IWC Industries Pty Ltd v Sergienko

Background

1. The priority in time rule directs attention to the circumstances in which DKEC and Sergienko acquired their interests in the property.

Klisovic's interest in the property

1. 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.
2. 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.

DKEC contract

1. 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.
2. 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.
3. 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.
4. 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].

DKEC Trust

1. 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].
2. 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].
3. 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.

1. 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).

AXLF contract

1. 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.
2. 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.
3. 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.
4. 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.

Source of the funds to purchase the property

1. 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].
2. 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].
3. 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.
4. 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].
5. 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].

Sergienko's unregistered mortgage

1. 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.
2. 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.

Events after April 2018

1. 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].
2. 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].
3. 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.
4. 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).

The appellants' case at trial

1. 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.

The primary judge's reasons

1. 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].
2. 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].
3. There is no challenge to the first finding. The appellants challenge aspects of the second and third findings.
4. 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. …

Whether DKEC was a volunteer: ground 2

1. 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.
2. 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.
3. 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.
4. 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]).
5. 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.

Whether prior interest postponed to later interest: ground 1

Submissions

1. 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.
2. 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.
3. No submissions were advanced by Sergienko in support of the fourth reason, which may be put aside.

Competition between prior and later equitable interests

1. It is necessary first to refer to some matters of principle concerning the priority in time rule before addressing the facts.
2. 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.)
3. 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.
4. 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].
5. 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).

Abigail v Lapin

1. 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.
2. 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.
3. 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.

Rimmer v Webster and Burgis v Constantine

1. The distinction between cases decided on agency principles and the rule in Shropshire is reflected in two English authorities.
2. 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.)
3. 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.

Australian cases involving beneficiaries of a trust

1. 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".
2. 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).
3. Reference to four other Australian cases involving beneficiaries of a trust (express, resulting and constructive) are of assistance.

Meth v CBC

1. 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".
2. 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.

Thorpe v Bristle Ltd

1. 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.

Platzer

1. 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).

Parsons v McBain

1. 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.

Does the rule in Shropshire apply in Australia?

1. 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).
2. 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.
3. 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.

Are the merits unequal?

1. 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.
2. 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.

Conduct of DKEC prior to Sergienko acquiring his interest

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.

Failure to lodge a caveat

1. 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.
2. 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).
3. 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.

Who has the better equity?

1. 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.
2. 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.
3. 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.

Conclusion

1. 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.
2. I propose the following orders: 1. Appeal dismissed. 2. Appellants to pay the first respondent's costs of the appeal.

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