105]; that DKEC empowered AXLF by the terms of the trust deed to deal with the property adversely by a transaction of the type entered into by AXLF with Sergienko: [106]; and that the commercial circumstances of the transaction should have alerted Klisovic to the fact that he could not have any confidence that AXLF would act in DKEC's interests in acquiring the property, given that he had no connection or knowledge of AXLF, he had not provided the purchase monies and was unaware how the purchase was to be funded, and he had no contact with AXLF between late November 2017 and completion of the purchase in February 2018: [107]-[111]. It should be concluded that DKEC's conduct was disentitling conduct: [116].
It is no answer that AXLF exceeded the limits of its authority in granting the mortgage to Sergienko: [112].
Meth v C.B.C. (NSWSC, Shepperd J, 8 December 1976, unreported); (1977-1978) CLC 40-302; Thorpe v Bristle Ltd (1997) 80 FCR 330 applied.
The risk of the deception practised by AXLF on Sergienko was enhanced because any person searching the register would not have found a caveat by DKEC. The commercial circumstances of the transaction should have alerted DKEC to the need to lodge a caveat to protect its interest as beneficiary. Although not necessary to decide, the conduct of DKEC in not lodging a caveat, in combination with the other circumstances earlier referred to, was also postponing conduct: [126]-[127].
J & H Just (Holdings) Pty Ltd v Bank of New South Wales (1971) 125 CLR 546; [1971] HCA 57; Black v Garnock (2007) 230 CLR 438; [2007] HCA 31; Australian Property & Management Pty Ltd v Devefi Pty Ltd (NSWSC, Young J, 7 April 1997); (1997) 7 BPR [97,640]; Lintel Pines Pty Ltd v Nixon [1991] IVR 287; Betlehem v Keytown Constructions Pty Ltd (formerly known as Jadestar Investments Pty Ltd) [2007] WASC 38 considered.
Clause 14 specified the interest of unitholders in the assets of the trust:
…The beneficial interest in the trust at any time is vested in the holders of units in the trust at that time, in proportions determined in accordance with the rights attaching to the units.
Each unit entitles the holder to an equal share with each other unit holder of a unit in the beneficial interest in the trust as a whole.
Clause 15 provided that, despite any other provision in the deed, in accordance with cl 14, each unitholder is presently entitled to their proportionate share in the income of the trust, subject only to the proper payment of expenses by and of the trustee relating to the administration of the trust and the trust assets. There was no issue at trial that DKEC's interest as the holder of all of the units in the DKEC Trust was an equitable interest in the specific trust assets, including the property: CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98; [2005] HCA 53 at [34].
Clause 16 contained restrictions on the rights of unitholders, including restricting unitholders from lodging a caveat or other notice in relation to an asset or claim any interest in an asset in any other way.
It is convenient first to address the appellants' factual challenge, which assumed that the primary judge found that DKEC was a volunteer.
Given the body of evidence against the finding for which the appellants now contend (contrary to their position at trial), there was no error by the primary judge in not making that finding. In addition, the appellants ought not be permitted to advance a new point on appeal in relation to the AXLF "borrowing" scenario when it could possibly have been met by the calling of evidence: Water Board v Moustakas (1988) 180 CLR 491 at 497; [1998] HCA 12.
The appellants' second argument was that Sergienko had the onus to prove that DKEC was a volunteer and had not done so, given his Honour's observation that the state of the evidence did not permit a finding to be made with any confidence as to what the real source of the money used by AXLF to buy the property was: J [104].
This submission reads out of context his Honour's observation as to the state of the evidence, which followed on from three earlier findings. First, his Honour found that the three purported heads of agreement between Kovacs and Madorma in February and March 2017 purporting to record loan agreements, each for an amount of $600,000, were not genuine, and no money was in fact advanced pursuant to them or indeed otherwise: J [56]. Second, his Honour rejected the evidence of Klisovic that in March 2017 he obtained possession of the suitcase and canvas bag from Kovacs containing $1.8 million in cash and handed them to Chalmers at his office: J [62]-[63]. Third, his Honour found that there was no evidence of the payment of $1,530,000 as recorded in the application by DKEC to AXLF for units in the DKEC Trust, and his Honour did not accept that this payment was ever made: J [70].
It is implicit in his Honour's findings - that DKEC did not provide $1.8 million in cash to Chalmers in March 2017 to purchase the property, and that DKEC did not pay $1,530,000 to AXLF in July 2017 to acquire units in the DKEC Trust - that DKEC was a volunteer.
The appellants' third argument sought to resist the conclusion that DKEC was a volunteer by arguing, in the alternative, that even if DKEC did not pay for the units, DKEC is bound by the trust deed which "binds and benefits" unit holders (cl 4) and has a liability to pay $1,530,000 for the units issued to DKEC, given the terms of cll 10 and 73 of the trust deed. The appellants also sought to distinguish DKEC's position from that of the beneficiaries of the voluntary settlement in Taylor v London and County Banking Company [1901] 2 Ch 231 whose claims, although earlier in time, were deferred to the claims of the second set of beneficiaries who had, through their trustee, given value.
Clause 10 of the trust deed provided that if a unit holder fails to pay an amount due on a partly paid unit on time, the trustee has a first and paramount lien over all units registered in the name of the unit holder, which extends to any unpaid fees or calls in respect of the units. Clause 73 provided, among other things, that a unit holder's sole liability is in respect of any amount unpaid on partly paid units. Neither of those clauses assist the appellants' argument. Both cll 10 and 73 are concerned only with partly paid units. Here, the units issued to DKEC were all fully paid units. That is plain from the recital in cl 3 of the trust deed, the terms of DKEC's application for the units, and the certificate signed on behalf of AXLF as trustee; each records that the units held by DKEC are fully paid: see [18] above.
Absent an admission by DKEC that it had not paid for the units (and no such admission was made at trial), IWC as the successor trustee to AXLF would be estopped from denying the correctness of the matters stated in both the trust deed (cl 3 and the Schedule) and the certificate of units issued by AXLF which record that the units issued to DKEC were "fully paid". Consistent with such an estoppel as between IWC and DKEC, the appellants did not adduce any evidence that IWC had made a demand for payment from DKEC of the amount of $1,530,000, let alone advance a submission that DKEC was ready, willing and able to pay such an amount to IWC.
Given the state of the evidence and the common position adopted by the appellants at trial that the units were fully paid, it is untenable for the appellants belatedly to assert in this Court that DKEC has a liability for $1,530,000 to IWC in respect of the fully paid units DKEC holds in the DKEC Trust. Ground 2 is rejected. It should be concluded that DKEC was a volunteer.
Postponing conduct: In Abigail v Lapin at 68, Lord Wright, delivering the judgment of the Privy Council allowing the appeal from the High Court in Lapin v Abigail (1930) 44 CLR 166; [1930] HCA 6, spoke of the need to show "something tangible and distinct" to postpone the prior equity:
… it is now clearly established that prima facie priority in time will decide the matter unless as laid down by Lord Cairns L.C. in Shropshire Union Railways and Canal Co v The Queen, that which is relied on to take away the pre-existing equitable title can be shown to be something tangible and distinct having grave and strong effect to accomplish the purpose. (Emphasis added.)
and continued at 68:
Apart from priority in time, the test for ascertaining which encumbrancer has the better equity must be whether either has been guilty of some act or default which prejudices his claim….
In examining the competing equities, regard is to be had to "the nature and condition of [the] respective equitable interests, the circumstances and manner of their acquisition, and the whole conduct of each party with respect thereto": Rice v Rice (1853) 2 Drew 73; 61 ER 646 at 648 (Kindersley VC). This statement was referred to with approval by Lord Wright in Abigail v Lapin at 68 who said that "all the circumstances" of the conduct of the parties having the equitable interests must be taken into consideration in order to determine which has the better equity: see also Australia Capital Financial Management Pty Ltd v Linfield Developments Pty Ltd; Guan v Linfield Developments Pty Ltd [2017] NSWCA 99; 18 BPR 36,683 at [233] (Ward JA, McColl and Gleeson JJA agreeing).
In Heid, Mason and Deane JJ, after discussing estoppel as a rationale for postponing an earlier equity, expressed a preference at 341 for a more "general and flexible principle" which gives priority to the better interest in the light of all relevant circumstances, and continued at 341-342:
It will always be necessary to characterize the conduct of the holder of the earlier interest in order to determine whether, in all the circumstances, that conduct is such that, in fairness and in justice, the earlier interest should be postponed to the later interest.
…
To say that the question involves general considerations of fairness and justice acknowledges that, in whatever form the relevant test be stated, the overriding question is "... whose is the better equity, bearing in mind the conduct of both parties, the question of any negligence on the part of the prior claimant, the effect of any representation as possibly raising an estoppel and whether it can be said that the conduct of the first or prior owner has enabled such a representation to be made ..." (Citations omitted.)
Addressing the kind of act, neglect or default that will postpone the equitable interest of the prior holder, Mason and Deane JJ referred to the reasonably foreseeable consequences of the conduct or inaction on behalf of the prior equity holder at 342:
Fairness and justice demand that we be primarily concerned with acts of a certain kind - those acts during the carrying out of which it is reasonably foreseeable that a later equitable interest will be created and that the holder of that later interest will assume the non-existence of the earlier interest. (Emphasis added.)
This passage drew upon the observation by Lord Selborne LC in Dixon v Mucklestone (1872) LR 8 Ch App 155 at 160 that the holder of the first equity is bound by the natural consequences of his positive acts, being a concept which had been applied in IAC (Finance) Pty Ltd v Courtenay (1963) 110 CLR 550; [1963] HCA 64 by Kitto J at 578-579 and Taylor J at 590.
Heid involved competition between an unpaid vendor's lien and subsequent equitable mortgages granted by the purchaser who had been given the indicia of title. After identifying the question as being whether the risk of the deception practised by McKay (on behalf of the purchaser) was reasonably foreseeable to the vendor, Heid, when Heid delivered to Gibby (the purported solicitor acting for both parties) the signed instrument of transfer and authority to collect the certificate of title, which McKay then fraudulently used to borrow money secured by equitable mortgages, Mason and Deane JJ observed at 343:
… in some situations a person may be under a duty to take care to avoid or minimize the risk of fraudulent or deceptive conduct by others or that a person may be negligent in placing another in a position in which he can readily misrepresent to a third party that he is the owner of the property.
The parties diverged on whether the search for the better equity can take into account the parties' conduct after the later equity has been acquired. The appellants say that later conduct is not relevant and should be disregarded. That is not an accurate statement of the law. Notwithstanding, as Mason and Deane JJ said in Heid at 343 that the court is "primarily concerned with acts of a certain kind" which have a temporal character, in Clark v Raymor (Brisbane) Pty Ltd (No 2) [1982] Qd R 790, Thomas J (Campbell CJ, Andrews SPJ agreeing) said at 797:
All acts or omissions of either party and the effect of those acts or omissions upon the other party may be relevant, irrespective of the time when they occurred.
A similar view was taken by the New Zealand Court of Appeal in Australian Guarantee Corp (NZ) Ltd v CFC Commercial Finance Ltd [1995] 1 NZLR 129 at 137. It has been said, however, that the circumstances in which subsequent conduct of the parties is relevant to the search for the better equity are likely to be limited: see B Edgeworth, Butt's Land Law (7th Ed, LawBook Co, 2017) at [12.1160]. I agree. This can be seen from the facts of the two cases mentioned.
In Clark v Raymor, the respondents contracted to purchase land in March 1980. In February 1980, one month earlier, the vendor executed a guarantee in favour of the appellant which included a charge on all his property both real and personal. After the respondents had conducted title searches, which revealed no encumbrance on the land, and acquired their equitable interest in the property, but before the registration of the transfer of the land to the respondents had been effected, a caveat was lodged by the appellant claiming an interest in the land as equitable chargee. The later conduct of the appellant, being the failure to publicise its interest by lodging a caveat, was relevant as the respondents would not have paid over the purchase monies had they known of the interest of the prior equity holder. In Australian Guarantee Corp (NZ) v CFC Commercial Finance, the subsequent conduct of the later equity holder in delaying its challenge to the priority of the prior equity holder was relevant in determining whether the prior equity holder had acted contrary to its interests on the assumption that no challenge to its interest was forthcoming.
Beneficiary under a trust: The authorities recognise a distinction between two types of cases: cases involving the equity of a beneficial owner under a trust in the full sense, and cases involving some lesser interest, such as an equity of redemption, an interest as equitable mortgagee or purchaser, or the right to have a transaction set aside for fraud or mistake.
In the former type of case, Shropshire establishes that having a trustee hold all the indicia of legal title, and therefore putting it within the power of the trustee to deal adversely with the property, does not of itself constitute postponing conduct by a beneficiary under a trust as against a subsequent equity: at 507-508, 510-511 (Lord Cairns LC), at 512 (Lord Hatherley) at 515 (Lord O'Hagan). See also: Cory v Eyre (1893) 1 De GJ & S 149; 46 ER 58 at 65 (Turner LJ); Bradley v Riches [1876] 9 Ch D 189 at 192-193 (Fry J); Carritt v Real and Personal Advance Company (1889) 42 Ch D 263 at 270 (Chitty J); Taylor v London and County Banking Co at 260-261 (Stirling LJ, Rigby and Vaughan-Williams LJJ agreeing); Burgis v Constantine [1908] 2 KB 484 at 503-504 (Farwell LJ); Coleman v London County & Westminster Bank Ltd [1916] 2 Ch 353 at 360 (Neville J); Hill v Peters [1918] 2 Ch 273 at 277-278 (Eve J).
In Burgis v Constantine at 501-502, Farwell LJ explained the rule in Shropshire in these terms:
As has been pointed out by Lord Cairns in Shropshire Union Railways and Canal Co. v. The Queen, the mere fact that a person has transferred the legal ownership of stock or shares or other property, real or personal, to a trustee, and given him the title deeds, or the securities, or other indicia of title, does not justify any one in assuming that the person to whom such transfer is made is the beneficial owner. If the trustee does, in fact, deal with the property, and convey the legal ownership to a bona fide purchaser or mortgagee for value without notice, the cestui que trust has to bear the loss. If such a subsequent purchaser or mortgagee does not get the legal estate it is because he has not taken those precautions which the law allows him in order to protect himself from all risks; and he cannot set up the apparent ownership of the trustee as evidence of any misconduct or negligence on the part of the beneficial owner, because it is in accordance with the usages of mankind that the legal estate in property should be conveyed to, and the indicia of title deposited with, trustees, and no other member of the community, therefore, is entitled to allege that such a course of action constitutes any invitation to him from which a duty towards him can be inferred. (Emphasis added.)
In the latter type of case, the principles of agency are often applied in finding that the conduct of the holder of the prior equity in "arming" a third person with all the indicia of title is disentitling conduct.
Importantly, however, the types of cases are not mutually exclusive. Although the rule in Shropshire protects the beneficiary whose trustee improperly creates a subsequent equitable interest in someone else, Lord Cairns accepted in Shropshire at 506 that the existence of the equity of a beneficiary may still be defeated:
… by conduct, by representations, by misstatements of a character which would operate and enure to forfeit and to take away the pre-existing equitable title.
Of present significance, Farwell LJ clarified his earlier views expressed in Rimmer, stating in Burgis at 503:
… That case was one of agency, but, as the agent had also obtained the legal estate, I dealt with it first on the ground of agency, and then on that of trusteeship. On pp. 172, 173, I dealt with the question of agency, and held that the mere fact that the legal estate had for convenience been transferred to the agent did not prevent the application of the usual doctrines of agency. Then I dealt with it on the ground of trusteeship, upon the footing of the well-known case of Rice v. Rice. The observations which were relied upon by the defendant's counsel in this case were directed to the question of agency, not of trusteeship, and were not intended to apply to the case where trustees under wills or settlements hold property either on trust for, or with power of, sale: such persons are trustees, not agents; and, if they deposit the deeds or stock or share certificates with, or in any other way seek to give an equitable charge to, a banker or any one else in breach of trust, and that banker or other person does not take the precaution of getting a legal transfer, his claims will be postponed to those of the cestuis que trustent, because, as already stated, persons who transfer land, or stocks or shares, into the name of a trustee on trust for sale only do that which is in accordance with the common usages of mankind. The equity of the cestui que trust would prevail over that of the banker or other person in the case which I have put, and any cestui que trust could get an injunction to restrain a transfer of the legal estate to such a banker or person, if he applied for one before such transfer had taken place. I agree that this appeal should be allowed. (Emphasis added.)
Both authorities, among others, were referred to by Lord Wright in Abigail v Lapin at 72, who observed:
… Rimmer v Webster has been approved by this Board in Tsang Chuen v Li Po Kwai. Burgis v Constantine contains nothing contrary to this rule; as Sir George Farwell there points out, the case before the Court was to be distinguished from Rimmer v Webster, because it was one of trustee and cestui que trust, to which he thought the principles of the Shropshire Union Railways Case were applicable.
The appellants submitted that what Farwell LJ said in Burgis at 503 concerning his earlier remarks in Rimmer meant that conduct of a beneficiary of a trust in expressly authorising the trustee to deal with trust property, such as by way of sale, or mortgage, could not operate as disentitling conduct. I do not agree. To the extent that Farwell LJ said that the rule in Shropshire applies "where trustees under wills or settlements hold property either on trust for, or with power of, sale", three points should be noted.
First, the statement by Farwell LJ was not necessary for the purposes of deciding Burgis, which turned on the significance of the beneficiary's conduct in allowing the trustee to remain on the register as the owner of the shares. Second, the statement goes further than Lord Cairns' statement in Shropshire, the effect of which Farwell LJ correctly summarised in Burgis at 501 as "[the later equity] cannot set up the apparent ownership of the trustee as evidence of any misconduct or negligence on the part of the beneficial owner". Third, the statement is inconsistent with the statement of Lord Cairns in Shropshire at 506, which was approved by Lord Wright in Abigail v Lapin at 69, as to the circumstances in which the prior equity of a beneficiary can be displaced: see [80] above.
Third, although Klisovic was, at least, "a little bit" concerned by the warning given to him by Velcic that AXLF was untrustworthy, he proceeded to insulate himself from the means of legal advice as he no longer had a solicitor acting for him on the purchase of the property.
Fourth, Klisovic was unaware how the purchase of the property would be funded by AXLF and had no contact with AXLF between late November 2017 and the completion of the purchase of the property by AXLF in February 2018.
It is no answer for the appellants to say that empowering AXLF to deal with the property was not disentitling conduct because AXLF exceeded the limits of its authority in granting a mortgage to Sergienko and therefore committed a breach of trust. Both Meth and Thorpe v Bristle are examples of postponing conduct of a beneficiary in expressly authorising a trustee to deal with trust property. In Meth, agency principles were applied when the trustee acted in excess of its authority.
The appellants further submitted that the trustee in Shropshire had similar powers to deal with the trust property as AXLF had in this case, and therefore DKEC's conduct in empowering AXLF to deal with the property adversely to DKEC's interests was not disentitling. That submission is a misreading of the statement of Lord Cairns at 505 that the trustee in Shropshire had "the right to transfer the stock to any other person, and to give a valid receipt for the purchase-money to any person who had no notice of the beneficial interest of the Defendants". The full statement by Lord Cairns at 505 was:
Holyoake was a person who held merely legal title and the right to transfer the stock. He was able, if not interfered with, to transfer the stock to any other person, and to give a valid receipt for the purchase-money to any person who had no notice of the beneficial interest of the Defendants. On the other hand, any person with whom Holyoake might deal by virtue of his title on the register, … (Emphasis added)
The trustee in Shropshire did not have an express power of sale; the trustee was a bare or "mere" trustee of the shares (see Lord Hatherley at 511, and Lord O'Hagan at 514). In saying that the trustee was able to transfer the shares, Lord Cairns was not describing the terms of the trust arrangement in Shropshire; his Lordship was simply referring to the fact that since the trustee held legal title, the trustee as the owner was able to transfer the stock to third parties unless prevented by the beneficiary from doing so. That distinguishes the present case from Shropshire.
In my view, the facts of this case are closer to those in Meth where the terms of the clients' agreements with the stockbroker provided a power to pledge or lend property of the clients that was registered in the name of the stockbrokers' nominee company. Although the nominee company held the clients' shares on trust for the clients, the prior equity of the clients was displaced by their act in empowering the nominee company to deal with their shares. Notwithstanding that the clients were beneficiaries of a trust, disentitling conduct was found on the agency principles, given the express terms of the client agreements authorising the nominee company to pledge or lend the client's property which was held on trust.
In this case, DKEC was negligent, not because it allowed AXLF to purchase the property it its own name as trustee and hold all the indicia of title, but because the commercial circumstances of the transaction should have alerted Klisovic to the fact that he could not repose any confidence in AXLF to act in DKEC's interests in circumstances where DKEC had empowered AXLF under the trust deed to deal with the property: see Heid at 343, set out at [72] above. These acts of DKEC are enough to render the merits unequal.
However, in Platzer, McPherson JA observed, without deciding, that there is a difficulty in equating the reported cases dealing with the failure to caveat with a case of a beneficial owner under a trust in the full sense. His Honour said at 285:
In each, the competing earlier equity consisted of some lesser interest such as an equity of redemption, an interest as equitable mortgagee or purchaser, or the right to have a transaction set aside for fraud or mistake, and so on. In cases like that it might readily be expected that a caveat would be lodged to protect the interest pending completion of the transaction or the resolution of litigation to determine the rights of the parties. In Lapin v. Abigail (1930) 44 C.L.R. 166, 205, Sir Owen Dixon remarked that:
'The very nature of an equitable right requires that the legal ownership shall be elsewhere, and to constitute a person legal owner does not per se imply any representation, or warrant any supposition, that his legal title is not subject to equities.'
It is true that his Honour's observations were made in the course of giving reasons for a judgment which was later reversed by the Privy Council; but what he said in Lapin v. Abigail applies with greater force to the case of a full beneficial owner of registered land under a completely constituted trust.
Assuming that the rule in Shropshire applies to Torrens system land, the parties diverged on whether it was necessary for Sergienko to adduce evidence of a settled practice for beneficiaries under trusts to lodge caveats protecting their interests before any particular beneficiary's failure to follow that practice would be disentitling conduct. The appellants drew attention to the remarks of Dixon J at 205 in Lapin v Abigail, where his Honour doubted whether there was a "settled practice" for all owners of equitable interests to lodge caveats, and relied upon the absence of evidence from Sergienko of such a practice for the submission that DKEC's failure to lodge a caveat was not postponing conduct in this case. Sergienko submitted that the statement by Dixon J does not represent the law.
The consequences of failure to caveat should not depend on evidence of prevailing conveyancing practices. First, the appellants' reliance on the statement of Dixon J in Lapin v Abigail at 205 concerning the significance of prevailing conveyancing practice was in a judgment reversed on appeal by the Privy Council. Second, as Burchett J observed in Thorpe v Bristle at 334-335, the dissenting judgment of Gavan Duffy and Starke JJ in Lapin v Abigail prevailed on appeal to the Privy Council and is cited by Mason and Deane JJ in Heid at 339 in relation to the conduct of the prior equity holder "neglecting the well-known method of protecting their rights and interests by means of a caveat." Third, the appellants' submission is inconsistent with Heid where Mason and Deane JJ direct attention to the reasonably foreseeable consequences of the conduct of the prior equity holder in "all the circumstances" (which would include the failure to caveat) and whether the later equity holder was misled, rather than prevailing conveyancing practices. Fourth, although not definitive, the remarks of the majority in Black v Garnock (2007) 230 CLR 438; [2007] HCA 31 suggest some encouragement for the lodgement of a caveat as a matter of course whenever an equitable interest is acquired: see Gummow and Hayne JJ at [44], Callinan J at [52], [80], [83]-[84].
Accepting favourably to the appellants that conduct of a beneficiary in allowing a trustee to hold all the indicia of title is not a representation that the trustee's title is not subject to equities, and therefore it is not negligent for that reason alone for the beneficiary not to lodge a caveat to protect its interest, I do not read the remarks of Dixon J in Lapin v Abigail at 205, cited by McPherson JA in Platzer at 285 (see [120] above), as addressing the case of a beneficiary who empowers the trustee to deal with the trust property. In that circumstance, the beneficiary must be taken to know that the trustee could deal with the property adversely to its interests.
Next, the appellants submitted that DKEC's failure to caveat was not postponing conduct given the contractual restriction in cl 16 of the trust deed against lodging a caveat. That, however, ignores that an agreement not to lodge a caveat does not deprive the holder of an equitable interest of the statutory right to lodge a caveat: Australian Property & Management Pty Ltd v Devefi Pty Ltd (NSWSC, Young J, 7 April 1997); (1997) 7 BPR [97,640] at 15,257; Lintel Pines Pty Ltd v Nixon [1991] IVR 287 at 291 (Nathan J); Betlehem v Keytown Constructions Pty Ltd (formerly known as Jadestar Investments Pty Ltd) [2007] WASC 38 at [19]-[20] (Heenan J). Of course, breach of an agreement not to lodge a caveat is still a relevant discretionary consideration that a court would take into account in deciding whether, in all the circumstances, the caveat should be extended in the event of a dispute: Australian Property & Management v Devefi at 15,257.
In this case, DKEC's agreement not to lodge a caveat may be explicable by the circumstance that DKEC had not at the time of the trust deed paid any money towards the purchase of the property or the units in the DKEC Trust. Viewed in that context, the promise by DKEC not to lodge a caveat is arguably something which drastically diminishes the expectation of DKEC that its equitable interest qua beneficiary is to be protected: see the remarks of Young J in Australian Property & Management Pty Ltd v Devefi at BPR 15,257.
Putting aside the last matter, as it was not the subject of argument, in my view, the risk of the deception practised by AXLF as the registered proprietor to deal with the property adversely to DKEC's interest was enhanced because any person searching the register, as Sergienko's solicitor did before he acquired his interest, would not have found a caveat by DKEC inconsistent with the warranty by AXLF in cl 2.2.6 of the deed that the property was unencumbered. It is not in dispute that Mr Andrew Wei, Sergienko's solicitor, carried out a title search on 5 April 2018, and again on 9 April 2018, which both revealed that the property was not encumbered or the subject of any caveats. Given Sergienko's unchallenged affidavit evidence of his concern that the property was unencumbered, it can be accepted that he relied upon these searches of the register by his solicitor in assuming at the time of entering into the deed on 9 April 2018 that the property was unencumbered.
If it was necessary to decide this point, it seems to me that the commercial circumstances of the transaction should have alerted DKEC to the need to lodge a caveat to protect its interest as beneficiary, as it could not reasonably repose confidence in AXLF to act in DKEC's interests. I would conclude that the conduct of DKEC in not lodging a caveat, in combination with the other circumstances referred to in (1)-(4) above, was also postponing conduct.
It is no answer, as Klisovic said in his affidavit, that no one told him to lodge a caveat. As indicated, Klisovic insulated himself from any opportunity to receive legal advice to the effect that he should have lodged a caveat, which it can be inferred would have been given to him, had Velcic continued to act on the purchase of the property. DKEC did not adduce evidence that Velcic, who considered AXLF untrustworthy, would not have advised DKEC to protect its interest in the property by lodging a caveat.